Presentation is loading. Please wait.

Presentation is loading. Please wait.

International Finance and Payments Lecture VIII International Credit Market Lecturer Cristian PĂUN URL:

Similar presentations


Presentation on theme: "International Finance and Payments Lecture VIII International Credit Market Lecturer Cristian PĂUN URL:"— Presentation transcript:

1 International Finance and Payments Lecture VIII International Credit Market Lecturer Cristian PĂUN URL: Academy of Economic Studies Faculty of International Business and Economics

2 Lecture 8: International Credit Market 2 International Payments - review the payments in international business are made using specific techniques, in order to reduce the high default risk; when the risk is low for the exporter can be used: open account payments, bank drafts or documentary collection; when the risk is too high for the exporter it is strongly recommend to be used the letter of credit (or cash in advance); the letter of credit is the most complex payment mechanism ensuring a reduced risk if the operation;

3 Lecture 8: International Credit Market 3 International Credit Market International MarketDimension (2002) Credit Market9446 bil. USD Bond Market31000 bil. USD Stock Market3500 bil. USD Total Credit9.446 bil. USDWeight Developed Countries7302 bil. USD77 % Offshore Countries1250 bil. USD13 % Developing Countries894 bil. USD9 %9 % A. Credit Market (general situation)

4 Lecture 8: International Credit Market 4 International Credit Market Area< 1year> 1 year Total Credit53,1 %27,7 % Developed Countries56 %24,3 % Offshore Countries52 %36,9 % Developing Countries46,7 %43 % B. Credit Market (by the maturity) World Bank: "Global Development Finance", C. Credit Market (by the destination) World Bank: "Global Development Finance", AreaBanksPublic SectorPrivate sector Total Credit46.9 %11.9 %38.7 % Developed Countries50.6 %12.2 %34.5 % Offshore Countries38.7 %0.9 %59.8 % Developing Countries30.1 %17.1 %52.1 %

5 Lecture 8: International Credit Market 5 International Credit Market AreaEU BanksNAJapOthers Total Credit57.8 %7.5 %11.2 %23.5 % Developed Countries57.5 %6.5 %10.7 %25.5 % Offshore Countries54.9 %8.1 %27.2 %9.8 % Developing Countries62.6 %14.1 %9.3 %14 % D. Credit Market (creditors by origin) E. Credit Market (country distribution) CountriesWeight US16 % EU54.6 % UK13 % GER8.4 % ITA5.4 % JAP5.6 %

6 Lecture 8: International Credit Market 6 International Credit Market - conclusions International Credit Market is the second financing alternative after bonds; Last years, credit expansion was higher than bonds; The developed countries have a net dominant position on international credit market; In the developing countries the total credit tends to decrease; Private sector becomes more important on international credit market (instead banks); Short term credits are dominant (instead long term credits) Syndicalized loans become more and more important.

7 Lecture 8: International Credit Market 7 International Credit Market I. Short term credits: -Credits in advance; - Export credits; II. Long term credits: Syndicated loans; Eurocredits; Parallel loans; Back to back credits; Buyer credits; Seller credits. III. Special credits: Leasing / Factoring / Forfeiting

8 Lecture 8: International Credit Market 8 Short term credits

9 Lecture 8: International Credit Market 9 A. Short term credits – Export Pre-financing Producer Exporters Bank Exporter Government – Signing an Export contract; 2 – Obtaining a Credit; 3 – Refinance from public funds; 4 – Delivery of goods; 5 – Payment at the maturity; 6 – Credit reimbursement. 6

10 Lecture 8: International Credit Market 10 B. Credit based on B/E discount 1 – Export contract based on B/E payment; 2 – B/E Acceptance by the importer; 3 – Presenting the B/E to the X Bank in order to be discounted; 4 – Discounting the B/E on the local money market; 5 – Payment of the exporter. 1 Exporter X Bank Importer 3 4 Other bank 5 2

11 Lecture 8: International Credit Market 11 C. Importer Bankers Acceptance 1 – Export contract containing a commercial credit granted by the exporter (the importer will pay at a specific maturity after delivery); 2 – B/E acceptance by the importer bank; 3 – Presenting the B/E to the Exporter Bank; 4 – B/E discounting to an Exporters bank; 5 – Payment at the maturity. Exporter Exporter Bank Importer 1 34 Importer Bank 2 5 5

12 Lecture 8: International Credit Market 12 D. Exporter Bankers Acceptance Exporter Exporter Bank Importer Importer Bank – Export contract; 2 – B/E Acceptance by the Exporter Bank; 3 – Presenting B/E to the Exportes Bank or to other local bank; 4 – Discounting the B/E; 5 – Payment at the maturity against B/E.

13 Lecture 8: International Credit Market 13 E. Credit transfer Exporter Financing Company Importer Importers Bank Export contract. Delivery of goods 2. Credit transfer to a financing company; 3. Payment against the B/E transfered; 4. Payment at the maturity.

14 Lecture 8: International Credit Market 14 F. Revolving Credit Agreements Agreements are frequently for three years. The actual notes are usually 90 days, but the company can renew them per the agreement. Most useful when funding needs are uncertain. Many are set up so at maturity the borrower has the option of converting into a term loan. Revolving Credit Agreement Revolving Credit Agreement -- A formal, legal commitment to extend credit up to some maximum amount over a stated period of time.

15 Lecture 8: International Credit Market 15 G. Line of credit - The consumer may borrow as much of the line as needed and pays interest on the borrowed portion only; - Payment amounts are revolving, based on the outstanding balance amount; - If the funds are not totally used the borrower is submitted to pay some penalties in the favor of the lender. Line of credit Line of credit -- An agreement between a lender and a borrower in which the borrower has access to funds up to a specific amount during a specific period of time.

16 Lecture 8: International Credit Market 16 Long term credits

17 Lecture 8: International Credit Market 17 A. Syndicated loans Beneficiary Group of the participant banks Credit Management Group Lead Manager Credit Memorandum Bank ABank B

18 Lecture 8: International Credit Market 18 A. Syndicated loans – operations description 1.Contacting a leader bank 2.Creating the coordinating group (when the amount is important), analyzing the beneficiary, establishing the credit conditions 3.Creating the group of participating banks 4.Creating the credit memorandum (usually the 60% from the credit is granted by leader bank and coordinating group, the remaining amount being obtained from participating banks, if the total credit it is not covered by them, the leader bank will make an offer to international credit markets by this credit memorandum); 5.Obtaining money from other banks.

19 Lecture 8: International Credit Market 19 B. Eurocredits Beneficiary Lead Manager 2 Bank A Bank C Bank B 1 4 Coordinating Group 4 3 Capital transfer from local markets 5

20 Lecture 8: International Credit Market 20 B. Eurocredit – operations description 1.Contacting a leader bank 2.Creating the coordinating group (when the amount is important), analyzing the beneficiary, 3.Establishing the credit conditions by analyzing the beneficiary 4.Contacting different banks that will provide funds trough revolving credit arrangements to the coordinating group 5.Refinancing from local capital markets by issuing stocks and bonds.

21 Lecture 8: International Credit Market 21 C. Seller Credit Exporter Export Credit Agency Guarantee bank Exporter Bank Importer

22 Lecture 8: International Credit Market 22 C. Seller Credit – operations description 1.Import contract of an equipment; 2.Obtaining a guarantee letter against default risk for the credit; 3.Obtaining the seller credit based on export contract and guarantee letter. Delivering the goods to importer; 4.Refinancing the transaction from public funds (Export Credit Agency); 5.Paying back the import at the maturity 6.Seller Credit reimbursement

23 Lecture 8: International Credit Market 23 D. Buyer Credit Exporter Guarantee Institution Exporter Bank Importer Export Credit Agency Insurance Company 6

24 Lecture 8: International Credit Market 24 D. Buyer Credit – operations description 1.Import contract of an equipment; 2.Obtaining a guarantee letter against default risk for the credit; 3.Obtaining an insurance policy by importer for political risk associated to the buyer credit 4.Obtaining the buyer credit based on export contract, political risk insurance policy and guarantee letter. Delivering the goods to importer and payment of goofs; 5.Refinancing the transaction from public funds (Export Credit Agency); 6.Buyer Credit reimbursement

25 Lecture 8: International Credit Market 25 E. Parallel Loans USD Credit 1 Company A Company B Subsidiary of B Subsidiary of A Credit Contract 32 GBP Credit

26 Lecture 8: International Credit Market 26 E. Parallel loan – operations description 1.Parallel loan contract 2.Granting a credit directly from A Company to B subsidiary from USA expressed in USD 3.Granting a credit directly from B Company to A subsidiary from UK expressed in GBP -Lower cost than granting a credit from A Company to A subsidiary and vice versa -Simplicity

27 Lecture 8: International Credit Market 27 F. « Back-to-back » loans Credit in USD 1 Company A Company B Subsidiary of B Subsidiary of A Credit Contract Credit in GBP Bank B Bank A

28 Lecture 8: International Credit Market 28 F. Back to back loan – operations description 1.Back to back loan contract 2.Obtaining a credit in USD for Company A and a credit in GBP for Company B from their own local markets 3.Granting a credit directly from A Company to B subsidiary from USA expressed in USD based on initial credit 4.Granting a credit directly from B Company to A subsidiary from UK expressed in GBP based on initial credit -Lower cost than granting a credit from A Company to A subsidiary and vice versa -Simplicity -The interest rates will not be negotiated as it is in case of parallel loan (the main problem)

29 Lecture 8: International Credit Market 29 Special Credits

30 Lecture 8: International Credit Market 30 G. Leasing contract Importer Exporter Leasing company Insurance Company Banks 6 9

31 Lecture 8: International Credit Market 31 G. International Leasing contract – operations description 1.Signing a leasing contract for import of an equipment 2.Indicating the provider of equipment 3.Negotiating the contract 4.Insurance policy for the equipment 5.Delivering the equipment 6.Refinancing from banks 7.Paying the equipment 8.Paying the leasing taxes 9.Paying back the credits by the leasing company

32 Lecture 8: International Credit Market 32 Types of leasing contracts 1.Lease-back: the sale of an asset with the agreement to immediately lease it back for an extended period of time. 2.Direct leasing: the producer directly leases the equipment to a company; 3.Leveraged Leasing: – the leasing company borrows from a lender to buy the asset that will be leased to the beneficiary. 4.Financial Leasing: Longer-term, fully amortized and the lessee is responsible for maintenance, taxes, and insurance. 5.Operating Leasing: Usually relatively short-term; less than economic life of asset, the leasing company is responsible for maintenance / upkeep / taxes / service. The beneficiary has the possibility to cancel the contract at the maturity. 6.Net Leasing: in the leasing contract are not included the expenses with the maintenance of the leased equipment

33 Lecture 8: International Credit Market 33 Financial Impact of the leasing contracts A. Balance Sheet with Purchase (co. finances $100,000 truck with debt) Truck$100,000Debt$100,000 Other assets 100,000Equity 100,000 Total assets$200,000Debt plus equity$200,000 B. Balance Sheet with Operating Lease (co. finances truck with an operating lease) Truck$ 0Debt$ 0 Other assets 100,000Equity 100,000 Total assets$100,000Debt plus equity$100,000 C. Balance Sheet with Financial Lease (co. finances truck with a capital lease) Assets under capitalObligations under lease$100,000capital lease $100,000 Other assets 100,000Equity 100,000 Total assets$200,000Debt plus equity$200,000

34 1) Flexibility and Convenience Leases are easier, quicker and require less documentation. Leases are easier to have approved than capital budgeting projects. Leasing simplifies bookkeeping for tax purposes. Leasing allows synchronization of lease payments with the firms cash cycle. Leasing avoids the problems of ownership. Leasing vs. Debt Financing: Potential Benefits 2) Lack of Restrictions Leases usually do not have protective restrictions. 3) Avoiding Risk of Obsolescence? Not really - only in cancelable operating leases. 4) Conservation of Working Capital Leases usually have a lower initial outlay than a purchase.

35 5) Tax Savings Leases may provide a larger tax shield than that provided by depreciation. 6) Ease of Obtaining Credit It is often easier for riskier firms to obtain a lease than to obtain debt financing. Leasing vs. Debt Financing: Potential Benefits

36 Lecture 8: International Credit Market 36 Exporter Factoring company Importer Importers Bank Factoring with payment in advance (old fashion factoring) 1

37 Lecture 8: International Credit Market 37 1.Export contract 2.Delivering the goods 3.Presenting the commercial documents for payments (invoices) 4.Paying in advance the presented invoices (less a commission an a guarantee of 10%) 5.Paying at the maturity 6.Transferring the money to the factoring company Notes: -The exporter should pay an interest rate for credit period -The factoring company will be refinanced by the banks -The guarantee will be paid back at the maturity and will cover the default risk -The factor will administrate ALL the commercial transaction of the exporter Factoring with payment in advance (old fashion factoring) – Operations descriptions

38 Lecture 8: International Credit Market 38 I. Factoring with a payment at the maturity Exporter Factoring company Importer Importers Bank

39 Lecture 8: International Credit Market 39 I. Factoring with payment at the maturity – operations description 1.Export contract 2.Delivering the goods 3.Presenting the commercial documents to the factor 4.Paying at the maturity 5.Transferring the money to the exporter (less a commission)

40 Lecture 8: International Credit Market 40 J.. Forfeiting Exporter Forfeiting Institution Importer Importers Bank Forfeiting vs. Credit transfer: Forfeiting is a long term financing operation - Forfeiting vs. Factoring: Forfeiting is used for a single transaction - Forfeiting vs. Discounting the Banks Drafts: Forfeiting is a long term financing operation and the Forfeiting institution will be refinanced from international financial markets using long term credit techniques or capital market techniques (IPO, securitization)

41 Lecture 8: International Credit Market 41 J.. Forfeiting – operations description 1.Export contract 2.Delivering the goods 3.Presenting the commercial documents to the forfeiting company 4.Paying the transaction against presented documents 5.Transferring the money to the forfeiting company at the maturiy Note: The exporter will pay an interest rate This transaction is used when the Exporter rating is too low and international market is not accessible for him (the forfeiting company will be refinanced from international markets)

42 Lecture 8: International Credit Market 42 International Credit – Final Conclusions ExportersImporters export pre-financing; discounting the banks drafts; credit transfer; importer / exporter bankers acceptance; syndicated loans; eurocredits; seller credits; back to back loans; parallel loans; factoring; forfeiting. line of credits; revolving credit arrangements bankers acceptances; syndicated loans; eurocredits; buyer credit; back to back loans; parallel loans; leasing;


Download ppt "International Finance and Payments Lecture VIII International Credit Market Lecturer Cristian PĂUN URL:"

Similar presentations


Ads by Google