Managing International Credit Risk

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Information for managing international credit risk during the economic downturn and the coming recovery.

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Managing International Credit Risk

  1. 1. CMA Webinar<br />MANAGING INTERNATIONAL CREDIT RISK DURING THE ECONOMIC DOWNTURN<br />AND THE COMING RECOVERY<br />PRESENTED<br />FEBRUARY 2010<br /> BY GARY MENDELL<br />MERIDIAN FINANCE GROUP<br />
  2. 2. Exporting in the Economic Downturn<br />Amidst the challenges in the world’s present economic <br />situation, there are also opportunities for growth. The global <br />financial crisis is not affecting every sector of the real <br />economy. Many companies will continue to grow and in <br />many cases their growth will come from export sales.<br />While total export volumes may fall short of<br />earlier projections, worldwide market<br />demand for goods and services will continue<br />to engender a considerable amount of<br />international trade, and even expansion<br />in some sectors.<br /> <br />
  3. 3. Purchasing Power in Other Countries<br />The U.S. economy is projected to continue declining for some <br />time before it begins to recover, but with just five percent of <br />the world’s population and less than one-quarter of global <br />GDP, the U.S. is not the only country with purchasing power. <br />While all countries are linked to some degree<br />by economic interdependence, different cultural,<br />political, and market forces will lead Europe,<br />Asia, Latin America, and other regions each<br />on their own trajectory during the present<br />downturn and into the coming recovery.<br />
  4. 4. Credit Demand During Downturn<br /><ul><li>Little or no lending by local banks
  5. 5. Limited access to capital from non-bank lenders
  6. 6. Currency exchange/transfer controls
  7. 7. Inability to remit cash in advance
  8. 8. Bank fees/rates too high to open L/Cs
  9. 9. Pushing you and other suppliers as a competitive tactic
  10. 10. Need for working capital via longer payment terms
  11. 11. Making credit a condition for representation
  12. 12. Maintaining in-country supply chains
  13. 13. Keeping doors open in strategic markets</li></li></ul><li> Export Credit Risks in Downturn<br /><ul><li>Voluntary bankruptcy
  14. 14. Involuntary receivership
  15. 15. Other forms of insolvency (e.g. just closing the doors)
  16. 16. Protracted slow payment for any number of reasons
  17. 17. Cash flow problems
  18. 18. General economic conditions in export markets
  19. 19. Currency fluctuations
  20. 20. Foreign exchange/transfer controls
  21. 21. Expropriation and other risks to assets
  22. 22. War, strikes, civil strife, political violence</li></li></ul><li>Credit Demand During Recovery<br /><ul><li>High interest rates from local banks and other lenders
  23. 23. Limited access to longer-term financing
  24. 24. Desire for working capital via longer payment terms
  25. 25. Refusal to pay cash in advance
  26. 26. Unwillingness to absorb fees/hassles of opening L/Cs
  27. 27. Pushing you and other suppliers as a competitive tactic
  28. 28. Making credit a condition for distribution
  29. 29. Insisting on terms for stocking inventory
  30. 30. Credit to facilitate supply chain benefits
  31. 31. Building brand recognition in other countries
  32. 32. Expanding share in new strategic markets</li></li></ul><li> Export Credit Risks for Recovery<br /><ul><li>Customer bankruptcy, receivership, or insolvency
  33. 33. Protracted slow payment for any number of reasons
  34. 34. Balance sheet issues (working capital, leverage, etc.)
  35. 35. General economic conditions in export markets
  36. 36. General economic conditions in domestic markets
  37. 37. Inflation risk (hot economy, currency devaluations, etc.)
  38. 38. Over-anticipation of demand for products
  39. 39. Superior selling by local/foreign competition
  40. 40. Payment delays caused by exchange controls
  41. 41. Changes in import or export regulations
  42. 42. Trade sanctions, embargoes, etc.</li></li></ul><li>Credit Overview by Region<br />Europe Latin America<br />Northern Europe Mexico<br />Southern Europe Brazil<br />Eastern Europe Chile, Colombia , Peru<br /> Argentina, Ecuador<br />Asia Venezuela, Bolivia<br />Japan Central America<br />China <br />India Africa<br />Pacific Rim Sub-Saharan<br /> Southern Africa<br />Middle East <br /> Saudi Arabia/UAE <br />Turkey <br />Israel <br />
  43. 43. Sources of Int’l Credit Information<br /><ul><li>Trade supplier credit references
  44. 44. Credit agency reports
  45. 45. Financial statements
  46. 46. Bank references (limited availability and usefulness)
  47. 47. Industry-specific creditor groups
  48. 48. Specialized industry resources
  49. 49. Personal visits (essential ahead of recovery)
  50. 50. Local reputation, market share, etc.
  51. 51. On-line, legal, news-wire info
  52. 52. Juxtaposition of all of the above</li></li></ul><li>Credit Risk Mitigation<br /><ul><li>Cash-in-advance or partial deposits
  53. 53. Usance or standby letters of credit
  54. 54. Notes, drafts, documentary collections
  55. 55. Payment from bank account in USA
  56. 56. Direct revenue remittances
  57. 57. Legal/enforceable documents
  58. 58. Linguistic competence
  59. 59. Export credit insurance:</li></ul> protects foreign receivables against virtually all commercial/political non-payment risks<br />
  60. 60. Export Credit Insurance - Update<br />While constrained by increasing claim activity, contracting <br />reinsurance capacity, and other factors engendered by the <br />economic downturn, export credit insurance underwriters <br />remain active and to the extent possible are rising to the <br />challenge of continuing to support international trade credit. <br /><ul><li>No insurers have entirely exited the trade credit market
  61. 61. Several insurers have expanded their trade credit products
  62. 62. Non-cancelable limits are still available
  63. 63. ECAs especially supporting their exporters
  64. 64. Private sector still perceives growth market</li></li></ul><li> Export Credit Insurance Trends<br /><ul><li>Insureds with existing policies receiving favorable treatment
  65. 65. Strong preference for multiple-buyer spreads of risk
  66. 66. Less interest in underwriting single-buyer coverage
  67. 67. Lender preference for ECAs but content issues limit utility
  68. 68. In some cases irrational concerns regarding private sector
  69. 69. Some applications being submitted too late vs credit issues
  70. 70. Non-cancelable limits available but hard to underwrite
  71. 71. Policies with cancelable limits exercising that option
  72. 72. Higher premium rates and deductibles
  73. 73. Larger discretionary limits to address demand
  74. 74. Unprecedented increase in market awareness</li></li></ul><li> Export Credit Insurance Outlook<br /><ul><li>Increasing market share for Ex-Im Bank and other ECAs despite limitations of content requirements
  75. 75. Growth also in use of private-sector coverage, especially for experienced exporters with cogent credit procedures
  76. 76. Trend towards underwriting exporter credit procedures, performance, and cogency of underlying transactions in addition to stand-alone creditworthiness of foreign buyers
  77. 77. It will be a long time before underwriting</li></ul> returns to exuberance of a few years ago<br /><ul><li>Strategic projection is for significant growth</li></li></ul><li>Meridian Finance Group<br /><ul><li>TRADE FINANCE
  78. 78. Cross-Border Equipment Financing
  79. 79. Foreign Buyer Credit Facilities
  80. 80. Note Purchase Agreements
  81. 81. Custom Financing Structures
  82. 82. INSURANCE
  83. 83. Export Credit Insurance
  84. 84. Political Risk Coverage
  85. 85. Domestic Receivables Insurance
  86. 86. Policies for Financial Institutions</li></li></ul><li>For More Information:<br />Meridian Finance Group<br /> 1247 7th Street, Suite 200<br /> Santa Monica, CA 90401<br /> Tel: 310 260 2130<br /> Fax: 310 260 2140<br /> gmendell@meridianfinance.com<br /> www.meridianfinance.com<br />

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