Information on how letters of credit work and why they sometimes don't work.

1. How Letters of Credit Work NACM Oregon/CMA Business Credit Learning Center Webinar May 21, 2009 Buddy Baker, Head of Trade Services Sales Fifth Third Bank [email_address] (847) 830-3038 If you can read this, your settings are not optimal for printing this presentation and will draw certain graphics incorrectly. Please re-print using the “Color” setting, even if printing using a black & white printer. (…and Why They Sometimes Don’t)

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3. Walter (Buddy) Baker Walter (Buddy) Baker has over 30 years of experience in international trade finance. In May 2009 he joined Fifth Third Bank as the head of their Trade Services Sales team. Prior to Fifth Third, Buddy worked for Atradius Trade Credit Insurance, ABN AMRO Bank, Bank of America, Wachovia Bank, and The First National Bank of Chicago. Buddy is a recognized expert in trade finance and author of numerous magazine articles and the books Users’ Handbook to Documentary Credits under UCP600 , Documentary Payments & Short-Term Trade Finance , and The Regulatory Environment of Letters of Credit and Trade Finance . He owns the consulting firm Global Trade Risk Management Strategies, which specializes in educational training, and makes frequent presentations for national associations of exporters, importers, bankers and lawyers. Mr. Baker serves as a member-at-large of the National Letter of Credit Committee of the International Financial Services Association and is actively involved in establishing national and worldwide standard practices for LCs, such as the recent revision of the Uniform Customs and Practice for Documentary Credits (referred to as UCP600), the official ICC guide for examining letter of credit documents, called the International Standard Banking Practices for the Examination of Documents under Documentary Credits, the eUCP supplement to the UCP dealing with electronic documents, the International Standby Practices, and Article 5 of the Uniform Commercial Code. He acts as an advisor to the Wolfsberg Group, an international group that includes most of the largest banks in the world whose purpose is to set standards for combating money laundering, and to the Institute for International Banking Law and Practice. Buddy also serves on the Advisory Council of the Finance Credit and International Business Association (FCIB), a multinational association of export credit managers. Buddy earned his undergraduate degree at Yale University and his MBA at Northwestern. He can be reached at (847) 830-3038 or [email_address] .

4. How L/Cs Are Supposed to Work May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker

9. How Letters of Credit Work: Theory May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Buyer Seller Contract Buyer’s Bank Letter of Credit Application

10. How Letters of Credit Work: Theory May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Buyer Seller Contract Buyer’s Bank Letter of Credit Application Letter of Credit

11. How Letters of Credit Work: Theory May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Buyer Buyer’s Bank Seller Contract Letter of Credit Application Letter of Credit 3 parties 3 independent contracts

12. How Letters of Credit Work: Theory May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Buyer Buyer’s Bank Seller Contract Letter of Credit Application Letter of Credit Principles of Letters of Credit: Independent and Documentary Goods Documents

13. How Letters of Credit Work: Theory May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Buyer Buyer’s Bank Seller Contract Letter of Credit Application Documents Letter of Credit Goods Payment

14. How Letters of Credit Work: Theory May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Buyer Buyer’s Bank Seller Contract Letter of Credit Application Documents Letter of Credit Goods Documents Payment Debit

15. How Letters of Credit Work: Theory May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Buyer Buyer’s Bank Seller Contract Letter of Credit Application Documents Documents Payment Debit Letter of Credit Goods

16. Risk Mitigation Techniques May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker 1. It may be possible for the applicant to obtain a court injunction to stop payment of a non-negotiable L/C. 7. A receivable in a foreign currency made be sold, including the remaining currency fluctuation risk. 8. FX exposure depends on the currency of the credit.

18. How Letters of Credit Work: Theory May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Buyer Buyer’s Bank Seller Contract Letter of Credit Application Documents Documents Payment Debit Letter of Credit Goods

19. How Letters of Credit Work: Reality May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Foreign Buyer Buyer’s Bank Advising Bank Seller’s Bank Seller NominatedBank Freight Forwarder Reimbursing Bank Contract L/C Appli- cation Docu- ments Debit L/C L/C L/C L/C & Documents Documents Payment Payment Reimbursement Authorization Reimbursement Goods Goods Reimbursement Claim

20. How Letters of Credit Work: Theory May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Buyer Buyer’s Bank Seller Contract Letter of Credit Application Documents Documents Debit Letter of Credit Goods Payment

21. How International Letters of Credit Work May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Buyer Seller Contract Nominated Bank Docu- ments Goods Debit Documents Payment Pay- ment Buyer’s Bank L/C Appli- cation L/C Advising Bank L/C Docu- ments

22. How Confirmed Letters of Credit Work May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Buyer Seller Docu- ments Pay- ment Goods Contract Confirming Bank L/C L/C Debit Documents Payment Buyer’s Bank L/C Appli- cation Docu- ments

23. Risk Mitigation Techniques May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker

24. Standby L/Cs and Guarantees May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker

27. How Letters of Credit Work: Theory May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Buyer Buyer’s Bank Seller Contract Documents Documents Payment Debit Letter of Credit Letter of Credit Application Goods

28. How Standby Letters of Credit Work May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Applicant Applicant’s Bank Beneficiary Contract Letter of Credit Application Letter of Credit Documents Documents Payment Debit Payment

29. Risk Mitigation Techniques May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker 2. Preferential payment risk exists unless the standby is properly worded. 3. Country risks are covered if the L/C is confirmed by a “developed-world” bank.

31. Standby L/Cs vs. Guarantees & Bonds May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Standby L/C Demand Guarantee Accessory/Contract Guarantee, Surety Bond Independent & payable against documents Independent & payable against documents Specified amount Specified amount Payable upon occurrence of specified event Amount of damages (usually with a maximum) Specified expiry Usually has a specified expiry Expiry event Rules: UCP or ISP (and UCC5 in the U.S.) Rules: URDG, ISP, or local law Rules: Local law

32. Risk Mitigation Techniques May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker 4. Country risks are covered if the guarantee is a ‘local guarantee’. 5. If the principal repudiates the contract, the guarantor may do the same.

33. Risk Mitigation Techniques May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker 4. Country risks are covered if the guarantee is a ‘local guarantee’. 5. If the principal repudiates the contract, the guarantor may do the same. Be sure you know which kind of guarantee you’re dealing with

35. Real-World Letter of Credit Mechanics May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker

36. How Letters of Credit Work: Theory May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Buyer Buyer’s Bank Seller Contract Letter of Credit Application Documents Documents Payment Debit Letter of Credit Goods

37. How Letters of Credit Work: Reality May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Foreign Buyer Buyer’s Bank Advising Bank Seller’s Bank Seller Nominated Bank Freight Forwarder Reimbursing Bank Contract L/C Appli- cation Docu- ments Debit L/C L/C L/C L/C & Documents Documents Payment Payment Reimbursement Authorization Reimbursement Goods Goods Reimbursement Claim

38. How Letters of Credit Work: Reality May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Foreign Buyer Seller Contract Buyer’s Bank L/C Appli- cation

39. How Letters of Credit Work: Reality May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Foreign Buyer Seller Contract L/C Appli- cation Buyer’s Bank Advising Bank L/C L/C

40. How Letters of Credit Work: Reality May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Foreign Buyer Advising Bank Seller Contract L/C Appli- cation L/C L/C Buyer’s Bank Reimbursing Bank Reimbursement Authorization

41. How Letters of Credit Work: Reality May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Foreign Buyer Buyer’s Bank Advising Bank Reimbursing Bank Contract L/C Appli- cation L/C L/C Reimbursement Authorization Seller Freight Forwarder L/C

42. How Letters of Credit Work: Reality May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Foreign Buyer Buyer’s Bank Advising Bank Reimbursing Bank Contract L/C Appli- cation L/C L/C L/C Reimbursement Authorization Seller Freight Forwarder Nominated Bank L/C & Documents Goods Goods

43. How Letters of Credit Work: Reality May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Foreign Buyer Buyer’s Bank Advising Bank Seller Freight Forwarder Reimbursing Bank Contract L/C Appli- cation L/C L/C L/C L/C & Documents Reimbursement Authorization Goods Goods Nominated Bank Reimbursement Claim Documents

44. How Letters of Credit Work: Reality May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Foreign Buyer Buyer’s Bank Advising Bank Seller Nominated Bank Freight Forwarder Reimbursing Bank Contract L/C Appli- cation L/C L/C L/C L/C & Documents Documents Reimbursement Authorization Goods Goods Reimbursement Claim Reimbursement

45. How Letters of Credit Work: Reality May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Foreign Buyer Buyer’s Bank Advising Bank Seller Freight Forwarder Reimbursing Bank Contract L/C Appli- cation L/C L/C L/C L/C & Documents Documents Reimbursement Authorization Goods Goods Reimbursement Claim Nominated Bank Payment Seller’s Bank Payment Reimbursement

46. How Letters of Credit Work: Reality May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Advising Bank Seller’s Bank Seller Nominated Bank Freight Forwarder Reimbursing Bank Contract L/C Appli- cation L/C L/C L/C L/C & Documents Documents Payment Payment Reimbursement Authorization Reimbursement Goods Goods Reimbursement Claim Foreign Buyer Buyer’s Bank Docu- ments Debit

47. How Letters of Credit Work: Reality May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Foreign Buyer Buyer’s Bank Advising Bank Seller’s Bank Seller Nominated Bank Freight Forwarder Reimbursing Bank Contract L/C Appli- cation Docu- ments L/C L/C L/C L/C & Documents Documents Payment Payment Reimbursement Authorization Reimbursement Goods Goods Reimbursement Claim Debit

50. How Confirmed Letters of Credit Work May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Docu- ments Pay- ment Buyer Seller Goods Debit Documents Payment Docu- ments Contract Confirming Bank L/C L/C Buyer’s Bank L/C Appli- cation

51. How Silent Confirmation Works May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker Buyer A ‘silent confirmation’ is a commitment, issued in advance by the nominated bank, to purchase compliant documents without recourse Seller Goods Contract Debit Documents Payment Pay- ment Buyer’s Bank L/C Appli- cation Docu- ments Commit- ment L/C Advising Bank L/C Nominated Bank L/C Docu- ments

52. Risk Mitigation Techniques May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker

54. An Extended Look at Standby L/Cs May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker

59. UCP vs. ISP May 21, 2009 – BCLC – How L/Cs Work – Buddy Baker UCP600 ISP98 Force majeure L/C expires nonetheless Expiry extended 30 days after bank re-opens Consistency of documents Data in documents must not conflict Documents need not be consistent Time allowed for dishonor 5 banking days <4 days = reasonable >7 days = unreasonable Original documents “ In __ copies” means one original of each document “ Copies” means copies Transport documents Extensive, detailed requirements Treated like “other” documents Disposition of documents Strict requirements No requirements Deemed acceptance of amendments If documents comply w/ amended terms If documents will not comply w/o amendment Transfer One time but multiple partial transfers allowed Multiple times but always in entirety