Trade and Working Capital Finance

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Trade & Working Capital Finance: Engaging the Treasurer, Gauteng Province, South Africa

A 4-day course focused on the identification, risk mitigation, operation and structuring of trade and working capital finance solutions. This course enables the delegates to identify trade-related working capital opportunities, evaluate credit risk, determine the optimum structure to satisfy the client’s needs and gain credit support.

Focus is made on identifying the working capital drivers of the treasurer and proactively introducing solutions that satisfy their needs through a clear understanding of the client’s trade cycle and importance of DSO and DPO financial ratios.

This trade and working capital finance training enables client-facing personnel to engage with their customers and prospects with confidence and credibility, to raise questions and handle responses around the working capital needs of the client, to differentiate themselves in the marketplace, to identify sales opportunities and proactively select the right working capital finance solution.

The credit risk assessment in a self-liquidating structured trade and working capital finance facility differs from that of a conventional ‘balance sheet’ lending appraisal in that the primary source of repayment is the transactional proceeds rather than the borrower. The key aspects of appraisal will be described and compared with conventional lending assessment.

Emphasis is placed upon risk and working capital assessment, problem solving techniques, credit enhancement and deal structuring, through a clear understanding of a customer’s trade cycle. This will seek to ensure that the solution ‘joins the dots’ from identification of client need, credit risk appreciation, risk mitigation and formulation of the proposition which is articulated to the client and to the credit committee.

Training objectives

By attending this interactive and practical training course, the delegates will be able to:

  • Evaluate a client’s working capital needs and satisfy these proactively using trade and working capital finance solutions

  • Appreciate the operation, benefits and risk considerations of key trade and working capital products

  • Structure trade and working capital finance solutions to mitigate risk and satisfy client needs

  • Use trade and working capital finance solutions to differentiate from the competition

PROGRAM OUTLINE

SESSION 1

Working capital and risk mitigation needs identification

Key client drivers

  • Conflicting requirements of seller and buyer
  • Importance and implications of trade credit:
    • Need for credit
    • Credit risk exposure
    • Liquidity risk
  • Working capital optimisation:
    • Cash conversion cycle
    • Importance, calculation and assessment of DSO and DPO ratios

DSO & DPO

Calculation of DSO & DPO ratios
Risk assessment and sales opportunities for trade & working capital finance
Exercise    

 Need for trade finance

  • Description of trade finance
  • Why trade finance is required; the need for:
    • Risk mitigation and finance
    • Increased facility requirement in international trade
    • Alternative to balance sheet lending:
      • Self-liquidating
      • Identifiable and reliable source of transactional repayment
      • Reduced risk of default: results of the ICC trade register/survey
  • Key benefits of trade and working capital finance solutions to the bank and treasurer:
    • Increased credit appetite: repayment from the transactional proceeds
    • Control of documents, goods and monies
    • Monitoring of the transaction and timely triggers for enquiry

Funding the trade cycle

  • The trade cycle:
    • Key stages: risk profile of each
    • Identification and calculation of the funding gap
    • Plotting the time flow of goods, documentation and money

FACILITY CALCULATION

Identification of the funding  gap and calculation of the required credit facility
Exercise 

SESSION 2

Risk and trade documentation

Trade transactional risk evaluation: identifying and managing trade risk

  • Financial risk: buyer credit risk, country, and transfer risk
  • Performance risk: supply chain, nature of goods, delivery, dispute
  • Liquidity risk: client fulfilment of the end-buyer’s purchase order
  • Political risk: contract and/or payment frustration
  • Commercial risk: debt instrument, method of payment, trade credit terms, currency, Incoterms®, contractual terms, sales leverage, quality management, goods rejection, dilutions
  • Documentary risk: trade instrument, export and import clearance
  • Legal risk: impact on ICC rules, trade products, control and security over goods, debt recovery

PRE-SHIPMENT FINANCE: RISK APPRAISAL (Part 1)

Lou Rawls Machinery
Risk appraisal on the funding requirement of a potential client for the manufacture and export of a machine
Virtual breakout syndicate case study 

Trade documentation: its importance to trade finance

  • Important role of trade documentation in trade finance
  • Control over goods:
    • Importance of the bill of lading: key requirements for goods control and possession
    • Other modes of transport and implications for control
    • Cargo insurance: key aspects and considerations for the financier
    • Inspection certification: mitigating risk of dispute
    • Negotiable documents: function and importance

SESSION 3

Collections (import & export)

  • What a collection is:
    • Description and parties
  • When collections should be used
  • Bank responsibility:
    • Compliance with instructions
    • No undertaking to honour or pay (unless bank aval)
  • Types:
    • Documents against payment (DP/CAD)
    • Documents against acceptance (DA)
  • Operation
  • Risk, benefit, and control features
  • Dishonour: protest
  • Bank liability: document in trust facilities
  • Financing collections:
    • Import
    • Export
  • An appreciation of ICC rules URC 522
  • Advantages and disadvantages
  • Identification of sales and finance opportunities

ADVANCE AGAINST COLLECTIONS 

Poco Pipes
Consideration of the risks and benefits of an advance against collections facility compared with bank overdraft
Virtual breakout syndicate case study

SESSION 4

Bank aval

  • What bank aval is:
    • Description and parties
  • When bank aval should be used
  • Avalising bank liability: need for a credit approved facility
  • Form of bank aval and indemnification
  • Risk appreciation and benefits for the:
    • Seller
    • Buyer
    • Avalising bank
  • Financing avalised bills:
    • Seller’s bank
    • Buyer’s bank (avalising bank)
    • Third party financier
  • Identification of sales and finance opportunities

DEBT PURCHASE: AVALISED BILL OF EXCHANGE 

Dire Straits
Consideration of a request to purchase an avalised bill of exchange
Identification of the risk features and further information required to evaluate the proposition
Virtual breakout syndicate case study       

 

SESSION 5

Import letters of credit

Fundamentals

  • What a letter of credit is:
    • Description and parties
  • When letters of credit should be used
  • Key aspects:
    • Irrevocable
    • Conditional bank undertaking to pay
    • Banks deal only in documents ‘on their face’
    • Independence
  • ICC rules UCP 600; appreciation
  • Operation
  • Importance of documentation: standard for examination:
    • Complying presentation:
      • Obligation to honour/pay
      • Exceptions to the payment principle

Issuing the letter of credit

  • Opening a letter of credit:
    • Issuing bank undertaking
    • Facility limit requirement:
      • Terms of credit approval
  • Application form (example)
  • Risk, benefit, and control features:
    • Risk implications for issuing bank and applicant
    • Protecting the bank and the applicant:
      • Control of goods
      • Goods inspection
      • Cargo insurance
  • Sight and term credits:
    • Contingent and actual engagement bank liability

LETTER OF CREDIT FACILITY 

Stereophonics
Import letter of credit facility calculation
Exercise

Presentation of documents

  • Complying presentation:
    • Release of documents: obligation to honour
    • Timing of debit to applicant’s account
  • Discrepant presentation:
    • Common discrepancies
    • Discrepancy waiver and rejection:
      • Decision factors in rejecting the applicant’s discrepancy waiver

Financing

  • Financing working capital using import letters of credit:
    • Usance credits
    • Re-finance
    • Usance payable at sight: maximising bank income

Structuring

  • Structuring an import letter of credit: mitigation of risk:
    • Availability:
      • With whom
      • By sight payment, acceptance, deferred payment, or negotiation (nominated bank only)
    • Date and place of expiry:
      • Calculation of expiry date
    • Documentary requirements: control over document issuance and goods
    • Days allowed for presentation of documents:
      • Calculation re timely availability of documents for goods arrival

IMPORT LETTER OF CREDIT APPLICATION

Bowie Imports
Examination of a completed import letter of credit application form
Identification of technical issues and non-compliance with the terms of credit approval
Virtual breakout syndicate case study       

SESSION 6

Export letters of credit

Advising

  • Letter of credit (example)
  • Role of the advising bank:
    • Unconfirmed credits: no financial engagement by the advising bank
  • Confirmation: description and operation:
    • Confirming bank undertaking
    • Confirming bank risk:
      • Issuing bank and country risk
      • Documentary risk: issuing bank document rejection
    • Requested confirmation party (SWIFT field 58a)
    • Use of “may add” confirmation instruction
    • Silent confirmation:
      • Undertaking to pay
      • Commitment to negotiate
    • Benefits of confirmation:
      • Maximising group income opportunities
  • Amendments:
    • Acceptance and rejection

Presentation

  • Complying presentation: actions arising:
    • Advising bank
    • Negotiating bank
    • Confirming bank
  • Discrepant presentation under the export credit:
    • Importance of timely notice of rejection to the presenter
    • Risk implications of a discrepant presentation to the:
      • Beneficiary
      • Confirming bank
      • Negotiating bank
    • Options for handling discrepant documents:
      • Timescale for corrections/document replacement and resubmission
      • ‘Cable’ the issuing bank for authority to pay or negotiate
      • Transmission of documents in trust to the issuing bank
      • LC amendment aligning export credit requirements with documents presented

Financing

  • Financing of export letters of credit:
    • Pre-shipment
    • Discounting, negotiating, and advancing funds post-shipment(with and without recourse):
      • Calculation of discount/negotiation interest and charges
      • Financing implications for the negotiating bank
    • Assignment/allocation of proceeds

Structuring

  • Risk appreciation: structuring the export letter of credit to:
    • Protect the beneficiary
    • Reduce risk for the confirming bank
    • Facilitate working capital finance
    • Maximise revenue
  • Advantages and disadvantages of letters of credit
  • Identification of sales and finance opportunities

PRE-SHIPMENT FINANCE: EXPORT LC APPRAISAL (Part 2)

Lou Rawls Machinery
Evaluation of an export letter of credit and identification of risk
Recommendations for the restructuring of the LC terms to mitigate risk for the beneficiary and to facilitate financing
Virtual breakout syndicate case study       

SESSION 7

Standby credits & demand guarantees

  • Overview and operation
  • Types used for working capital enhancement and protection:
    • Advance payment facilitation:
      • Risk implications to the applicant (seller) of an advance payment guarantee or standby credit
      • Use of operative and reduction clauses to manage risk exposure
    • Release of retention monies
    • Payment security
  • Use of a commercial standby credit to support working capital solutions

SESSION 8

Open account trade 

  • Sales invoice:
    • Key elements
    • Risk appreciation and mitigation
  • Bill of exchange
  • Promissory note

 Short term credit insurance

  • What credit insurance is and when it should be used
  • Working with and evaluating a credit insurance policy:
    • Assessing the extent of financier cover
    • Financier endorsement: joint insured Vs loss payee
  • Risk appreciation: adherence to policy terms and conditions

CREDIT INSURANCE: EVALUATION

In Excess Traders
Evaluation of the suitability of a credit insurance schedule for financing support
Identification of areas of risk from a financier’s perspective
Virtual breakout syndicate case study       

SESSION 9

Receivables finance

Fundamentals

  • Financing open account transactions:
    • What receivables finance is and when it is used
  • Nature of debt and implications for finance:
    • Invoice (example):
      • Assignment of debt
    • Bill of exchange and promissory note (examples):
      • Independent payment obligation
      • Negotiability
  • Validity and legal enforceability of the trade receivable:
    • Proof of delivery in accordance with the Incoterms® rule
    • Encumbrance: can the financier achieve good title?
  • Debt purchase versus advance
  • Disclosed and undisclosed facilities:
    • Risk implications
  • Types of recourse:
    • With recourse
    • Limited recourse
    • Without recourse:
      • Re-purchase events

Risk assessment

  • Seller:
    • Ability to perform:
      • Credit note history: its importance to risk assessment
    • Debt turn trend (ageing of invoice debts)
    • Invoice dilutions
    • Concentration of the sales ledger
    • Contra trade
    • ‘Going concern status’
  • Debtor:
    • Ability to pay:
      • Credit term
    • Willingness to pay:
      • Nature of goods: specification and quality (dispute risk)
      • Timeliness of delivery
      • Post-delivery performance obligations
    • Transfer risk
    • Political risk
    • Collectability of debt: legal right to recovery
  • Prepayment:
    • Determining the amount to finance (prepay):
      • Dilutions and retentions

Types

  • Specific debt purchase:
    • Insured
    • Uninsured
  • Factoring:
    • Difference between factoring and confidential invoice discounting

INSURED DEBT PURCHASE 

Traffic Land Cruisers
Structuring an insured receivables finance solution for the sale of vehicles to Africa on three years trade credit
Virtual breakout syndicate case study

SESSION 10

Payables finance (supply chain finance)

  • What payables finance is and when it should be used
  • Financing the supply chain: types of payables finance:
    • Advance payment to the supplier
    • Financing prior to shipment to the end-buyer
    • Approved trade payables finance (buyer-led/reverse factoring)
  • Risk appreciation and structuring

PRE-SHIPMENT FINANCE: STRUCTURED PAYABLES SOLUTION (Part 3)

Lou Rawls Machinery
Structuring a payables funding solution for a potential client (manufacturer of a machine) which mitigates risks identified in Part 1
Virtual breakout syndicate case study

SESSION 11

Structured trade finance

  • The self-liquidating facility: primary source of repayment
  • When and why deal structuring should be used:
    • Requirement to transfer the primary source of repayment away from the borrower
  • Exercising control: ‘follow the goods, documentation and the money’
  • Facility structuring: key controls:
    • Use and application of finance
    • Linkage of payment and/or finance to trade documentation
    • Control over goods: bills of lading; warehouse receipts:
      • Maintaining control over movement of goods throughout the trade cycle
    • Cargo insurance: its importance to the financier
    • Establishing an identifiable and reliable source of repayment:
      • Credit quality
      • Nature of the debt instrument
      • Dependencies: performance risk and allowable dilutions
      • Controlling the source of repayment: ring fencing, ownership, and capture
  • Structuring each stage of the trade cycle: controlling and limiting the nature of risk exposure
  • Funding alignment: use of trade loans:
    • Managing risk exposure: use of facility sub-limits:
      • Drawdown documentation
      • Duration: identifiable date set for repayment aligned to the trade cycle

STRUCTURING A TRADE PAYABLES & RECEIVABLES SOLUTION 

Travis Meats
Risk appraisal and formulation of a solution for the importation of frozen chicken meat and its sale on extended trade credit terms
Virtual breakout syndicate case study

1Credit risk assessment in structured trade finance

  • Relevant factors to credit risk appraisal in structured trade finance:
    • Key aspects of credit assessment
    • Differences to traditional balance sheet assessment
    • The self-liquidating facility
    • Partially structured facilities
  • Relevance of financial statement analysis in structured trade finance:
    • Fundamental importance of performance risk to the structured trade financier
    • Importance of the client’s aged debtor and creditor listings, and credit note history
  • “Going concern”: dependence risk on other credit facilities:
    • Type of facilities: double finance risk?
    • Available headroom
    • Security provided
    • Expiry/renewal date
    • Facility covenants (risk of breach?)
  • Goods: risk aspects and dependencies to facility repayment:
    • Nature of goods:
      • Vulnerability to dispute
    • Product life cycle
    • Quality management
    • Secondary market: realisable price and liquidity
    • Security over goods: the legal principle of ‘lex situs’
    • Liquidation: the reality of  goods disposal
  • Identification, evaluation, and dependencies of the source of repayment:
    • Quality (end-buyer’s ability to pay)
    • Performance (end-buyer’s willingness to pay)
    • Control/capture of the trade receivable proceeds
    • Legal right to the receivable and rights of enforcement against the debtor
  • Sales leverage: motivation for end-buyer’s order (needs based or price driven?)

Proposition evaluation: key aspects

  • Key aspects of the evaluation of a trade proposition:
    • Basis of sales contract/end-buyer’s purchase order
    • Trade cycle
    • Supply chain
    • Nature of goods:
      • Risk of dispute
    • Secondary market:
      • Sales or market restriction (unique, branded or licensed goods)
      • Market liquidity (time to sale)
      • Realisable value (net of liquidation costs)
    • Quality risk management
    • Mode of shipment and/or domicile of warehoused goods:
      • Implications for control and perfection of security
    • End-buyer:
      • Credit status
      • Political and economic status of its country
      • Method of payment
      • Trade credit term
      • Debt instrument/nature of evidence of debt

SESSION 12

Using trade & working capital finance to originate business

  • Differentiating from the competition
  • Capturing the trade flow of clients and prospect companies
  • Maximising cross selling and finance opportunities

FORMULATING A COMPELLING TRADE & WORKING CAPITAL SOLUTION

Ultravox Lighting
Identification of the key business drivers of a potential new client who is sceptical on how structured finance can be beneficial
Formulation of a compelling solution which demonstrates the benefits of trade & working capital finance
Virtual breakout syndicate case study