Guide to for Fa It Ing

8/3/2019 Guide to for Fa It Ing

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FORFAITING

A useful tool in Trade Finance


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FORFAITING


1. What is Forfaiting?

2. Which instruments are eligible for forfaiting?

3. Why does the Exporter like the forfaiting tool?

4. What is the advantage for the Importer?

5. Any advantage for the Importers house bank?

6. Factoring versus Forfaiting

7. Suppliers Credits versus Buyers Credits

8. Which Documents do we usually require under

an a-Forfait-Transaction?

9. Example of a typical Transaction

10. How does a discount calculation look like?

11. What are the usual terms involved in a forfait deal?

12. How can such a deal be structured in the best possible way?

13. Which other instruments can NLB InterFinanz AG offer?

14. Sample Documentation for:

- promnote

- Letter of Guarantee- Letter of Credit


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FORFAITING


Forfaiting is a "without recourse or "non-recourse purchase of receivables

from Exporters which arise in context of a trade related transactions and

provide an exporter access to a lump sum of cash shortly after delivery thereby

reducing its assets and liabilities. In other words the "Forfaiter or purchaser of

an abstract claim takes on all risks which are associated with the payment,

such as:

- Political Risk (moratorium etc.)

- Transfer Risk

- Commercial Risk

- Currency Risk

- Interest Rate Risk

- Responsibility of Collection at Maturity

As only abstract payment claims are eligible for a forfait transaction, any

objections and defenses related to the underlying transaction have to besettled directly between the Exporter and the Importer and are explicitly

excluded from the a forfait deal.

1 WHAT IS FORFAITING?


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FORFAITING


Every instrument which in itself constitutes an irrevocable and

unconditional payment claim (i.e. are abstract), such as:

- Promissory Notes

- Bills of Exchange

- Deferred Payment Letters of Credit

- Stand By Letters of Credit

- Irrevocable and Unconditional Payment Guarantees

In principle Book Receivables can also be forfaited if they are accompanied

by a Bank Guarantee orif the obligor is willing to issue a confirmation in

favour of the Forfaiter stating that:

- the payment claims are legally valid,

- no third party rights to the claims exist,

- neither counterclaims nor rights to set-off will be exercised,- he irrevocably and unconditionally warrants to pay at maturity in

effective currency without deduction of any taxes, levies, duties,

charges of whatever nature,

- objections and defenses arising from the underlying transaction will

be lodged directly between Exporter and Importer.

2 WHICH INSTRUMENTS ARE ELIGIBLE FOR FORFAITING?


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FORFAITING


Neither Export Credit Agency (hereinafter: ECA) nor insurance cover is

needed and consequently the administrative workload involved in an

insurance covered deal is saved.

No losses arising from partial insurance cover/retainer.

It does not burden his credit limits.

Forfaiting cost can be built into the commercial contract.

Origin of goods is irrelevant (which is not the case with ECA cover).

100% of the contract value can be financed (which is not the case with

ECA cover).

Exporter gets 100% of the receivables off his books and thus eliminates allthe risks mentioned under point 1.

Often the forfaiting market offers longer tenors than ECAs.

Forfaiting is most of the time quicker and more flexible than ECA-covered

buyers credits.

No time consuming applications are required (as for ECA cover).

An exporter does not need to have an account/relationship with the

Forfaiter (like in buyers credit scenario).

For convenience purposes an exporter can settle the documentary part of

the deal through his house bank and does not have to go through the

Forfaiter.

3 WHY DOES AN EXPORTER LIKE THE FORFAITING TOOL?


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FORFAITING


He can buy goods on appropriate (according to the lifetime of the

underlying asset) credit terms.

He can obtain credit in a variety of hard currencies in accordance with a)

his own hard currency earnings or b) his assessment of interest rate or

currency fluctuation.

The time consuming application and decision periods of ECA or insurance

companies are saved.

4 WHAT IS THE ADVANTAGE FOR AN IMPORTER?


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FORFAITING


They can for example advise the l/c through a bank of their own choice.

In cases where usually the Exporter asks for a confirmed l/c, they save the

request for confirmation and consequently neither burden their limits with

the advising bank nor do they have to supply any collaterals to the advising

bank.

They can offer to their client/Importer financing of his trade flows on

competitive terms.

Often importers house bank does not even have sufficient lines or

adequate maturities for these lines with the exporters bank.

5 ANY ADVANTAGE FOR THE IMPORTERS HOUSE BANK?


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FORFAITING


A frequently asked question is, what is the difference between factoring and

forfaiting.

Factoring is the revolving sale of all or at least a majority of a companys

receivables to a factoring company. The acceptable tenor of the receivables is

usually maximum 180 days. A few factoring companies accept also tenors of

up to 360 days. There are two essential conditions to factoring:

1. the company that sells its receivables has to pass a credit review.

2. insurance cover for the commercial risk of the receivables has to be

obtained. Usually book receivables are acceptable.

The factoring company pays out a certain percentage of the claims i.e. for

example 80% and keeps 20% as default reserve.

Forfaiting is the single sale/purchase of a single transaction. The deal itself

has to be documented and assigned properly. The maximum forfaitable tenor

depends on the possibilities of the Forfaiters in the market i.e. their available

country and banklimits. Technically any tenors from 180 days up to 5-7 years

are feasible. There are no credit reviews of the Exporter required.

6 FACTORING VERSUS FORFAITING


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FORFAITING


If the suppliers credit is sold on a without recourse basis i.e. forfaited its less of

administrative work for the Exporter and his house bank then a buyers credit,

as a buyers credit requires a loan agreement; often an ECA cover is needed on

top and a risk premium for the takeover of the retainer through the Exporters

house bank has to be agreed. The supplier has to pay the premium to the ECA

and has over the full length of the financing period certain responsibilities

towards the ECA and his house bank.

In the scenario of a forfait transaction, the supplier has to get simultaneously,

at the time of contract conclusion with the Importer, a written commitment

from the Forfaiter. His obligation is then to ship within the agreed time span

and present proper documentation as agreed.

Once the Exporter has

- shipped his goods according to contractual stipulations with the

Importer, and- presented a full set of documents according to the forfaiting

agreement, and

- assigned his payment instruments to the Forfaiter

he will receive the discounted proceeds.

7 SUPPLIERS CREDITS VERSUS BUYERS CREDITS


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FORFAITING


- conformed copy of the underlying invoice(s)

- conformed copy of the underlying sales contract (financial section)

- conformed copy of the transport document

- plus:

a) In case of promissory notes or bills of exchange:

- notes endorsed in our favour "without recourse

b) In case of a Bank Guarantee:

- Letter of assignment issued by the Exporter assigning the underlying

payment claims towards the Importer and the guaranteeing bank in

our favour.

- Notification of the assignments issued by the Exporter addressed to

the Importer and the guaranteeing bank- Letter of acknowledgement issued from the Importer and the

guaranteeing bank acknowledging ourselves as new bona-fide-

holder.

c) In case of an L/C:

- Letter of assignment issued from the Exporter assigning the claims

arising from the l/c in our favour.

- Notification of the assignments issued by the Exporter addressed tothe advising and the guaranteeing bank.

- Letter of acknowledgement issued from the advising bank

acknowledging us as new beneficiary to the l/c (case by case)

- Letter of acknowledgement issued from the opening bank

confirming to us that they will effect payment under the l/c at

maturity in our favour and according to our instructions.

8 WHICH DOCUMENTS DO WE USUALLY REQUIREUNDER AN A-FORFAIT-TRANSACTION?


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FORFAITING


1. Prior to its negotiations with the Importer, it is recommendable that the

Exporter gets in touch with the Forfaiter and asks for the pricing for

financing the relative risk over the requested payment term, in order to get

the financing cost properly calculated and built into the contract value.

2. Upon signing of the sales contract, the Exporter should ask the Forfaiter fora firm written commitment which is from a security point of view

comparable to a confirmed l/c. This written commitment contains the

conditions precedent to the without recourse purchase and fixes the

financing cost involved.

3. By now the Exporter should receive the contractually stipulated security

from the Importer/his house bank in exchange for granting a suppliers

credit. After its receipt the Exporter can start the production of the goods.

9 EXAMPLE OF A TYPICAL TRANSACTION


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FORFAITING


4. When goods are ready for shipment the Exporter has to present the

documents to the Importer (through l/c; documentary collection etc.) in

accordance with the underlying instrument.

5. A conformed (i.e. a copy of the original that contains the words "true

copy and is duly signed on each page) copy of documents required under

the forfait contract has to be send to the Forfaiter together with a set of

assignment and notification letters (see point 8/documentary requirements).

6. After receipt of the acknowledgement of the assignments from the relevant

counterparties involved the Forfaiter will discount the receivables and

disburse funds without recourse in favour of the Exporter.

7. Now the legal relationship exists between Forfaiter and Obligor/Importers

House bank. At maturity, the Forfaiter will collect the funds under therelevant payment instrument and is duly entitled to receive payment.

9 EXAMPLE OF A TYPICAL TRANSACTION


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FORFAITING


If the Exporter approaches the Forfaiter prior to his sale negotiations with the

Importer, a buyers interest rate calculation can be prepared.

The Forfaiter will then - on the basis of the actually prevailing refinancingrates and the current risk margin for the underlying risk - make a discount

calculation that contains the value of the goods plus the cost for

discounting of the deal on a without recourse basis.

In the above example the Exporter will on the assumption that he receives

the written commitment on 09.03.2005 and discounting takes place value

10.06.2005 have to increase the sale price by

508.281,87 in order to receive for a granted financing period of 5 years and

10 halfyearly repayments net proceeds that equal his principal i.e. his original

sale price/value of goods less cost for commitment and discounting.

10 HOW DOES A DISCOUNT CALCULATION LOOK LIKE?


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FORFAITING


refinancing cost calculated on the basis of the cost of

refinancing for every maturity/instalment.

refinancing cost, calculated on the basis of the cost for

the average lifetime of the transaction.

applied cost for the underlying risk

days additionally calculated on the original maturity as

assumed period for late receipt of funds.

Risk margin usually calculated from the date of the

written commitment until disbursement of funds.

interest rate for in advance calculation of interest

(opposite of yield) comparable in terms of capital withpresent value.

interest rate for post calculation of interest (opposite of

straight discount) comparable in terms of capital with

future value.

e.g. annually, semi-annually, quarterly, monthly

Indicates how interest upon interest is calculated.

Usually the compounding method matches the tenor ofthe underlying instalments.

no compound method is applied.

11 WHAT ARE THE USUAL TERMS INVOLVED IN AFORFAIT DEAL?

Matching Libor:

Average Libor:

Risk Margin:

Days of Grace:

Commitment Fee:

Straight Discount:

Discount to yield:

Method of compounding:

Simple discount to yield:


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FORFAITING


Usually Exporters who are aware of the forfaiting tool approach their house

banks and ask for possibilities of forfaiting. If the house bank has no own

limits and work together with NLB InterFinanz AG they will ask us for a

commitment and sell the deal to us.

It is also possible that the Importers house bank informs the Importer of our

possibilities so that the Importer can advise his Exporter to get in touch with us

parallel to the sale negotiations. Than we can advise the Exporter directly of

the cost involved in a deal and help him to structure the deal tailor made

according to the needs of the parties involved.

12 HOW CAN SUCH A DEAL BE STRUCTURED IN THEBEST POSSIBLE WAY?


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FORFAITING


Commercial/Political Risk Guarantee

Sometimes the Exporter does not mind having the risk on its own books, due

to cheap inhouse refinancing. However he is not able to assess the

commercial/political risk of the export deal or his in-house regulations do not

permit to incur certain political/commercial risks.

In this case NLB InterFinanz AG is prepared to give an irrevocable counter-

guarantee for the commercial and/or political risk.

Silent confirmation

A silent confirmation for a sight letter of credit or a deferred payment l/c is the

irrevocable undertaking to pay at maturity of the l/c in case the opening bank

does not effect payment. It is usually asked for when the l/c does not bear a

request for confirmation, however the exporter would like to have additionalcomfort.

Down payment financing

If an export is financed through an ECA-covered buyers credit then a down

payment is required as precondition for the ECA cover. In this case we are

prepared to make the financing of the down payment. Usually we will ask for

a deferred payment l/c as instrument which is payable against singlepresentation of the down payment guarantee.

Pre-export financing

Subject to the underlying transaction and the counterparties involved it is

often structured on the basis of a stand by l/c.

13 WHICH OTHER INSTRUMENTS CANNLB INTERFINANZ AG OFFER?


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FORFAITING


How does a valid promnote look like?

14 SAMPLE DOCUMENTATION FORPromissory Notes

Name and Stamp ofthe avalizing Bank

Authorized

Signatures

Date and City of Issuance

Maturity DateBeneficiary of the Note

Currency and Amount in Figures

Currency and Amount in Words

Name of Bank and full Address

Name and Address of ObligorStamp and Signature of

Obligor

Valid Endorsement:

Pay to the order of:

NLB Interfinanz AG, Zurich

Without RecourseStamp of the Exporter/Seller of the noteAuthorized, valid and binding signatureson behalf of the Seller of the note


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FORFAITING


Place and Date of Issue Currency and Amount in Figures

On Maturity Date

against this Promissory Note we promise to pay to

Name of Beneficiary (i.e., Supplier) or their order

the sum of Amount in Words

effective payment to be made in Currency in words (e.g., United States Dollars),

without deduction for and free of any taxes, impost, levies or duties present or future of

any nature.

This Promissory Note is payable at Name and Address of Bank for Presentation

FOR VALUE RECEIVED

For and on behalf ofName of Maker

Authorised Signatory/ies

Per Aval for account of

Name of Maker

for and on behalf of

Name of Guarantor/ Guaranteeing Bank


PAY TO THE ORDER OF

name of purchaser of the promissory note (e.g. NLB InterFinanz AG)

Without Recourse

Name of Beneficiary


14 SAMPLE DOCUMENTATION FORSpecimen Promissory Note Free Draft

Prior to discount the Promissory Note should be endorsed on the reverse:

As there is no form-

requirement to a prom note,

it can be freely drafted.


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FORFAITING


14 SAMPLE DOCUMENTATION FORLetter of Guarantee /1

To be issued on the Letterhead of the Bank

Name

and full address

of the exporter

................... ...........................

Payment Guarantee No. ...............

We have been informed that you have concluded

a contract no. . dated .

with ......(name and full address of the importer).....,

hereinafter called "the importer"

for the supply of ...(name of goods)...

at a total price of .....................

Payment terms: XY % Down payment

XY in 10 equal half yearly instalments as follows:

Amount EURO Maturities

place date


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For the proper and due fulfilment of the above payment obligations a bank guarantee has to befurnished according to the contractual stipulations. .

In consideration of the aforesaid, we ...........(name and full address of the guaranteeingbank)............., irrespective of the validity and the legal effects of the above mentioned contract andwaiving all rights of objection and defence arising therefrom, hereby irrevocably and unconditionallyundertake to pay any amount up to

EURO ............(amount in figures)...........(in words: EURO xxxxhundredandxxxxxxxxthousandxxxxxhundredandxxxx-only)

upon receipt of your written request for payment stating that the importer has not fulfilled hispayment obligations at maturity. Such request shall be conclusive evidence of non-payment by theimporter of the amount requested.

Our payments under this guarantee will be made in effective EURO without deduction for and free ofany taxes, imposts, levies, duties, charges, set-offs or withholdings present or future of any nature.

For the purpose of identification, your demand has either to be presented through the intermediaryof your bankers confirming that the signatures thereon are binding upon yourselves.

This guarantee shall be automatically reduced by the amounts duly paid or by our payments made

under this letter of guarantee.

This guarantee is effective as of today and shall expire, even if this document is not returned, on........(30 days after the last maturity)......... at the latest, unless your written demand for paymentaccompanied by the requested statement in accordance with the above mentioned conditions hasreached us in ...........(seat of the bank)........... by the end of that day.

We confirm that this guarantee is our legally binding obligation and that all necessary governmentaland central bank consents and approvals have been obtained and complied with in order to enable usto remit effective Euro/US$ under this guarantee when requested. The issuance of this guarantee ispermitted according to the laws of . the country of issuance (Bosnia, Macedonia etc.)...............

This guarantee including all rights, privileges and benefits deriving therefrom is freely transferable and

may be assigned in full or in part without any limitation, fees or charges upon prior written notice tous.

This guarantee is governed by the laws of Germany/Austria/Switzerland/UK. We hereby submit to thejurisdiction of the courts of ., however this shall not prejudice your rights in any other jurisdictionwhere proceedings may be commenced against us.

Yours faithfully,

........................(name of issuing bank).................

(authorised signature) (authorised signature)(name) (name)

FORFAITING


14 SAMPLE DOCUMENTATION FORLetter of Guarantee / 2


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There are only 2 conditions to a Letter of credit:

the form has to be irrevocable

UCP 500 Revision 1993 has to apply.

14 SAMPLE DOCUMENTATION FORLetter of Credit