School of Trade Finance

Learn essential techniques on buy and sell-side with our comprehensive school

Euromoney training course provides practical, in-depth coverage of international trade and commodity finance. The conflicting needs of buyer and seller are identified and how trade finance provides risk mitigation and working capital solutions for both exporter and importer

The training covers the importance of Incoterms® rules, commercial contract, the nature of trade documentation, how to maintain control over the goods, the risks faced by exporters, importers and banks, and detailed coverage of the key trade products to include the parties, mechanics, risk mitigating features, optimal structuring techniques and financing solutions

Emphasis is placed upon risk assessment, problem solving techniques and deal structuring, through a clear understanding of a corporate’s trade cycle. Great attention is paid to the effective and appropriate use of structured financing techniques in meeting the corporate’s needs for optimal working capital solutions, whilst satisfying the bank’s requirement for controlled lending and credit support

The course uses extensive case studies1 and exercises to develop the understanding of attendees in a practical and engaging way across a range of scenarios on the identification of risk, risk mitigation, structuring techniques and providing optimal working capital solutions for the bank and the corporate

1The case studies and exercises described are provided for indicative purposes only. The trainer reserves the right of discretion to vary the selection of case studies covered in the classroom depending upon the background, experience and key learning objectives of the delegates in attendance and classroom time availability

Objectives

By attending this training course, the delegates will:

• Know when and how to use trade finance effectively
• Appreciate the importance of the commercial contract, Incoterms® and trade documentation
• Identify trade risk and how this can be mitigated
• Know the methods of payment, their use, risks and benefits to the buyer, seller and the financier
• Identify when and how each of the trade finance products should be used
• Understand the risks, benefits and key considerations of each of the trade finance products
• Appreciate the operation and risk considerations of on demand guarantees and standby credits
• Structure documentary credits, standby credits and letters of guarantee to mitigate risk
• Be able to gather information to thoroughly assess and evaluate a trade proposition
• Understand the fundamentals of deal structuring
• Construct a trade cycle time line to evaluate type, amount and duration of trade finance
• Appreciate why trade finance is an alternative to balance sheet lending assessment
• Understand the key aspects and structuring techniques of receivables finance
• Be aware of the key payables and supply chain finance solutions and when they should be used
• Apply credit enhancement techniques, ECA support and evaluate credit insurance
• Structure a self-liquidating trade finance facility
• Appreciate the structures, products and risk management in commodity trade finance
• Apply AML, sanctions and fraud based suspicious activity indicators
• Be aware of the market trends and developments in trade finance

Agenda

Day 1

Trade finance – its essential role in trade and revenue growth

• Conflicting requirements of seller and buyer
• The importance and implications of trade credit:
• Credit risk exposure
• Liquidity risk
• Working capital optimisation:
• Cash conversion cycle
• Identifying the funding gap
• Importance and calculation of DSO and DPO ratios
• The essential role of trade finance:
• Benefits to corporate and bank

Incoterms® rules 2020

• Their relevance and importance to risk management
• Key differences to Incoterms® 2010
• Examination of the most commonly used Incoterms®
• Importance of Incoterms® from a trade financing perspective

Case study: evaluation of the needs of the seller, buyer and financier in a case study prioritising the Incoterms® rules in order of preference from a control and risk mitigation perspective

Commercial contracts

• Key aspects of the commercial contract:
• Its importance to the financier

Case study: examination of a commercial contract and identification of areas of risk for the seller and financier and the required amendments to mitigate risk

Trade documentation; its importance to trade finance

• Bill of lading:
• Function and key features
• Taking control of the goods
• Other types of bill of lading
• The use of the shipping guarantee; example
• Air waybill
• Taking control of the goods:
• Practical issues
• Other transport documents and risk implications
• Cargo insurance: key aspects and considerations
• Inspection certification: basis of inspection and its importance to risk mitigation

Identifying and managing trade risk

• Financial: buyer credit risk, country and transfer risk
• Political risk: contract and/or payment frustration
• Commercial risk: debt instrument, method of payment, commercial terms, sales leverage
• Performance: supply chain, nature of goods, delivery, dispute
• Documentary: trade instrument performance, export and import clearance
• Legal risk: impact on ICC rules, trade products, security over goods, debt recovery

Methods of payment

• The payment “risk ladder”: key risk considerations for importer and exporter

Exercise: determining the key commercial aspects of a trade transaction to mitigate risk

*Day 2 *

Documentary collections

• What a collection is and when it should be used
• Bank responsibility
• Parties
• Types:
• Documents against payment (DP/CAD)
• Documents against acceptance (DA)
• Operation
• Collection schedule of instruction (example)
• Risk and control features
• Protest
• Financing: advance against collections
• ICC URC 522 rules; appreciation
• Advantages and disadvantages

Case study: consideration of the risk and benefits to the financier of an advance against collections facility compared with a bank overdraft

Bank aval

• What avalisation is and when it should be used
• Risk and benefit features
• Financing opportunities

Documentary letters of credit

• What a letter of credit is and when it should be used
• Key aspects
• Parties
• Structure:
• Availability
• Expiry date and place
• Documentary presentation period
• Bank to bank reimbursement

Exercise: calculation of the letter of credit facility requirement for an importer

• Confirmation:
• Unconfirmed credits; risk implications to the beneficiary
• Confirming bank liability:
• Without recourse financing
• Documentary risk
• Silent confirmation:
• Types, operation and terms of a ‘commitment to negotiate’
• Letter of credit process
• Letter of credit example
• Amendments: acceptance and rejection
• Risk appreciation - structuring the letter of credit to protect the:
• Applicant
• Issuing bank
• Beneficiary
• Importance of documentation: standard for examination
• Use of the letter of indemnity (LOI): example
• Complying presentation - obligation to honour/pay:
• Exceptions to the payment principle
• Discrepant presentation; risk implications to the:
• Beneficiary
• Confirming bank
• Negotiating bank
• Discrepant waiver:
• Applicant waiver
• Applicant rejection
• Issuing bank waiver rejection

Exercise: examination of a completed import letter of credit application form and identification of technical issues and non-compliance with the terms of credit approval

*Day 3 *

Documentary letters of credit (continued)

• Financing:
• Pre-shipment finance
• Discount/negotiation (example):
• With and without recourse
• Refinancing
• Usance payable at sight
• ICC UCP 600, ISBP 745, URR 725 rules; appreciation
• Letters of credit: advantages and disadvantages

Case study: evaluation of an export letter of credit and identification of risk for the beneficiary. Recommendations will be made for the restructuring of the LC terms to mitigate risk for the manufacturer (beneficiary) and to facilitate financing

Other forms of letters of credit

• Use, operation, risk and structuring of:
• Transferable letters of credit
• Back to back letters of credit
• Revolving letters of credit

Standby credits

• What a standby credit is and when it is used
• The operation of standby credits
• Commercial standby letter of credit (working example)
• Structuring standby credits: risk appreciation and mitigation
• The use of UCP 600 and ISP 98
• How a standby credit differs from a documentary credit and demand guarantee

*Day 4 *

Case study: assessment of the risk profile of a middle-party’s request for a standby letter of credit and an increase in their overdraft in respect of the purchase of pre-sold goods. Construction of the trade cycle timeline, calculation of the facility requirement and formulation of an import and export trade financing structure to mitigate risk for the bank and middle-party

Demand guarantees

• What demand bank guarantees are and when they are used
• Key aspects
• Direct guarantees
• Indirect guarantees - operation and parties:
• Nature, role and risk implications of the counter-guarantee (example)
• Types: bid, advance payment, performance and payment
• Text wordings: APG working example
• Key clauses: guarantee text construction
• Claim demand
• Risk appreciation:
• Unjustified claim (unfair calling)
• Fair calling (politically driven)
• Extend or pay notice
• Foreign laws and usages
• Cancellation
• Risk management: structuring guarantees
• URDG 758: appreciation and use

Case study: consideration of a request to issue an advance payment guarantee, identification of the risks and formulation of a proposal to mitigate risk exposure

Forfaiting

• What forfaiting is and when it is used
• Description, parties and process
• Without recourse finance:
• Events of recourse
• Primary and secondary purchase
• Risk appreciation and due diligence
• ICC URF 800: appreciation

Case study: consideration of a request to purchase an avalised bill of exchange, identification of the risk features and further information required to evaluate the proposition

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 cover
• Financier endorsement - joint insured Vs loss payee
• Risk appreciation: adherence to policy terms and conditions

Receivables finance

• What receivables finance is and when it is used
• Accelerating the receivable: improving the DSO ratio
• Nature of debt and implications for finance:
• Invoice: assignment of debt
• Bill of exchange and promissory note (examples)
• Proof of delivery (relevance of the Incoterms® rule)
• Disclosed and undisclosed facilities:
• Risk implications
• Recourse and re-purchase events
• Seller - risk assessment:
• Ability to perform
• ‘Going concern’ status
• Debtor - risk assessment:
• Ability to pay (and country transfer risk)
• Willingness to pay
• Prepayment:
• Determining the amount to finance (prepay): dilutions and retentions
• Types of receivables finance:
• Specific debt purchase: insured and uninsured
• Factoring
• Difference between factoring and confidential invoice discounting

Case study: structuring an insured receivables finance solution for the sale of vehicles to a buyer in Africa on three years trade credit

*Day 5 *

Pre-shipment finance (supplier led)

• Description, use and operation
• Risk appreciation and structuring

Approved trade payables finance/supply chain finance (buyer led)

• Description, use and operation
• Risk appreciation and evaluation

Export Credit Agency (ECA) support

• Role of an ECA
• Financing and mitigating risk with ECA support
• Eligibility for ECA support: regulations and criteria
• Types of ECA support - description and operation:
• Supplier credit
• Buyer credit
• Lines of credit: general purpose and project specific
• Partial guarantees to lenders
• Bond support
• Letter of credit confirmation support
• Credit insurance cover

Structured trade finance; exercising control

• The self-liquidating facility - primary source of repayment
• When and why deal structuring should be used
• Establishing an identifiable and reliable source of repayment:
• Credit quality
• Nature of the debt instrument
• Dependencies: performance risk and allowable dilutions
• Understanding and evaluating the trade cycle:
• Key stages - risk profile of each
• Plotting the time flow of goods, documentation and money

Exercise: identification of the funding gap and calculation of the facility requirement

• Exercising control: ‘follow the goods, documentation and the money’
• Facility structuring - key controls
• Structuring each stage of the trade cycle - controlling the nature of risk exposure:
• Use of labelled/descriptive trade loans
• Managing risk exposure aligned to facility sub-limits:
• Drawdown documentation
• Duration: repayment aligned to the trade cycle
• Taking security over the goods: pledge and trust receipt
• Reality of security - liquidation of goods

Commodity trade finance

• What commodity finance is and when it should be used:
• Using structured commodity finance to look beyond the balance sheet
• Typical commodities
• An appreciation of the key risk characteristics of commodity financing
• Financing the commodity trader
• Pre-export and prepayment:
• Risk appreciation and mitigation

Case study: the structuring of a pre-export finance solution

• Warehouse financing:
• Control of goods: warehouse receipt, warrant, deed of attornment
• Warehouse receipt - negotiable?
• Security over goods - legal implications of ‘lex situs’
• Financing ratio
• Risk appreciation and mitigation
• Role of collateral managers
• Receivables:
• Structural enhancement
• Borrowing base:
• Operation
• Risk appreciation

Case study: identification of the risks and construction of a trade financing solution across the commodity cycle

Recent developments and trends

Summary and close

DELEGATE PACK

Trade document examples

• Debt instruments:
• Bill of exchange
• Promissory note
• Bank aval
• Collection instructions:
• Accompanying shipping documents (document examples)
• Letter of credit:
• Amendment
• Presentation (document examples)
• Allocation of proceeds
• Discrepancy notice
• Standby credit (UCP & ISP)
• Demand guarantees:
• Bid
• Advance payment
• Performance
• Payment
• Counter
• Letter of indemnity (LOI)
• Shipping guarantee
• Warehouse receipt