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Copyright © International Chamber of Commerce (ICC). All rights reserved.
( Source of the document: ICC Digital Library )
by Mark Ford
by Mark Ford
As the world emerges hesitantly from the global financial crisis, the letter of credit is repositioning itself with some success in the post-crisis era, at least in terms of not losing significant ground to alternative methods of trade finance.
By contrast, credit insurance had a very bumpy ride during the crisis and has yet to fully recover. There is evidence of some flight to open account and supply chain financing solutions, while the nascent and still tiny international factoring industry appears to be emerging quite strongly from the financial maelstrom of recent years.
A recent survey by credit insurer, Atradius, confirmed that conditions for trade finance users remain tough worldwide. On 30 September 2010, its latest biannual Payment Practices Barometer reported that businesses - even in countries not severely hit by the financial crisis such as China and Poland - were suffering payment problems.
Many respondents said they had to take specific measures to protect and correct their own cash flow and in some cases postpone payments to their own suppliers. In the UK, where nearly 4,000 firms were canvassed, 59 per cent of respondents reported that customers had requested extended payment terms over the past six months, while 57 per cent of companies surveyed reported delayed payment from customers without prior agreement.
These scenarios suggest that businesses would be gravitating to more secure methods of payment, but according to Marc Henstridge, head of risk for Atradius UK and Ireland, today's trade finance environment is sometimes having the opposite effect. "In some cases, we are seeing more supply chain credit in use, which shows businesses are supporting one another in the face of straitened credit supply from other sources, which is a positive," he says. Nevertheless, he stresses the negative impacts of unexpected payment delays and advises businesses to protect themselves against unforeseen circumstances.
Credit insurance and factoring
Credit insurers had a dire financial crisis, experiencing not only falling premiums but some very substantial claims as well. In terms of sales in 2009, the members of the Berne Union supported USD 1.4 trillion of new business, down 9.7 per cent from the international association of credit insurers' 2008 peak, but a greater overall volume than it recorded for 2007 and preceding years.
Credit insurers remain unpopular in some quarters, since underwriters shied away from risks in autumn 2008 to avoid potentially calamitous losses. At first sight, there appear to be signs of recovery. COFACE, the French-headquartered trade receivables group, reported a net profit of EUR 60 million for the first nine months of 2010, compared with a loss of EUR 166 million in the same period in the previous year. Euler Hermes, the largest credit insurer, is reporting a rise in enquiries.
But the recovery at COFACE is not down to credit insurance. The group says its biggest growth was registered by turnover from factoring, which gained 18 per cent to EUR 85 million, while turnover from insurance increased by just 0.5 per cent to EUR 930 million in the first nine months of 2010.
The relatively very small market for international factoring - worth just EUR 165 billion worldwide in 2009 - fared reasonably well through the crisis. According to Factors Chain International (FCI), the value of international factoring declined by just 6.08 per cent in 2009, half of the contraction of 12.2 per cent in the volume of global trade that same year as calculated by the World Trade Organization (WTO).
In comparison, the average value of L/Cs - although it initially plunged 19 per cent between December 2008 and March 2009 - declined by just 4 per cent between December 2008 and September 2009, according to SWIFT.
ICC's Rethinking Trade Finance 2010 Survey confirmed this trend. It found that around 60 per cent of respondents indicated that the value of trade finance activity they handled had decreased between 2008 and 2009.
But as SWIFT points out, it has not all been gloom and doom. From a regional perspective, Asia Pacific showed the largest and most consistent increase in L/C average value of 25 per cent over its survey period. By contrast, the Europe non-euro region, a region with a high average L/C value, saw a significant decrease of 31 per cent.
Factoring and L/C outlooks
International factoring has seen the strongest growth in Asia as well. The secretary general of FCI, Jeroen Kohnstamm, says the largest percentage growth has been seen in inter-Asian trade and describes a "remarkable growth of import factoring" in countries such as China and Taiwan.
Factors see recent growth as an encouraging sign that international traders are becoming more familiar with the advantages to be derived from factoring, while respondents to the ICC Survey also thought the future looked bright in terms of demand for traditional trade finance products. Specifically, these respondents thought demand for commercial L/Cs, standby L/Cs, guarantees and collections would be sustained in 2010, a view supported by anecdotal evidence of the year's results. A majority of 84 per cent of respondents anticipated an increase in demand for traditional trade products, while 93 per cent were confident they could meet increased demand for these products.
In some instances, the financial crisis has created new environments in which the L/C and credit insurance markets are often collaborating. This particularly appears to be the case in transactions between emerging market issuing banks and confirming banks in OECD countries. During the crisis, the appetite of banks in developed countries to partner emerging market banking risks diminished, causing OECD banks to take out public or private insurance.
One French banker told DCInisght this remains a commonly used technique, and it is one that has propelled export credit agencies (ECAs) into key arenas in the post-crisis trade finance market. Documentary credit insurance is now provided by ECAs worldwide.
Respondents to the ICC Survey indicated that trade facilitation programs, such as those offered by ECAs and multilateral development agencies, are providing valuable trade support, a view shared by a finance director of a large European shipbuilder who said he was "very positive" about the role his ECA had provided. However, he did add that his firm sometimes found it difficult to come up with additional security requirements demanded by the ECA.
Several ECA facilities are only just coming on stream. The UK's Export Credits Guarantee Department (ECGD) only signed up the first participant in its Letter of Credit Guarantee Scheme in August 2010. ECGD will help Spooner Industries deliver a EUR 5 million export order for equipment for the paper industry to the Philippines. Perhaps the most notable feature in the deal is the public-private risk sharing. ECGD guaranteed EUR 1 million of the EUR 2 million trade facility provided by Lloyds Banking Group.
Public-private risk sharing is becoming increasingly frequent in post-crisis trade finance. Citigroup, for example, recently signed up with the International Finance Corporation (IFC) and the African Development Bank in a USD 300 million scheme under the Global Trade Liquidity Programme (GTLP). The innovative shortterm, revolving nature of the assets could generate up to USD 1.5 billion in trade finance for African traders.
These partnerships are helping the L/C regain pre-crisis positions and establish new niches. However, documentary credit professionals should be aware that other types of trade finance are also being encouraged by public-private partnerships. The IFC, for example, is partnering Russia's Transcapitalbank and Malta's FIMBank to establish a new factoring company.
The question of what form of trade finance will dominate in future is still very much up in the air.
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