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Scotia Bank & EDC Working Together EDC’s Tool Box for Bankers

Scotia Bank & EDC Working Together EDC’s Tool Box for Bankers. Why you would to consider our Tools To Help You. A compliment to the bank’s offerings to its customers Especially where customer needs stretch your ability to cover off additional or specific risks

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Scotia Bank & EDC Working Together EDC’s Tool Box for Bankers

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  1. Scotia Bank & EDC Working TogetherEDC’s Tool Box for Bankers

  2. Why you would to consider our ToolsTo Help You • A compliment to the bank’s offerings to its customers • Especially where customer needs stretch your ability to cover off additional or specific risks • Ability to strengthen bank's offerings in a weak credit environment • Broadens & enhances your range of solutions to serve customers • Helps to manage your own risk • Differentiation in a competitive market • Creatively leveraged EDC solutions provide greater value added to your customers • Grow prospects, increased share of customers' wallets, and/or its portfolio • Customer retention and growth through enhanced value-added

  3. Why you would want to consider our ToolsTo Help Your Customers • Enhancing working capital and protecting assets • Credit & political risk insurance • Bonding support • Getting a competitive edge • Buyer financing • Protecting & financing foreign investments • Knowledge is power! • Online buyer credit checks • Export market insight • Both direct and indirect exports • Sales made directly to a foreign buyer • Supply sales to a Canadian that in turn sells to a foreign buyer

  4. EDC’s RoleHelping Banks help Customers • Freeing up working capital • Guarantees as collateral for L/G issued on the customer’s behalf • Increasing working capital • Risk-sharing on contract-specific or incremental Operating Credit Lines • Increasing Borrowing Base value • Mitigating risk • A full range of insurance & bonding, guarantees and financing services that transfer risk from the bank’s or customer’s balance sheet to EDC

  5. Case Study Thor Export

  6. Thor Export • Electrical control equipment for water treatment industry with world-class software to manage the system • Sales: $8 million / Equity: $3.2 million / Operating Line: $2 million – OK for normal day-to-day ops but not much additional capacity Situation • US$2 million contract to supply a system to a buyer in Finland. This is double the size of normal contract, but standard technology • Terms: 85% net 60 shipment / 15% @ commissioning + delivery of a 24-month warranty bond • Buyer has requested 5-year financing • Chinese supplier needs advance payment before starting as well as an LC for the remaining balance before starting • Manufacturing costs = $1.25 million • Cash flow over 9-month manufacturing period = - $1.0 million

  7. Contract Signing Final Payment Shipment 9 months 60d Non-payment Risk (85%) Advance Payment Non-payment Risk (15%) ILC to Chinese supplier Cash flow Delivery and Installation ManufacturingPeriod Credit Period WarrantyPeriod Pre-contract Period Thor Export Warranty Bond Buyer Financing time WIP LOC F/X Risk

  8. Contract Signing Final Payment Shipment 9 months 60d Advance Payment ILC to Chinese supplier Delivery and Installation ManufacturingPeriod Credit Period WarrantyPeriod Pre-contract Period Thor Export • Advance Payment Requirement & Payment ILC • Both items place pressure on Thor’s working capital • One option might be issuance of a Standby ILC in return for dropping advance payment requirement – supplier could use as security with its bank for WIP financing … Thor’s LOC still reduced but at least there is no cash payment time • Financial Services Guarantee • 100% guarantee from EDC to the bank • Restores Thor’s LOC • If bank instrument is called, EDC pays under its own • EDC = AAA = zero-rated = profitable for the bank • Other possible applications … • Regulatory bonds • Support for foreign subsidiary LOC • Utility bonds • Landlord bonds

  9. Contract Signing Final Payment Shipment 9 months 60d Cash flow Delivery and Installation ManufacturingPeriod Credit Period WarrantyPeriod Pre-contract Period Thor Export • Exporter Guarantee Program • 75% guarantee from EDC to the bank • Pari passu security sharing • Set up fee shared @ 50/50 • Interest spread shared proportionally @ 75/25 • Bank’s COF defined as Prime-50pb = profitable! • In the event of multiple contacts, a revolver could be set up on the same terms • Contract Frustration Insurance • Many banks require their customers get contract insurance as extra security – esp for risks like contract cancellation or buyer bankruptcy during the manufacturingperiod time • Oh and did we mention? … • If there was the need for new equipment, the same guarantee concept could be used as collateral for a capital loan on a 50/50 risk-sharing split • A similar 50/50 split would apply for an operating loan • Could also be structured to support foreign expansion – existing or new asset acquisition WIP LOC • Work in Process Financing • Larger-than-usual transaction = temporary bulge in LOC • This contract alone will use up 50% of Thor’s line

  10. Contract Signing Final Payment Shipment 9 months 60d Non-payment Risk (85%) Non-payment Risk (15%) Delivery and Installation ManufacturingPeriod Credit Period WarrantyPeriod Pre-contract Period Thor Export • Credit Insurance • Most banks recognize EDC-insured A/Rs as better quality security • Can help to manage the financial risk exposure to the bank’s customer • Reinforces – sometimes introduces! – the idea of credit (A/R) risk management practices of the bank’s customer • Claim payments can be made directly to the bank under a direction-to-pay time • Non-payment risk • Could be due to commercial or political causes • Foreign A/Rs often are not accepted as collateral at the same % as domestic A/Rs = limitation on LOC • Overdues are removed from the A/R pool forming collateral = hit on LOC • Risky buyers increase the overall risk profile of the bank’s customer

  11. Contract Signing Final Payment Shipment 9 months 60d Non-payment Risk (85%) Non-payment Risk (15%) Delivery and Installation ManufacturingPeriod Credit Period WarrantyPeriod Pre-contract Period Thor Export • Foreign Exchange Facility Guarantee • Replaces the need for cash collateral = frees up LOC = increased working capital • 100% guarantee from EDC to the bank • The bank must make a demand on the customer before calling on the EDC guarantee, but does not have to crystallize any security time • Foreign Exchange Fluctuations • Mismatched supply and export contract currencies cause a financial risk to the bank’s customer • F/X forward contracts help to manage that risk, but require cash collateral = hit on LOC = reduced working capital F/X Risk

  12. Contract Signing Final Payment Shipment 9 months 60d Delivery and Installation ManufacturingPeriod Credit Period WarrantyPeriod Pre-contract Period Thor Export • Performance Security Insurance • Call is 100% in buyer’s control = risk of wrongful call • EDC indemnifies the customer for 95% • Most banks require their customers to get both products for risk mitigation Warranty Bond time • Performance Security Guarantee • 100% guarantee from EDC to the bank • If bank instrument is called, EDC pays under its own • EDC does not take security, but does get a recourse agreement • EDC = AAA = zero-rated = profitable for the bank • working capital is restored to the customer • Warranty Bond • Issued by the bank to guarantee exporter performance • Payable on demand by the buyer/beneficiary • Bank doesn’t judge validity of claim – just pays • Need for cash collateral = hit on LOC = reduced working capital

  13. Contract Signing Final Payment Shipment 9 months 60d Delivery and Installation ManufacturingPeriod Credit Period WarrantyPeriod Pre-contract Period Thor Export • Foreign Buyer Financing • EDC can bring capacity to the market • Co-financing with the bank is an option Buyer Financing time • Buyer financing • The bank may not have the appetite to provide foreign buyer financing for a variety of reasons – market or portfolio considerations; credit risk; term; etc

  14. Final Payment Shipment 60d Thor Export … 2010 • Opportunities – and Risks - Abroad • Follow-on foreign investment opportunities may arise related to export transactions • Integration into global supply chains • Establishment of off-shore production facilities • JV or other investment partnerships • But with opportunities come risks and the need for financial support CDIA time • Canadian Direct Investment Abroad • A wide range of products can contribute to an overall solution • The Exporter Guarantee Program can be used to guarantee the bank on loans extended to acquire assets abroad • A Financial Security Guarantee to the bank can backstop domestic guarantees issued to help a sub located abroad obtain an LOC from a foreign bank • Political Risk Insurance can protect • The investor against in-country political risks like expropriation, transfer & conversion problems and war damage • The bank on project loans in developing countries • To name a few …

  15. Summary of EDC Solutions To address buyer risks To address exporter risks Full Range of Services Loan Guarantees Bonding Financing Insurance

  16. EDC Solutions – Buyer Risks

  17. EDC Solutions – Exporter Risks

  18. Got a customer involved in an export transaction or investment abroad?Call us.We’d love to talk to you Jeff MacArthur Account Manager (506) 851-6066 jmacarthur@edc.ca

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