Distribution and Risk Mitigation Silja Calac, ITFA Board Member and Senior Underwriter, Swiss Re Corporate Solutions Paolo Carrozza, Chief Commercial Officer Middle East, Euler Hermes GCC Dubai, 13 February 2017

Agenda Brief summary of the Regulatory Environment : Capital Requirements / Basel III Risk Mitigation and Distribution of Trade Assets: Different forms of risk mitigation Insurance: Various risk cover available for transaction banking / trade finance

Capital requirements under Standard Approach AAA AAA- AA+AA AA AA- A+ A- BBB+ BBB BBB- BB+ BB BB- B+ B B- lower rating no rating in default Corporate Customers 20% 50% 100% 150% Sovereigns 0% Bank's residence country Banks / Insurance Retail 75% Commercial property 50 to 100%, to the discretion of local monetary authority Private property 35%

Effect of CRI on RWA $10M $50M $100M $100M $100M $60M $50M INSURANCE FROM ‘AA’ RATED ENTITY LOAN TO ‘BB’ RATED CORPORATE OBLIGOR RISK WEIGHTED ASSET VALUE OF ‘BB’ LOAN $10M NET COMBINED RISK WEIGHTED ASSETS $50M LOAN NET AFTER INSURANCE $50M $100M $100M $100M $60M

RWA and Regulatory Capital comparison table SHOWING LIKE-FOR-LIKE BENEFIT (BASE = 100)

Distribution Channels overview Risk Participations Relative simplicity and possibility of being undisclosed to original parties Relies on a “fronting” bank administering the transaction until maturity Insurance Also undisclosed and a complementary source of risk capacity Unfunded only, and minimum hold requirements Forfaiting Agreements Ongoing framework for individual transactions sold on a forfaiting basis Typically requires recognition of assignment/endorsement/transfer Assignment Frameworks Equitable Assignment Care around perfection of assignment Synthetic Securitisations Possible capital relief from selling first loss on a portfolio Difficult to achieve “risk mitigation” Collateralised Loan Obligations Comprehensive benefits from selling a “vertical slice” of portfolio Expensive to set up, diversity requirements preclude large single tickets Special Purpose Vehicles Repackaging transactions for institutional/alternative investors Single transactions may not be profitable enough to cover cost ECAs / Multilaterals Sovereign / multilateral risk support for transactions Typically in the form of a guarantee only, and specific criteria have to be met

Risk Mitigation Techniques The new industry focus on risk mitigation => development of a new investor base for trade finance : Risk Participation Structures Source: SIBOS 2011 – Citi presentation

risk participation A way of transferring economic risk & rewards without transferring legal title Two types: unfunded (risk) and funded Unfunded (risk) participation (essentially a guarantee) Underlying obligor Grantor Participant 1. $100m loan 2. Sells 50% risk participation 3. Defaults on $10m repayment instalment 4. Pays share of defaulted amount - $5m Funded participation (essentially a back-to-back limited recourse loan) Underlying obligor Grantor Participant 1. Utilisation of $100m loan 2. Participant with 50% participation pays share of utilised amount - $50m 3. Repays $10m instalment 4. Pays share of repaid amount - $5m

http://www.baft.org/policy/document-library BAFT MRPA Freitag, 12. Januar 2018 BAFT MRPA http://www.baft.org/policy/document-library Präsentationstitel/Autor/Instradierung/Klassifikation

INTRODUCTION: Why Insurance? The insurance market grew materially over the last 20 years as a consequence of growth in Emerging Market investments as well as political risk events (Argentina, Asian Debt crises, ..) and an increase in banks’ acceptance of the benefits of using insurance. Overall market size is estimated at over $2.0-2.5bn annual premium and growing. Main placement hubs are London, Zurich, New York, Singapore. Whereas the cover is unfunded the key value proposition of the insurance market is that it typically does not compete directly with the banks and is confidential. Key benefits of using insurance are: Alternative distribution channel Opportunity to sell down on a private/confidential basis, complementary with or as an alternative to traditional loan syndication. Provides a straight forward mechanism for sell down of club or bi-lateral transactions. Additional capacity On risks where you have reached internal credit limits (counterparty/country). To write a larger share of transactions (obtaining better pricing or league table status) in the knowledge that you can sell down to insurer. Capital management If cover is “unconditional” typically capital relief under Basel II/III on transactions, potentially enhancing return on capital committed to a transaction (specifically if “advanced” approach is used). Manage concentrations against counterparties, sub-sectors, geographies etc.

RISK COVER FOR Transaction banking Typical Products Providers Clients Insurance Market Solutions Domestic Credit Insurance Export Credit Credit Companies (Mono- and Multiliners) Surety Financial Guaranty Trade Credit Political Risk Insurance Confiscation, Currency Inconvertibility, Contract Frustration, Political Violence Multiline insurers, Export Credit Agencies, Lloyd’s Syndicates Banks, larger Corporates Risk Participation Construction, Supply, Customs Performance, Bonds Specialized Surety Companies and Multiline Insurers Large Construction Companies Small / medium sized Corporates Documentary Trade Finance Commodity Trade Finance Banks, Insurers Banks Commodity Traders Consumer Loan Insurance, Mortgage Indemnity, "Credit Enhancement" Specialized Insurers, Export Credit Agencies Page 11 Lenders, Investors

CREDIT RISK INSURANCE covering accounts receivable Cover: Non-payment of a debt or a financial obligation Credit Risk Insurance “CRI” covering a wide range of financial obligations loans, guarantees, documentary credits Short Term Trade Credit Insurance “TCI” covering accounts receivable Non-payment caused by “3 Perils” : Confiscation/Expropriation, War/Political Violence and Inconvertibility Political Risk Insurance “PRI” covering loans, guarantees, projects parent company lending

Insuring clause - SAMPLES Typical insurance policy language for a bank CRI policy: The Insurer shall pay Compensation on the Claim Settlement Date to the Insured for the Insured Loss caused by the failure or refusal of the Borrower, for any reason, to pay Insured Principal due under the Insured Loan Agreement, provided that the Date of Loss occurs during the Policy Period. Typical insurance policy language for a corporate TCI policy: In consideration of the payment of the Premium, subject to and in reliance upon the statements made to the Insurers by the Insured and in strict accordance with the Policy Schedule and endorsements made as part of the Policy and its terms and conditions, the Insurer agrees to indemnify the Insured for the Insured Percentage of Loss in excess of the Deductible, provided that the Date of Loss occurs during the Policy Period, incurred in connection with Eligible Shipments and caused directly by Insolvency or Default, up to the applicable Limits of Liability. Typical insurance policy language for a Lenders Form policy: The Insurer shall be liable and shall pay Compensation to the Insured, subject to the terms and conditions set forth in this Insurance Policy, for the Insured Percentage of the Insured’s Loss caused by the following Political Risk Events: Expropriation and/or War on Land, Terrorism, Political Violence and/or Currency Inconvertibility and for which the Date of Loss occurs during the Policy Period.

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