“Getting Paid for Your Exports in a Challenging Global Economy” Lansing, MI Bill Richeson, CTP Senior Vice President International Division PNC Bank Ph: (616)771-8849 November 17, 2011

AGENDA Incoterms 2010 Foreign Exchange Payment Methods Letters of Credit at Financing Tools Medium-Term Financing for Foreign Buyers Export Credit Insurance Examples and “War Stories” Q & A

Pricing/Shipping Terms Known as Incoterms 2010 Published by: ICC Publishing Corporation 156 Fifth Avenue New York, New York 10010 (212) 206-1150 Website: http://www.iccwbo.org A set of international rules, initially formulated in 1936 by the International Chamber of Commerce (ICC) to define & interpret a standard set of pricing/shipping terms for international trade. Know the Rules I recommend that you purchase the ICC publication “A Guide to Incoterms” as a reference tool – approx. cost $35

Incoterms 2010 Rules for Any Mode or Modes of Transport EXW = Ex Works FCA = Free Carrier CPT = Carriage Paid To CIP = Carriage & Insurance Paid To DAT = Delivered At Terminal DAP = Delivered At Place DDP = Delivered Duty Paid Rules for Sea and Inland Waterway Transport FAS = Free Alongside Ship FOB = Free On Board CFR = Cost & Freight CIF = Cost, Insurance & Freight

Foreign Exchange There is foreign exchange risk to someone in every international transaction – even those payable in U.S. dollars Four Basic Risks - Fluctuation risk - Transaction risk – cash flow risk - Economic risk – operating risk vs. competitors - Translation risk – accounting risk You must quantify and manage this risk Banks have tools and expertise to help you mitigate these risks

Common Uses of Foreign Exchange Transactions – used to make or receive payments in another currency Precautionary hedges – to protect against unexpected changes in exchange rates Speculative positions – to profit from expected changes in exchange rates Foreign investments – to buy and sell foreign assets

Payment Methods

There is a mismatch between Buyer and Seller Goals When do YOU want to get paid? When do Buyers want to pay? Now! Later!

Payment Methods: 4 Methods Buyer (Importer) Perspective Open Account Documentary Collection Letter of Credit Cash In Advance Seller (Exporter) Perspective Cash In Advance Letter of Credit Documentary Collection Open Account Best Cash Flow Lowest Risk Highest Risk Worst Cash Flow Buyer & Seller have Reversed Priorities!

Choice of Methods (What Determines?) Buyer-Seller Relationship Buyer’s credit standing Competition Uniqueness of the product (custom made?) Country conditions (political, economic) Cash flow considerations Transaction costs Other

Payment Methods: 4 Methods Cash in Advance Terms Favor Seller Letter of Credit Documentary Collection Terms Favor Buyer Open Account

Risk Evaluation and Mitigation High Risk – Cash-in-Advance or Confirmed LC Moderate Risk – Advised or Confirmed LC Low Risk – Documentary Collection (at sight) Very Low Risk: Documentary Collection (Time) or, Open Account (possibly with Credit Insurance) Lowest Risk – Open Account on extended terms Make Decisions to Mitigate the Risks Consider ALL risks, not just credit risks

Cash In Advance Buyer Pays Wire Transfer Check Draft Credit Card Seller Ships No risk for seller except order cancellation Foreign Import Regulations may prohibit Hard sell to buyer Consider the type of payment (Wire Transfer Best) Requires little to no credit understanding of the buyer KYC (Important)

Open Account Seller Ships Buyer Pays Wire Transfer Check Draft Credit Card Ship it and hope you get paid Foreign import regulations may prohibit Full Country & Buyer Credit Risk Consider payment type (wire transfer best) Requires extensive knowledge of the buyer (underwriting, trade references, excellent reputation)

Letters of Credit A versatile tool for closing the gap that exists between buyers and sellers.

Letters of Credit Definition: - An undertaking issued by a bank for the account of the applicant (buyer) to pay to the beneficiary (seller) the value of the letter of credit, provided that the terms and conditions evidenced by documents presented, are complied with In other words: - A letter of credit substitutes a bank’s creditworthiness, which is generally well known or easily ascertainable for that of its customer, which may not be as well known

Letters of Credit Two Common Types Documentary / Commercial Standby Active payment instrument Active financing tool Standby Passive payment instrument Passive financing tool Performance Financial Trade-Related

Independence Principle Importer (Buyer) Exporter and Importer have a sales contract between them which supports the underlying transaction Buyer has an obligation to the Issuing Bank to pay upon claim for payment Separate Contracts Issuing Bank Advising/ Confirming bank Exporter (Seller) Issuing Bank has the obligation to the Exporter to pay if he has complied with all the terms and conditions in the L/C

Sight LC Transaction Flow Buyer (Applicant) Seller (Beneficiary) 1 Sales Contract Importer (Buyer) Issuing Bank Exporter (Seller) Advising/ Confirming bank 2 4 Application LC Advised 4 parties to all international letter of credit transactions Process begins with an underlying sales contract that specifies payment by letter of credit. Important for sales staff to understand LC’s. Foreign BANK PNC Bank 3 LC Issued (Issuing Bank) (Advising Bank)

Sight LC Transaction Flow Seller Buyer 5 (Applicant) Shipment Buyer pays BEFORE receipt of goods 8 $ 6 $ 8 Documents 8 Foreign BANK $ PNC Bank Payment Claim 7

Time LC Transaction Flow Seller Buyer 5 (Applicant) Shipment Payment At Maturity 8 $ 6 $ 8 6 Documents Documents 8 $ Foreign BANK PNC Bank Payment Documents 6 Acceptance 7

Advised Letters of Credit Beneficiary: Bears credit risk of the issuing bank Bears full country risk of the transaction Responsible for ensuring compliance with Pro Forma Advising Bank: Responsibility limited to authentication Has no payment obligation Advocate for beneficiary

Role of the Advising Bank Verify the authenticity of the Letter of Credit, thereby protecting the beneficiary from fraud Advocate for the beneficiary No conflict of interest Other benefits of using your bank Commitment to Customer Service Relationship Pricing Consistency in Processing If you want more protection the next step is to consider having the letter of credit confirmed

Confirmed Letters of Credit Eliminates issuing bank country and commercial risk If the issuing bank’s letter of credit is confirmed, the confirming bank substitutes its own creditworthiness for that of the issuing bank’s and takes on all duties and responsibilities of an issuing bank Must be requested by issuing bank to confirm credit If the issuing bank is not deemed creditworthy, or if there are country risk issues a bank may refuse to add confirmation

Confirmed Letters of Credit Confirmation eliminates: Commercial credit risk of issuing bank Country risk of issuing bank Confirmed credit means payment obligation moves to the confirming bank and its country However: Confirmation is location specific Verify country of confirming bank Confirmation by branch or subsidiary of issuing bank May shift country risk May not shift commercial

Payment Method: Letter of Credit Set it up right! Irrevocable Issue Date, Expiry Date & Location Issuing Bank/Advising Bank Importer/Exporter Value & Currency Description of Goods/Services Required Documents Payment Terms Incoterms Port-To-Port Info UCP 600 LC Fees - Who Pays? Latest Ship Date Presentation Date Partial Shipments (Y/N) Transshipments (Y/N) Paying Bank Drawee Bank Reimbursing Bank Confirming Bank 20 Points of Negotiation in Structuring your LC

Reducing Cost and Accelerating Payment Set up the LC correctly – negotiating all points Check with your bank on S.W.I.F.T arrangements prior to LC opening Avoid discrepancies Use LC template Get copy of LC application before issuance Have the LC confirmed/payable at PNC Bank In some cases, discount Consult with PNC Bank

What to do When the LC Arrives Read the letter of credit very carefully Ensure you can comply with the terms (all 20+ points) Send copy of LC to freight forwarder Ask about anything you don’t understand If incorrect, reject the LC immediately If necessary, request the buyer amend the Letter of Credit

The Letter of Credit as a Financing Tool The protections afforded both parties in a letter of credit transaction provide each additional benefits as well One of these is the ability to use the credit already evidenced by the letter of credit itself to lower Trade Cycle cash flow financing costs for both Buyer and Seller

Documentary Collections Disguised open account transactions Less secure than letters of credit More secure than open account Benefits Don’t encumber buyer’s line of credit Very inexpensive Effective if properly structured Use of correct Incoterms Role of banks and freight forwarders

Sight Collection (D/P) Buyer Seller Buy/Sell Agreement 1 Shipment 2 4 $ 4 4 $ 2 Documents Documents 4 Foreign BANK $ PNC Bank 3 Documents Buyer pays BEFORE receipt of goods

Time Collection (D/A) Buyer Seller Buy/Sell Agreement Shipment 1 Shipment 2 $ 6 5 Payment at Maturity 6 $ 2 Documents Documents 5 Acceptance 6 Foreign BANK $ PNC Bank 3 Documents Buyer pays AFTER receipt of goods

Documentary Collection Transaction Flow Seller ships Seller presents documents to National City National City sends documents to a correspondent Correspondent bank releases documents against: Payment (if Documents against Payment – D/P) Acceptance (if Documents against Acceptance – D/A) Note: D/A terms represent more risk to the seller. Correspondent wires funds to National City National City pays seller

Payment Method Variations CIA Variation 50% in advance, balance with order 100% upon shipment LC Variation Transfer Assignment Financing Open Account Variation Insured Performance guaranty (Standby LC)

Medium-Term Financing PNC is largest provider of Medium-term (typically up to 5 years) Financing to Foreign Buyers of Capital Goods under Eximbank’s Buyer Finance Program Financed amount is the lesser of 85% of the sales contract or 100% of the U.S. content of the sales contract Up to 30% of related local costs in the foreign country may be eligible for financing Repayment is through semi-annual installments of P & I Interest – floating or fixed each six months Eximbank fees may be financed as part of the credit Seller is paid out when shipment documentation is presented to PNC Bank; PNC receives payment directly from foreign buyer Program is at no cost to Seller; PNC needs introduction to Foreign Buyer from Seller

Export Credit Insurance Covers the risk of buyer nonpayment for commercial risks (e.g. bankruptcy) and certain political risks (e.g. war or the inconvertibility of currency) from qualified foreign buyers Does NOT cover product quality/service disputes Provides 90-95% commercial, 95-100% political coverage against buyer payment defaults Premiums are only paid on actual shipments Available through the U.S. Eximbank and other private insurers Can improve cash flow by allowing you to include insured foreign receivables in your borrowing base by assigning the policy to a commercial bank For Eximbank coverage, minimum 50% U.S. content required Use an insurance broker!!!!

“Examples and War Stories” Trust Gone Awry on a Documentary Collection When the credit markets freezed up “If it sounds too good to be true, it probably is…” In general, “Possibly trust, but verify…”

Contact Information Bill Richeson, CTP Senior Vice President International Division PNC Bank Phone: (616)771-8849 e-mail: william.richeson@pnc.com SWIFT: PNCCUS33ENJ Global Client Care Center: 800-682-4689