pnc trade finance solutions international

INTERNATIONALCUSTOMER FINANCING

AS A SALES TOOLPresentation to:

ExporTech ‘Doing Business in the Americas’

Agenda

• Current Market Dynamics

Risks & Rewards• International Payment Methods

Letters of Credit, Collections, Open Account• Trade Finance

Short & Medium Term

US Ex-Im Bank, Private Insurance

Alternative Solutions• Case Studies

Current Market Dynamics

• Worst conditions in 50 years• Unsupported lending is all but impossible to find• Loss of confidence in:

- Most domestic borrowers- Multinational corporations- Previously strong Western European and Asian companies- International banking system- Nearly all Emerging Market credit

• Even high quality borrowers have few alternatives• New rules govern; new rules coming• How to interpret or anticipate government actions?

Current Market Dynamics

• Local credit has evaporated• Costs of any credit have skyrocketed• Most buyers hoard their credit for day-to-day• Most banks hoard their cash• Exporters must be proactive in locating credit for customers• Conditions may last well in 2009 and beyond

Risks of Exporting

• Commercial Credit RisksFinancialContract

• Country RisksPoliticalTransfer/Economic

• Foreign Exchange RiskCurrency Fluctuation/Devaluation

• Documentation Risk

All These Risks - Why Sell Internationally?

• More sales, lower costs• Lower costs = more $ profits • Increase product life cycles• Amortize R&D costs• Market diversity – flatten business cycle• New markets = ideas for new innovations• New technology opportunities• Licensing opportunities• Meet the competition - Fight fire with fire!!

International Sales Strategies

• Mitigate foreign sales risk

• Overcome competitors’ selling terms

• Use customer financing as a sales tool

• Find the winning hand!

Which Goods Can be Financed Short-Term?

ConsumablesBulk Ag

Parts/Small ticket items Services

Customer Financing Solutions

• Short term financing (funding up to 1 year)

– Trade payment methods

– With US Ex-Im Bank or private insurance support

– Buyer credit or supplier credit

Balancing Costs With Risks: Methods of Payment

Seller’s Advantage

Buyer’s Advantage

Confirmed L/C

Letter of Credit

Documentary Collection- Acceptance/Payment

Open Account

Pluses• High credit quality• Assurance of repayment• Minimal risk• Low cost• Easily discounted

Minuses• High local costs for buyer• Ties up local credit• Collateral requirements• Short repayment period –

if any

Commercial Letters of Credit

Concepts• Revocable v. Irrevocable• Advised v. Confirmed

Credit Types• Sight v. Time• Transferable• Back-To-Back• Assignment of Proceeds

Transferable Letter of CreditSubmits Draft/Invoicefor $100M

ISSUING BANK ADVISING BANK

BENEFICIARY

TRANSFEREE

Apply for $100M Transferable L/C

Submits Documentsfor $80M

Advises Partial Transfer$80M

Submits Request forPartial Transfer

Open $100M Transferable L/C

Shipment is effected

Advise $100M L/C

Assignment of Proceeds

ADVISING BANK

BENEFICIARY

ASSIGNEE

Submits CompletedAssignment Forms

Advises Letter of Assignment and if beneficiary performs under the credit the Bank will effect payment.

(2) Open L/C

(3) Advise L/C

Apply for L/C(1)

(4) Effect Shipment

Special Purpose Letters of Credit

• Red Clause• Green Clause• Back-to-Back• Revolving• Standby

Trade Related Standby Letters of Credit

• Unpaid Invoices• Bid• Performance • Warranty• Advance Payment

• Bank Guaranty?

Short-term Trade Supported by a Standby Letter of Credit

Pluses• High credit quality• Minimal documentation• Low cost for multiple

low value shipments• May be cheaper than

commercial L/C

Minuses• Expensive for buyer• Ties up local credit• Collateral • Often covers only a

portion of exposure• Can be more difficult

to discount

• Documents Against Payment (Sight)D/P, DAP, or CAD

• Documents Against Acceptance (Time)D/A

Documentary Collections

Trade off between higher risk and lower cost

Seller ships and asks bank to collect Banks act as a collecting agent only,

No credit position taken Risk of non payment due to political

and commercial risks

Documentary Collections

Will I get paid??!!

Pluses• Generally good credit

quality• Low cost for seller• Relatively easy to

discount

Minuses

• Cost of guarantee• Ties up local credit• Collateral • Short repayment

period• Risk of non-

acceptance after shipment

Guaranteed International Collection Draft

• Government export credit agencies: Export-Import Bank of the United States, EDC, ECGD, HERMES, SACE, etc.

• Private Credit Insurers: FCIA, Coface, Euler, Houston Casualty, Atradius, QBE, etc.

Customer Financing SolutionsCustomer Financing Solutions

Key Differences between Eximbank and Private Insurers

EximbankMission is to support U.S. exportersAt least 51% U.S. contentGeared to small exporters or large transactionsWider coverage

Private Insurers Profit motivatedNo content restrictionsGeared to medium or large businessesCoverage varies

Key Differences between Eximbank and Private InsurersKey Differences between Eximbank and Private Insurers

Underwriting policies vary

Pricing – Private sector may be cheaper in better markets but more expensive in poorer ones

Private sector minimum premiums - $$$

Credit insurance brokers – VALUE!

Eximbank’s Short-Term Insurance

Allows exporter to offer short-term credit to international buyers

Protects against buyer defaultCommercial RisksPolitical Risks

Multi-buyer and single-buyer policies

Insured A/R can be financed

Ex-Im Bank Assists U.S. Exporters

• Official export credit agency (ECA) of the U.S.Create and maintain jobsEncourage the private credit markets

• Makes loan guaranteesSupports pre-export financingSupports loans to importers of U.S. productsGuarantees repayment

• Does not compete with private sector – fills the gapsAssumes credit and country risks Levels the playing field

Eximbank’s Eximbank’s Working Capital Guarantee Program

• How the Working Capital Guarantee Program Works

– Backed by the guarantee of the Ex-Im Bank, banks provides customers export working capital loans collateralized by:

• Foreign accounts receivables • Export-related inventory

– Finished goods– Work in process– Raw materials

Working Capital Guarantee Program

Rules of Engagement: 1 year of operating history (export experience preferred);

debt service capacity;

positive tangible net worth;

business operations in the US;

50% US content;

goods must be manufactured and shipped from the US.

Can not be military goods or sales made to a military or police entity – exceptions?

Minimum loan size - bank relationship manager?

Loan Structure Provisions

• Ex-Im guarantees bank on 90% of the repayment amount (including principal and interest)

• Generous advance rates on inventory and accounts receivable

• Up to 75% of eligible inventory

• Up to 90% of eligible foreign accounts receivable

• Issuance of Standby LCs with minimal collateralization

• Ex-Im Bank requires only 25% collateral to support the face amount of the LC (10% for SME’s)

• Typical loan tenor is for one year but can be up to a maximum of three years

• Can be transaction-specific or revolving

Market Activity

• In 2008, PNC was the largest lender of working capital guaranteed financing

• PNC closed Ex-Im Bank authorized transactions totaling $213 million (23% growth); double-digit growth again for ‘09

• 59% of these transactions were originated through Business Credit relationships (ABL)

• Super authority and Fast Track status

• Other large users include: JP Morgan Chase, Wells Fargo, Bank of America, Silicon Valley Bank, Comerica

Working Capital Guarantee Program – Case Study

AquatechAquatech

$25,000,000

Exim Bank Guaranteed

Working Capital Line

Situation

A designer and manufacturer of industrial water conditioning and waste-water treatment systems with offices in the US, Canada, China and with installations in 45 countries.

Had the opportunity to sell water purification equipment to Enel, Italy’s largest power company and second largest utility company in Europe, but it needed financing for inventory and a performance bond to win and support its sales contract.

Solution

Aquatech turned to PNC to leverage its Fast Track lending authority by the U.S. Export-Import Bank, and PNC supported Aquatech’s contract with a $25 million guaranteed working capital loan.

Results

PNC arranged Ex-Im Bank guaranteed working capital line in less than 90 days, enabling Aquatech to fulfill the contract within a short period of time.

Aquatech’s equipment will enable Enel, to promote greater environmental responsibility and development of environmentally-friendly technologies.

PNC recently closed a second working capital line of a similar amount for a project with Occidental Petroleum in Oman. Aquatech has more than doubled in size.

Which Goods Can be Financed Medium Term?

Machines and equipment - new or used

Services that can be capitalized

• PNC has recently financed:

Industry Sector Exporter/Product

Agriculture John Deere cotton pickersChickmaster hatchery equipment

ADM, Bunge corn & grain

Chemical / plastics Davis-Standard extruders

Construction Asphalt Drum Mixers

All Erection & Crane used cranes

Food Processing Peerless Machine sandwiching equipment

Franchises Applebees, Burger King, Four Points Sheraton

Manufacturing Diebold ATM’s

Medical Hill-Rom hospital beds

Mining Joy Global long-wall mining machinery

Oil and Gas Gardner Denver mud pumps

Packaging Barry Wehmiller (MarquipWardUnited)

Printing Nilpeter labeler

Telecom/Cable Scientific Atlanta cable boxes

Rail Harsco Track Technologies

Transportation Wabash trailers

Medium-Term Financing for International Buyers

Top Medium Term Lenders

Top Medium Term Lenders – FY 2008

*For the 12 months ended September 2008

Source: Data compiled through Freedom of Information Act resources

– In 2008, PNC was the largest lender of Ex-Im Bank supported medium-term financing

• Ex-Im approved 58 PNC transactions totaling $65 million to foreign buyers

• This represented 20% of market share in 2008 (19% in 2007).

1712 9 9 8 7 7 7

Medium term financing – up to 5 years (and longer) with US Ex-Im Bank support

• The least expensive way to finance U.S. equipment purchases• No recourse• Buyer pays all charges• Buyer credit or supplier credit

Private Credit Insurance availability?

Information Required

• Last three years of financial statements

• Financial information must be audited if request is US $ 1 million or larger

• Project information

• Business activities of borrower

• “Good” credit references

Performance Criteria

Ratio StandardOperating Profit Positive for last 2 yearsNet Income Positive for last 2 yearsCash from Operations Positive last yearCurrent Ratio >1.25Total Liabilities/Tangible Net Worth < 250%Ex-Im Exposure/Tangible Net Worth < 50%

Ratio StandardOperating Profit Positive for last 2 yearsNet Income Positive for last 2 yearsCash from Operations Positive last yearEBITDA/Debt Service >1.50xTotal Liabilities/Tangible Net Worth < 175%Ex-Im Exposure/Tangible Net Worth < 40%

Short-Term Performance Criteria

Medium-Term Performance Criteria

Main Issues

• 90% incoming financials have “issues”why? Tax avoidance – hide profits & assets

• “Grupo”’s spread out profits & assets

• Understanding inter-company relationships

• 6 key guidelines- exceptions?

• Consultative approach – full due diligence

How Long Does It Take?

• As little as 4 weeks and up to 6 months

Depends on importer’s financial package!

COST OF ACQUISITION COMPARISON - Cash versus Medium Term Financing ExampleEstimates only

Model Premises Loan Premises() means negative Total Contract Price 750,000$ Equipment Depreciation (in years) 5 Downpayment 112,500$ Interest rate on savings= 6.00% Sub-Total Financed Amount 637,500$ Interest Rate on loan= 6.00% Ex-Im Bank Fee 18,870$ Ex-Im Bank Fee 2.96% Total Financed Amount 656,370$ (Includes 1 year grace period from 1st shipment date) Projected Annual Profit= 150,000$

Competition Offer = 650,000$

Year One Year Two Year Three Year Four Year Five Year SixCash Out (650,000)$ Plus Annual Profit 150,000$ 150,000$ 150,000$ 150,000$ 150,000$ 150,000$ Plus Annual Depreciation 130,000$ 130,000$ 130,000 130,000$ 130,000$ -$ Less lost Interest (39,000)$ (41,340)$ (43,820)$ (46,450)$ (49,237)$ (52,191)$ Annual Profit (Loss) (409,000)$ 238,660$ 236,180$ 233,550$ 230,763$ 97,809$

Cumulative Cash Profit (Loss) (409,000)$ (170,340)$ 65,840$ 299,390$ 530,153$ 627,963$

US Exporter Offer = 750,000$ Closing Costs (7,875)$

Down payment (112,500)$ Plus Annual Profit 150,000$ 150,000$ 150,000$ 150,000$ 150,000$ 150,000$ Plus Annual Depreciation 150,000$ 150,000$ 150,000$ 150,000$ 150,000$ -$ Less payments - (170,656)$ (162,780)$ (154,903)$ (147,027)$ (139,150)$ Plus Savings interest 39,000$ 41,340$ 43,820$ 46,450$ 49,237$ 52,191$ Annual profit (Loss) 218,625$ 170,684$ 181,041$ 191,546$ 202,210$ 63,040$

Cumulative Cash Profit (Loss) 218,625$ 389,309$ 570,349$ 761,896$ 964,105$ 1,027,146$

Benefits Gained By Buying And Financing With US ExporterA net cash savings of 399,183$

Unsecured loan, no bank guarantee or L/C, keep your local bank lines free

Situation

•Thar Technologies is a manufacturer of environmental friendly supercritical fluids technology for the pharmaceutical, foods, chemicals and electronics industry.

•With 50% of its sales being exports, Thar was looking to expand into Central Europe and Asia. Thar had identified a buyer in Turkey; however, based on local market conditions, the buyer did not have access to local financing.

•Additionally, Thar was competing with a European supplier

Solution

PNC offered a competitive rate, flexible term 5-year $1.0 million loan to Thar’s Turkish buyer for the purchase of Thar’s new line of equipment that extracts natural oils from wheat germ and rosemary.

$1,000,000 – 5 yr. Loan

to Thar’s Turkish buyer

Eximbank Guaranteed

Medium Term Program

offered through

Results

•Thar was able to expand into a new market, and beat out a European competitor;

•PNC also did a follow up loan for $2.1 million to one of Thar’s buyers in the Ukraine.

Medium Term Financing – Case Study

What Should You Expect From Your Bank?

Is trade finance a core business?

Does it offer financing packages to the importer?

Does it facilitate Ex-Im Bank programs?

Does it have multilingual staff and experience in emerging markets?

NOTE: A good trade finance bank works hand-in-hand with exporters AND importers to help close the deal

Case Studies

Medium Term Financing deals Dogus Insaat ve Ticaret A.S., Turkey Sunshine Produce Ltd., China

Short Term Buk-Ag Financing Corporacion Pipasa S.A., Costa Rica

Read: Complete:Application Performance CriteriaCredit Memo Risk MitigantsFinancials Approve deal?

Contact

Alan Andrews Joseph A. Zeccardi,Jr. Vice President and Manager Vice PresidentGlobal Trade and Equipment Finance Group Global Sales and MarketingPNC Bank, N.A. PNC Bank, N.A.Two PNC Plaza, 620 Liberty Ave. 1600 Market Street Pittsburgh, PA 15265 Philadelphia, PA 19103PH: 412-768-7662 PH: 215.585.4687 FAX: 412-762-5022 FAX: 215.585.4689alan.andrews@pnc.com CELL: 215.704.2412www.pnc.com/tradefinance joseph.zeccardi@pnc.com

pnc trade finance solutions international

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