Subject Student data Date

Financial Management Surname: Torres García

22/06/2020
and Risk Management Name: Catherine

Case 3: Valleysan ZN
▸ Introduction
Valleysan ZN, is a Dutch company, SME, specialized in metal lamination, being in the market
one of the best companies in the heat treatment sector, its export is focused for the
moment, to some countries with political stability and sustained growth in Latin America
and the Middle East, such as Colombia, Peru, Brazil, Chile or the GCC countries.

Valleysan ZN, has been awarded an RFQ for the sale of three drying ovens for an existing
facility. These three furnaces would be made specifically for the characteristics of the Latin
American company's process and therefore require Valleysan ZN to design and
manufacture the equipment and then supervise on-site installation and start-up.

Valleysan ZN is very cash-strapped and, therefore, its economic capacity, or cash flow, does
not allow it to assume the manufacturing period without external financing, since the
equipment to be exported must be manufactured exclusively for the customer's installation
(taylor made).

▸ Development
The conditions of purchase of the Latin American customer are tough, but the
circumstances of this market worldwide and the moment in which it occurs, makes it an
operation of great interest for Valleysan ZN.

The total value of the order is detailed: 1 000 000 USD

The delivery date:
• 180 days, starting from the signature of the contract conditions of delivery
of equipment: CIP factory customer in his country.

Terms of payment:
• 15% of the value of the order at the signing of the contract, this advance
payment is guaranteed by a bank guarantee - total USD 150,000.

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 Subject Student data Date
Financial Management Surname: Torres García
22/06/2020
and Risk Management Name: Catherine

• Equipment. The remaining three-year equipment, in six semiannual

installments of the same amount - total US$750,000.
• Supervision and assembly. This operation will be charged upon completion
of commissioning - total USD 100,000.
Form of Payment:
• Equipment. Documentary remittance, against delivery of documents and
acceptance of the six bills of exchange at maturity.
• Supervision of assembly and start-up. By transfer against presentation of
invoice in USD (estimated at 10% of the value of the order) at the end of
these operations, estimated in two months since the equipment is on site.

So he goes to a Dutch export insurance agency, Atradius, and to his usual bank, to be able
to give an answer to the buyer of the signature and acceptance of the contract.

He is considering a new pure credit proposal to his bank and finds it unrealistic, as he knows
that Valleysan ZN's borrowing potential is at its limit. The banking entity is not very willing
to grant the concession without some additional guarantee; therefore, the insurer informs
him, after a quick analysis, that neither the country, nor the client, nor the project are
expecting any obstacles or difficulties to the possible operation of coverage of the desired
risks. In summary, at this time there are no coverage restrictions, either in the country or
with the client. The exporter also visits his bank manager, with whom he discusses the
operation and to whom he formulates his financial needs.

The manager, in order to meet your request, suggests the following:

1. Take out a contract termination policy
2. Propose to the customer to use documentary credit as a means of payment,
and better confirmed and usable by acceptance. What Valleysan ZN explains to
you is outside of what the customer wants.
3. Take out a bank guarantee policy.

For what it hires for the requirements of the bank's manager

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 Subject Student data Date
Financial Management Surname: Torres García
22/06/2020
and Risk Management Name: Catherine

 A performance policy is taken out to cover the breach of contract and the
obligations it undertakes with its insurer for the requirements requested.
 The CESCE Master ORO policy is also contracted for the management of commercial
credit and credit to customers and that the company is an SME, the policy covers all
or part of the commercial and political risks of export operations, since the cost is
1,000,000 euros and the payment term is around three years.1,000,000 and the
payment term is around three years, this is taken out for the bank guarantee policy.
 Therefore, it opts for forfaiting, generally used in operations with high-risk
countries, developing countries or countries with political or economic instability,
since it is willing to assume higher financial costs by contracting hedging formulas in
order not to have to assume so many risks. Forfaiting covers commissions and
commercial risk coverage expenses: the cost of guarantees, bank guarantees or
insurance premiums, which will be borne by the exporter or importer. These risks
are normally covered by ECAs.

Therefore, the contract will be signed under the risks that are to be covered, in order to
mitigate them with the actions taken.

OFFER DETAILS
Detail Value Collection Date
Payment 150 000 Signing of the contract
Equipment 750 000 Three years 6 semiannual letters
Supervision and 100 000 Commissioning completed
assembly

3 Acitvity
 Subject Student data Date
Financial Management Surname: Torres García
22/06/2020
and Risk Management Name: Catherine

Image1: Operation of a forfaitinginstrumented with promissory notes, Financial Management and

Risk Management

So the company Valleysan ZN makes a commitment with the Forfaiter and signs the
contract, the importer makes the payment of the advance payment of the bank guarantee
150 000 USD, and signs the guarantees by the foreign bank, thus allowing the shipment of
the goods in 6 months after signing and making effective documentary remittances, against
delivery of documents and promissory notes in 6 payments in letters up to three years 750
000 USD, guaranteed by the Forfaiter.The importer makes the payment of the advance
payment of the bank guarantee 150 000 USD, and signs the guarantees by the foreign bank,
thus allowing the shipment of the goods in 6 months after the signature and making
effective documentary remittances, against delivery of documents and promissory notes in
6 payments in letters up to three years 750 000 USD, guaranteed by the Forfaiter and once
the supervision and assembly is completed for the value of 100 000 USD.

▸ Conclusions
In conclusion, in any international transaction there will always be risks, as in the case of
Valleysan ZN, we must try to mitigate them by means of contract compliance policies and
bank guarantees; taking the respective precautions in the event that the importer does not
comply with the conditions.

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 Subject Student data Date
Financial Management Surname: Torres García
22/06/2020
and Risk Management Name: Catherine

Likewise, the company opts for financing through forfaiting, to guarantee payments, even
though there are higher costs, there are also greater guarantees for the company and thus
be able to receive the payments that correspond to the contract made; even if there is a
risk that the importer does not pay, the exporter will receive the value corresponding to the
transaction.

▸ Bibliography:
Universidad Internacional de La Rioja (UNIR), 2019-2020, Financial Management and Risk
Management, Financing operations (II) Export Insurance, Financial Management and
Risk Management, Topic 7. Outline, Key ideas.

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