Academy of Economic Studies

Faculty of International Business and Economics

“International Finance and Payments”

Lecture VIII
“International Credit Market”

Lecturer Cristian PĂUN

Email: cpaun@ase.ro
URL: http://www.finint.ase.ro
International Payments - review

• the payments in international business are made using specific

techniques, in order to reduce the high default risk;

• when the risk is low for the exporter can be used: open account
payments, bank drafts or documentary collection;

• when the risk is too high for the exporter it is strongly recommend
to be used the letter of credit (or cash in advance);

• the letter of credit is the most complex payment mechanism

ensuring a reduced risk if the operation;

Lecture 8: International Credit Market 2

International Credit Market

International Market Dimension (2002)

Credit Market 9446 bil. USD
Bond Market 31000 bil. USD
Stock Market 3500 bil. USD

A. Credit Market (general situation)

Total Credit 9.446 bil. USD Weight

Developed Countries 7302 bil. USD 77 %
Offshore Countries 1250 bil. USD 13 %
Developing Countries 894 bil. USD 9%

Lecture 8: International Credit Market 3

International Credit Market
B. Credit Market (by the maturity)
Area < 1year > 1 year
Total Credit 53,1 % 27,7 %
Developed Countries 56 % 24,3 %
Offshore Countries 52 % 36,9 %
Developing Countries 46,7 % 43 %
World Bank: "Global Development Finance", 2000 - 2001

C. Credit Market (by the destination)

Area Banks Public Sector Private sector
Total Credit 46.9 % 11.9 % 38.7 %
Developed Countries 50.6 % 12.2 % 34.5 %
Offshore Countries 38.7 % 0.9 % 59.8 %
Developing Countries 30.1 % 17.1 % 52.1 %
World Bank: "Global Development Finance", 2000 - 2001
Lecture 8: International Credit Market 4
International Credit Market
D. Credit Market (creditors by origin)
Area EU Banks NA Jap Others
Total Credit 57.8 % 7.5 % 11.2 % 23.5 %
Developed Countries 57.5 % 6.5 % 10.7 % 25.5 %
Offshore Countries 54.9 % 8.1 % 27.2 % 9.8 %
Developing Countries 62.6 % 14.1 % 9.3 % 14 %

E. Credit Market Countries Weight

(country distribution) US 16 %
EU 54.6 %
UK 13 %
GER 8.4 %
ITA 5.4 %
JAP 5.6 %

Lecture 8: International Credit Market 5

International Credit Market - conclusions
• International Credit Market is the second financing
alternative after bonds;

• Last years, credit expansion was higher than bonds;

• The developed countries have a net dominant position on

international credit market;

• In the developing countries the total credit tends to decrease;

• Private sector becomes more important on international

credit market (instead banks);

• Short term credits are dominant (instead long term credits)

• Syndicalized loans become more and more important.

Lecture 8: International Credit Market 6

International Credit Market

I. Short term credits:

- Credits in advance;
- Export credits;
II. Long term credits:
• Syndicated loans;
• Eurocredits;
• Parallel loans;
• “Back to back” credits;
• Buyer credits;
• Seller credits.
III. Special credits:
• Leasing / Factoring / Forfeiting

Lecture 8: International Credit Market 7

Short term credits

Lecture 8: International Credit Market 8

A. Short term credits – Export Pre-financing

Producer Exporter
1
4-5
2
6
3
Exporter’s Bank Government

1 – Signing an Export contract;

2 – Obtaining a Credit;
3 – Refinance from public funds;
4 – Delivery of goods;
5 – Payment at the maturity;
6 – Credit reimbursement.

Lecture 8: International Credit Market 9

B. Credit based on B/E discount

Exporter Importer
1

3 2
5
4
X Bank Other bank

1 – Export contract based on B/E payment;

2 – B/E Acceptance by the importer;
3 – Presenting the B/E to the X Bank in order to be discounted;
4 – Discounting the B/E on the local money market;
5 – Payment of the exporter.

Discount tax  N days

Discount value  Nominal value  (1  )
100  360

Lecture 8: International Credit Market 10

C. Importer Banker’s Acceptance

1
Exporter
Importer

4 3
2 5

Exporter Bank Importer Bank

5

1 – Export contract containing a commercial credit granted

by the exporter (the importer will pay at a specific maturity
after delivery);
2 – B/E acceptance by the importer bank;
3 – Presenting the B/E to the Exporter Bank;
4 – B/E discounting to an Exporter’s bank;
5 – Payment at the maturity.

Lecture 8: International Credit Market 11

D. Exporter Banker’s Acceptance

1
Exporter
Importer

4
3 2 5

Exporter Bank Importer Bank

5

1 – Export contract;
2 – B/E Acceptance by the Exporter Bank;
3 – Presenting B/E to the Exporte’s Bank or to other local bank;
4 – Discounting the B/E;
5 – Payment at the maturity against B/E.

Lecture 8: International Credit Market 12

E. Credit transfer

Exporter Importer
1
2 3 4

5
Financing Importer’s Bank
Company

1. Export contract. Delivery of goods

2. Credit transfer to a financing company;
3. Payment against the B/E transfered;
4. Payment at the maturity.

Lecture 8: International Credit Market 13

 F. Revolving Credit Agreements

Revolving Credit Agreement -- A formal, legal commitment to

extend credit up to some maximum amount over a stated period
of time.

 Agreements are frequently for three years.

 The actual notes are usually 90 days, but the company can
renew them per the agreement.
 Most useful when funding needs are uncertain.
 Many are set up so at maturity the borrower has the option of
converting into a term loan.

Lecture 8: International Credit Market 14

 G. Line of credit

Line of credit -- An agreement between a lender and a borrower

in which the borrower has access to funds up to a specific
amount during a specific period of time.

• - The consumer may borrow as much of the line as needed and

pays interest on the borrowed portion only;
• - Payment amounts are revolving, based on the outstanding
balance amount;
• - If the funds are not totally used the borrower is submitted to pay
some penalties in the favor of the lender.

Lecture 8: International Credit Market 15

Long term credits

Lecture 8: International Credit Market 16

A. Syndicated loans

1
Beneficiary Lead Manager

Credit Management 2 3
Group 4

Group of the participant banks

Credit Memorandum

5
Bank A Bank B

Lecture 8: International Credit Market 17

A. Syndicated loans – operations description

1. Contacting a leader bank

2. Creating the coordinating group (when the amount is important),
analyzing the beneficiary, establishing the credit conditions
3. Creating the group of participating banks
4. Creating the credit memorandum (usually the 60% from the credit is
granted by leader bank and coordinating group, the remaining
amount being obtained from participating banks, if the total credit it is
not covered by them, the leader bank will make an offer to
international credit markets by this credit memorandum);
5. Obtaining money from other banks.

Lecture 8: International Credit Market 18

B. Eurocredits

3
Beneficiary Lead Manager
1
4 Bank A

Bank B

Bank C
2 5
Coordinating
Group
4
Capital transfer from
local markets

Lecture 8: International Credit Market 19

B. Eurocredit – operations description

1. Contacting a leader bank

2. Creating the coordinating group (when the amount is important),
analyzing the beneficiary,
3. Establishing the credit conditions by analyzing the beneficiary
4. Contacting different banks that will provide funds trough revolving
credit arrangements to the coordinating group
5. Refinancing from local capital markets by issuing stocks and bonds.

Lecture 8: International Credit Market 20

C. Seller Credit

5
Exporter Importer
1
3 6
2
Exporter Bank

Guarantee bank 4

Export Credit Agency

Lecture 8: International Credit Market 21

C. Seller Credit – operations description

1. Import contract of an equipment;

2. Obtaining a guarantee letter against default risk for the credit;
3. Obtaining the seller credit based on export contract and guarantee
letter. Delivering the goods to importer;
4. Refinancing the transaction from public funds (Export Credit Agency);
5. Paying back the import at the maturity
6. Seller Credit reimbursement

Lecture 8: International Credit Market 22

D. Buyer Credit

1
Exporter Importer
4
6 3
Exporter Bank Insurance Company

2
5

Guarantee Institution Export Credit Agency

Lecture 8: International Credit Market 23

D. Buyer Credit – operations description

1. Import contract of an equipment;

2. Obtaining a guarantee letter against default risk for the credit;
3. Obtaining an insurance policy by importer for political risk associated
to the buyer credit
4. Obtaining the buyer credit based on export contract, political risk
insurance policy and guarantee letter. Delivering the goods to
importer and payment of goofs;
5. Refinancing the transaction from public funds (Export Credit Agency);
6. Buyer Credit reimbursement

Lecture 8: International Credit Market 24

 E. Parallel Loans

1
Company A Credit Contract Company B

USD Credit 2 3
GBP Credit

Subsidiary Subsidiary of
of B A

Lecture 8: International Credit Market 25

E. Parallel loan – operations description

1. Parallel loan contract

2. Granting a credit directly from A Company to B subsidiary from USA
expressed in USD
3. Granting a credit directly from B Company to A subsidiary from UK
expressed in GBP

- Lower cost than granting a credit from A Company to A subsidiary

and vice versa
- Simplicity

Lecture 8: International Credit Market 26

F. « Back-to-back » loans

2 1 2
Company A Company B
Credit Contract
Bank A
Bank B
3 4
Credit in USD Credit in GBP

Subsidiary Subsidiary of
of B A

Lecture 8: International Credit Market 27

F. Back to back loan – operations description

1. Back to back loan contract

2. Obtaining a credit in USD for Company A and a credit in GBP for
Company B from their own local markets
3. Granting a credit directly from A Company to B subsidiary from USA
expressed in USD based on initial credit
4. Granting a credit directly from B Company to A subsidiary from UK
expressed in GBP based on initial credit

- Lower cost than granting a credit from A Company to A subsidiary

and vice versa
- Simplicity
- The interest rates will not be negotiated as it is in case of parallel
loan (the main problem)

Lecture 8: International Credit Market 28

Special Credits

Lecture 8: International Credit Market 29

G. Leasing contract
Banks

8 6
9
1
Importer Leasing company
2
5 7 4
3

Exporter Insurance
Company

Lecture 8: International Credit Market 30

G. International Leasing contract – operations
description
1. Signing a leasing contract for import of an equipment
2. Indicating the provider of equipment
3. Negotiating the contract
4. Insurance policy for the equipment
5. Delivering the equipment
6. Refinancing from banks
7. Paying the equipment
8. Paying the leasing taxes
9. Paying back the credits by the leasing company

Lecture 8: International Credit Market 31

 Types of leasing contracts
1. Lease-back: the sale of an asset with the agreement to immediately lease it
back for an extended period of time.

2. Direct leasing: the producer directly leases the equipment to a company;

3. Leveraged Leasing: – the leasing company borrows from a lender to buy

the asset that will be leased to the beneficiary.

4. Financial Leasing: Longer-term, “fully amortized” and the lessee is

responsible for maintenance, taxes, and insurance.

5. Operating Leasing: Usually relatively short-term; less than economic life of

asset, the leasing company is responsible for maintenance / upkeep / taxes /
service. The beneficiary has the possibility to cancel the contract at the
maturity.

6. Net Leasing: in the leasing contract are not included the expenses with the
maintenance of the leased equipment

Lecture 8: International Credit Market 32

Financial Impact of the leasing contracts
A. Balance Sheet with Purchase (co. finances $100,000 truck with debt)
Truck $100,000 Debt $100,000
Other assets 100,000 Equity 100,000
Total assets $200,000 Debt plus equity $200,000

B. Balance Sheet with Operating Lease (co. finances truck with an operating lease)
Truck $ 0 Debt $ 0
Other assets 100,000 Equity 100,000
Total assets $100,000 Debt plus equity $100,000

C. Balance Sheet with Financial Lease (co. finances truck with a capital lease)
Assets under capital Obligations under
lease $100,000 capital lease $100,000
Other assets 100,000 Equity 100,000
Total assets $200,000 Debt plus equity $200,000

Lecture 8: International Credit Market 33

 Leasing vs. Debt Financing: Potential Benefits
1) Flexibility and Convenience
Leases are easier, quicker and require less documentation.
 Leases are easier to have approved than capital budgeting projects.
 Leasing simplifies bookkeeping for tax purposes.
 Leasing allows synchronization of lease payments with the firm’s cash
cycle.
 Leasing avoids the problems of ownership.

2) Lack of Restrictions
Leases usually do not have protective restrictions.
3) Avoiding Risk of Obsolescence?
Not really - only in cancelable operating leases.
4) Conservation of Working Capital
Leases usually have a lower initial outlay than a purchase.
Leasing vs. Debt Financing: Potential Benefits
5) Tax Savings
Leases may provide a larger tax shield than that provided by
depreciation.
6) Ease of Obtaining Credit
It is often easier for riskier firms to obtain a lease than to obtain
debt financing.
Factoring with payment in advance (old fashion
factoring)

1
Exporter Importer

2
3 4 5
6
Factoring company Importer’s Bank

Lecture 8: International Credit Market 36

Factoring with payment in advance (old fashion
factoring) – Operations descriptions
1. Export contract
2. Delivering the goods
3. Presenting the commercial documents for payments (invoices)
4. Paying in advance the presented invoices (less a commission an a
guarantee of 10%)
5. Paying at the maturity
6. Transferring the money to the factoring company

Notes:
- The exporter should pay an interest rate for credit period
- The factoring company will be refinanced by the banks
- The guarantee will be paid back at the maturity and will cover the
default risk
- The factor will administrate ALL the commercial transaction of the
exporter

Lecture 8: International Credit Market 37

I. Factoring with a payment at the maturity

Exporter Importer

2
3 6 4
5
Factoring company Importer’s Bank

Lecture 8: International Credit Market 38

I. Factoring with payment at the maturity
– operations description
1. Export contract
2. Delivering the goods
3. Presenting the commercial documents to the factor
4. Paying at the maturity
5. Transferring the money to the exporter (less a commission)

Lecture 8: International Credit Market 39

 J. . Forfeiting

1
Exporter Importer

2 3 4

5
Forfeiting Institution Importer’s Bank

- Forfeiting vs. Credit transfer: Forfeiting is a long term financing operation

- Forfeiting vs. Factoring: Forfeiting is used for a single transaction
- Forfeiting vs. Discounting the Bank’s Drafts: Forfeiting is a long term
financing operation and the Forfeiting institution will be refinanced from
international financial markets using long term credit techniques or capital
market techniques (IPO, securitization)

Lecture 8: International Credit Market 40

J. . Forfeiting – operations description

1. Export contract
2. Delivering the goods
3. Presenting the commercial documents to the forfeiting company
4. Paying the transaction against presented documents
5. Transferring the money to the forfeiting company at the maturiy

Note:
The exporter will pay an interest rate
This transaction is used when the Exporter rating is too low and
international market is not accessible for him (the forfeiting company
will be refinanced from international markets)

Lecture 8: International Credit Market 41

International Credit – Final Conclusions

Exporters Importers
 export pre-financing;  line of credits;
 discounting the bank’s drafts;  revolving credit arrangements
 credit transfer;  banker’s acceptances;
 importer / exporter banker’s  syndicated loans;
acceptance;  eurocredits;
 syndicated loans;  buyer credit;
 eurocredits;  “back to back” loans;
 seller credits;  parallel loans;
 “back to back” loans;  leasing;
 parallel loans;
 factoring;
 forfeiting.

Lecture 8: International Credit Market 42