International Business Strategies for Credit Professionals

GETTING PAID WHEN SELLING INTERNATIONALLY

Luis Alcalde, Esq. and David M. Wilson, Esq.

Background Due Diligence

Foreign Liens

Letters of Credit

@ LMAlcalde

@ dwilsonjdmba

Getting Paid When Selling Internationally


Foreign Liens

Letters of Credit

Background Definitions and Key Concepts

Nature of International Transactions

Types of International Transactions

Due Diligence

Foreign Buyer / Borrower Diligence

Foreign Market Diligence

Foreign Liens

Identifying Foreign Liens

Securing Your Transaction

Letters of Credit

Governing Laws and

Rules

Practical Legal Issues

Credit - the ability of a customer to obtain goods or services before payment (or full payment), based on the trust that payment will be made in the future.

Credit risk - the danger that you will not receive an amount of money you are owed because the party that owes the money is unable to pay and defaults on the obligation. Credit risk increases the further away in time the

payment is expected since every day increases the possibility of events that may cause an inability to pay.


Foreign Liens

Letters of Credit

Definitions and Key Concepts

Credit exposure - The total amount of credit extended to a borrower by a lender. The magnitude of credit exposure indicates the

extent to which the lender is exposed to the risk of loss in the event of the borrower's default.


Foreign Liens

Letters of Credit

Definitions and Key Concepts

Goods, services, technology, contract rights, money and/or people are moving from one market or legal jurisdiction to another market or legal jurisdiction.

The cross border nature of the trade and exchange means that at least the law of two jurisdictions or markets/countries apply to the transaction as well as principles of international law.


Foreign Liens

Letters of Credit


Export Goods,

Services, Technology, IP, People, Money from

USA

Import Goods,

Services, Technology, IP, People, Money into

Foreign Market


Foreign Liens

Letters of Credit


Exports from a Market EqualImports Into a Market

Exporting

Seller

Importing

BuyerGoods

Money


Foreign Liens

Letters of Credit


USA export laws re: goods, services, technology, IP

Export controls, ITAR, EAR

OFAC

Foreign market import laws re: goods, services, technology, IP, approval and registration of products, services, technology

Financial control laws re: foreign currency, foreign investments, transfer pricing, financial reporting, taxes, import duties and fees


Foreign Liens

Letters of Credit


US & Foreign Laws Affecting Cross Border Sale Transaction

USA laws applicable to

contracts, sale of goods, services, technology, IP,

financing, resolving conflicts

International treaties on IP, Sale

of Goods, Contracts, Resolving

Conflicts, Taxes

Foreign markets laws re contracts,

sale of goods, services,

technology, IP, solving conflicts


Foreign Liens

Letters of Credit


Laws Affecting the Private Relationship of Parties

-Freight Forwarder-Trading Company

Direct Sale from U.S.

-License-Agent-Distributor-Franchise-Joint venture

Non-Equity Alliance

-Joint venture-Joint company

Equity Alliance

-M&A-Greenfield-Brownfield

Wholly Owned Subsidiary



Foreign Liens

Letters of Credit

Incoterms® What are Incoterms?

Contractual terms created by the International Chamber of Commerce (ICC)

What do Incoterms address? Identify the location in the supply chain where the risk of loss or

damage transfers from seller to buyer. Identify the point in the supply chain where the responsibility for

certain costs and obligations shift from the seller to the buyer. What is not covered by Incoterms?

Do not address when title to the goods transfers. If applicable, should be addressed in separate contract clause.

Do not transfer US export control compliance obligations. Generally, US Principal Party In Interest responsible for filings.


Foreign Liens

Letters of Credit


Best Practices Understand where the risk of loss transfers.

Just because the seller pays for freight does not necessarily mean that the seller has the risk of loss while goods are being delivered.

Understand who has responsibility for loading and unloading charges.

Understand who has responsibility for customs clearance, duties, and other charges.

Understand how these terms relate to your trade solutions (LC, documentary solutions, SBLC, bank guarantee – UCP 600).


Foreign Liens

Letters of Credit



Foreign Liens

Letters of Credit


Best Practices All information contained in the export documents

should come from the original contract.


Foreign Liens

Letters of Credit


• Sales contract• Purchase order• AES System filings• Commercial Invoice• Packing List• Bill of lading• Insurance certificate• Certificate of origin• Certifications• Letter of credit

Export Goods,

Services, Technology, IP, People, Money from

USA

Import Goods,

Services, Technology, IP, People, Money into

Foreign Market


Foreign Liens

Letters of Credit


Exports from a Market EqualImports Into a Market

Best Practices All information contained in the export documents

should come from the original contract. One party’s export becomes another party’s

import.


Foreign Liens

Letters of Credit


• Sales contract• Purchase order• AES System filings• Commercial Invoice• Packing List• Bill of lading• Insurance certificate• Certificate of origin• Certifications• Letter of credit

• Commercial Invoice• Used by customs for product classification• Used by bank for paying on letter of credit

Best Practices Commercial Invoice Checklist


Foreign Liens

Letters of Credit


• USPPI name and address• Consignee (buyer)• Intermediate consignee (delivery party, notify party, often FF)• Forwarding party• Commercial invoice number• Customer PO Number• Bill of laden or air bill number• Country of origin• Date of export or invoice date• Incoterm

• Sales price• Currency of sale• Terms of payment• Port (airport) of export• Export carrier• Quantity• Unit of measure• Weight • Product description• HS number• Export control contract

clause


Foreign Liens

Letters of Credit

Foreign Buyer and Foreign Market Diligence




Due Diligence



Foreign Liens



Letters of Credit

Governing Laws and

Rules


Threshold Questions Has the risk analysis identified any general or

specific credit risks? What is reasonable under the circumstances?


Foreign Liens

Letters of Credit


Government & political environment Judicial system Transparency, fairness, rule of law Foreign exchange rates and monetary controls


Foreign Liens

Letters of Credit

Political Risk• The ability of government to respond to political risk• The ability of government to NOT cause political risk

The unit of measurement for political risk is

STABILITY


Political Risk• The ability of government to respond to political risk• The ability of government to NOT cause political risk

Denmark

1st

USA

19th

Chile

20th

Brazil

69th China 80th

Colombia

94th

India

94th

Russia

133rd

North Korea,

Somalia 174th

P E S T

The unit of measurement for political risk is

STABILITY


Foreign Liens

Letters of Credit


Currency Risk Transaction exposure – commitment to make

payment at future date Solutions

Forward Contracts to supply at future date at set price in a specified currency

Risk Sharing Clauses in long term supply contracts which address sharing the risk of specific variables

Foreign Currency Options to buy foreign currency in future at set price

P E S T


Foreign Liens

Letters of Credit


Prepare credit risk profile. Aggregate amount of risk of the buyer/borrower,

payment history, current capacity to repay based on historical and future projections.

Obtain written information from buyer and written consent to contact local bank and references.


Foreign Liens

Letters of Credit


Request relevant information from buyer. In many countries information is inaccessible or

difficult to access. China has no system for collecting & assessing

credit histories or even accessing criminal or land records.

Many countries do not recognize “private investigations” and consider them illegal.


Foreign Liens

Letters of Credit


Identify all principal owners. Identify all parent, subsidiary & affiliated entities. Identify all entities related through common ownership of

principal owners or close relatives. Determine whether borrower is a State Owned Enterprise

(“SOE”) or if there is any government ownership or control over the borrower.

Ensure legal capacity. This can be particularly tricky in foreign jurisdictions as many

countries incorporate a Legal Representative framework, which provides that only the designated Legal Representative may bind the company.


Foreign Liens

Letters of Credit



Foreign Liens

Letters of Credit

Foreign Liens




Due Diligence



Foreign Liens



Letters of Credit

Governing Laws and

Rules


Foreign Liens

Two common issues when selling abroad Searching for secured debts Securing your transaction


Foreign Liens

Letters of Credit

Foreign Liens

In the US Transparent records and recording systems

Federal and State tax liens are searchable Stable and fairly uniform legal structure - Uniform Commercial

Code

Outside of the US Countries where information is available often require

taxpayer consent to release. The UCC does not control.

Generally, the laws of the jurisdiction in which the debtor is located govern perfection of security interests in personal property (UCC 9-301).


Foreign Liens

Letters of Credit

Foreign Liens

UCC Equivalence Test If the laws of the debtor’s country are not equivalent to the

US, then the debtor may be deemed to reside in the District of Columbia. The secured party is essentially excused from compliance with

non-US law and may perfect its interest in the District of Columbia.* The equivalence test assesses whether the foreign

jurisdiction requires a foreign filing and whether recording or registration is equivalent to Rev. Article 9 of the UCC “Generally requires information concerning the existence of a non-

possessory security interest to be made generally available in a filing, recording, or registration system as a condition or result of the security interest’s obtaining priority over the rights of a lien creditor with respect to the collateral.”


Foreign Liens

Letters of Credit

Foreign Liens

If I file in the District of Columbia, am I ok? Additional information is required to determine

whether a secured party can achieve priority by registering its interest in the collateral under foreign or Washington D.C. law. Foreign law may not recognize security interests in

the type of collateral, or in favor of the type of secured party.

Contractual choice of law clauses may not be given effect to alter the law that otherwise would govern perfection over security interests.


Foreign Liens

Letters of Credit

Foreign Liens

Summary of select systems Canada

Ontario enacted the PPSA based on UCC Article 9 (all Canadian common law jurisdictions have followed)

Quebec (civil law jurisdiction) has a civil code which parallels the PPSA. Mexico

Registro Único de Garantías Mobiliarias (RUG) - Largely based on recommendations from UN Commission on International Trade Law (Executive decree issued September 23, 2010 implementing the amendments)

Unified registry of movable property Previously filed security interests in local registries are still effective.

Pledge System (much of South America) Perfection is generally by possession Transaction filing – generally, lender must file copy of entire loan agreement Generally requires new filing at each stage or modification of a transaction Generally cannot contain floating security interest Narrow collateral descriptions (generally, must be the same “specie” as the original)


Foreign Liens

Letters of Credit

Foreign Liens

Solutions Obtain guarantees from parent, subsidiary,

affiliate or common ownership company, or individuals located in U.S. or more legally secure or transparent jurisdictions.

Obtain liens or rights over collateral located in U.S. or more legally secure or transparent jurisdictions.


Foreign Liens

Letters of Credit


Foreign Liens

Letters of Credit




Due Diligence



Foreign Liens



Letters of Credit

Governing Laws and

Rules


Letters of Credit

Letter of credit (LC) characteristics: Offers the most protection to the seller. Substitutes the creditworthiness of an overseas buyer with that of a bank. Depending on the type of LC, the bank that pays on behalf of the buyer

may be at origin or at destination.

Banks deal in documents only. Payment is independent of the physical movement of the related goods. Buyer’s recourse for problems with goods is to the contract with the Seller.

Three independent “agreements” underline a letter of credit. between buyer and seller (their contract) between applicant and issuing bank (application and reimbursement

agreement) between issuing bank and beneficiary (the LC)


Foreign Liens

Letters of Credit

Letters of Credit

Relevant laws and rules Article 5 of the Uniform Commercial Code Uniform Customs and Practice for Documentary Credits

(UCP) Published by the International Chamber of Commerce (I.C.C.) The UCP is not law, rather a detailed restatement of “custom”

in the industry. However, the UCP may apply. Some states have enacted a

non-uniform amendment to UCC Article 5, which states that unless otherwise agreed, Article 5 does not apply to a letter of credit if the UCP is incorporated by reference into the documentary credit.


Foreign Liens

Letters of Credit

Letters of Credit

Example of LC use in practice Buyer requests extended payment terms of 90 days from date of shipment. Seller counters that it will not offer such terms on open account basis, but

would consider such terms if buyer provides acceptable LC and agrees to absorb the associated additional costs of financing.

Seller talks with its bank, to obtain pricing for credit/finance driven fees associated with this arrangement: Confirmation fee Acceptance commission Discount charges

Buyer’s bank issues the LC Seller’s bank is the confirming bank LC is payable via a time draft to be drawn at 90 days from date of

bill of lading


Foreign Liens

Letters of Credit

Letters of Credit

Background Terms Clean letter of credit

Requires no bill of lading. Documentary letter of credit

Requires a bill of lading.

Clean Bill of Lading. A clean bill of lading requirement cannot be met by a

“foul bill of lading,” in which the carrier has noted that there is patent damage to the cartons shipped.


Foreign Liens

Letters of Credit

Letters of Credit

Irrevocable documentary letter of credit Most common in international commercial transactions. Documentary letters of credit may also be “revocable,” giving the beneficiary a right

to payment “unless previously canceled” by the account party. Sight letter of credit

Payable on demand Time letter of credit

Payable at a certain time, such as: six months following presentation of documents. General letter of credit

Does not restrict the beneficiary’s right to transfer its rights thereunder. Special letter of credit

Limits permissible transfers, usually to one or more banks. Fixed letter of credit

May become “exhausted” either when drafts for payment have been drawn by the beneficiary for the full amount of the letter or when the time period for drawing upon the letter has expired.


Foreign Liens

Letters of Credit

Letters of Credit

Common broker issue Often have two transactions with the same goods. If both sales transactions involve payment by LC, then

broker will be the beneficiary (seller) of the LC in the first transaction, and the account party (buyer) in the second.

Broker solution Back to back credit

If the documents required by each LC are identical, then broker can assign its rights in the first transaction to the issuing bank of the second LC.

May enable broker to purchase the goods from supplier with credit of its buyer.


Foreign Liens

Letters of Credit

Letters of Credit

Legal Advice

The content of this presentation is for educational purposes only. Each legal issue is fact dependent, THIS PRESENTATION SHOULD NOT BE USED OR VIEWED AS LEGAL ADVICE; your legal counsel should be consulted on the application of your particular factual situation to the current law.

Copyright: 2013 Kegler, Brown, Hill & Ritter Co, LPA


Foreign Liens

Letters of Credit

GETTING PAID WHEN SELLING INTERNATIONALLY

Luis Alcalde, Esq. and David M. Wilson, Esq.


Foreign Liens

Letters of Credit

@ LMAlcalde

@ dwilsonjdmba

Selling Internationally Balancing Risk & Competitiveness

Andy ArduiniSenior Vice President

Director – Structured Trade Finance

October 24, 2013

• President’s National Export Initiative calls for doubling of exports between 2010 and 2015.

• Year-over-year growth rate for last 3 years is 17.1%

• U.S. exports very significant; $2.2 trillion in 2012.

• Ohio was 9th largest exporting state in 2012 with $48.5B in exports.

• The International Monetary Fund forecasts that 87% of world economic growth will take place outside of the U.S. over the next 5 years.

– Bullet level 4

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Setting the Scene

45

Setting the Scene (continued)

Primary Risks

• Not getting paid.

• Losses resulting from currency fluctuations.

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Most Overlooked Risk

• Lost revenue due to uncompetitive terms.

Getting Paid: Risk vs. Competitiveness

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CASH IN ADVANCE

LETTER OF CREDIT

CASH AGAINST DOCUMENTS

OPEN ACCOUNT

Least Risk

Most Risk

Least Competitive

Most Competitive

Common Payment Methods

Letter of Credit

• Payment method that has evolved over centuries of international commerce.

• Governed by standard rules (UCP 600).

• Very effective tool to eliminate commercial risk while selling internationally.

• Can be significant competitive impediment in many markets.

• Does not protect against Country/Political Risk.

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Open Account / Cash Against Documents

• Most competitive but risky payment method for selling internationally.

• Cash Against Documents allows you to control the delivery of goods, but does not guarantee payment or return of goods to you in a default.

• Does not protect against Commercial or Country/Political Risk.

• Risks can be lowered through ExIm Bank Credit Insurance & Foreign Buyer Financing Progams.

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ExIm Bank

• Export-Import Bank of the United States.

• Mission is to assist in financing the export of U.S. goods and services to international markets.

• Supported more than $450 billion of U.S. exports, primarily to developing markets worldwide, in its 77 year history.

• Authorized a historic total of $35.7 billion in loans to support U.S. exports in 2012 (10% increase over 2011).

• Provides export credit insurance and loan guarantees.

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Should I insure A/R?

• Often the only uninsured asset

• Frequency of loss generally the highest of all assets

• Magnitude and frequency of loss often magnified when selling internationally where legal remediation is more complicated

• Highly sensitive to changes in the business cycle

• Lifeblood of a company’s cash flow position

• Often critical to repay short-term borrowing

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ExIm Short Term Credit Insurance

• Over $2B in policies authorized in 2012.

• Available to exporters whose product contains more than 50% U.S. content.

• Coverage generally 95%. Covers commercial and political risk.

• Terms up to 180 days for consumable products and 360 days for some bulk agricultural products and capital equipment.

• Available as single buyer policy or multiple buyer policy.

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Should I give a loan to a foreign customer?

• Great sales tool but can be a very risky proposition.

• Commercial and political risk magnified exponentially as tenor increases.

• Credit analysis can be complicated given regional differences in accounting standards.

• Can be difficult and expensive to perfect a security interest in foreign collateral.

• Can be problematic and expensive to collect bad debts.

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ExIm Foreign Buyer Financing• A U.S. based bank provides a direct loan to a foreign

customer of a U.S. exporter on that is backed by a 100% ExIm guarantee.

• Non-recourse financing. The U.S. exporter has no responsibility for the loan once funded.

• Often very competitive financing in emerging markets where rates are higher and access to funding more difficult.

• Maximum advance rate of 85% with matching U.S. content requirement. Term is generally 5 to 7 years.

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Foreign Exchange: Risk vs. Competitiveness

55

SELL IN U.S. $

SELL IN FOREIGN CURRENCY

Two Options

Least Risk

Most Risk

Least Competitive

Most Competitive

Does selling in USD eliminate risk?

• Depends on how you define risk.

• It will protect you from currency valuation differences as it transfers this risk to your customer.

• Will cause you to lose sales as some prospective clients will not be amenable to taking this risk.

• Can expose you to risk during times of extraordinary fluctuation in currency values. Many lessons learned during the great recession.

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Foreign Exchange Strategy

• Eliminate foreign currency risk for both parties. Best of both worlds approach can eliminate both valuation and loss of revenue risk.

• Discuss hedging strategies with a capable bank. There are many ways to sell in a foreign currency and not take foreign currency risk.

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