Method For International Financing

>April 25–27, 2005Phoenix Civic Plaza/Hyatt Regency Phoenix Phoenix, AZ 1


LETTERS OF CREDIT

As a Method for International Financing

Presented by

Laura KrausApril 26, 2005

NCMA World Congress 2005“Prime Time: Contract Management at the Core of the Enterprise”


PARTIES TO INTERNATIONAL TRANSACTIONS

• Buyer: Seller:– Importer - Exporter– Applicant - Beneficiary– Account Party - Drawer– Drawee

• Buyer’s Bank: Seller’s Bank:– Issuing Bank - Advising Bank– Paying Bank - Confirming Bank– Collecting Bank - Negotiating Bank

- Remitting Bank



LETTERS OF CREDITThe Basics

Definition: A documentary credit is a conditional bank undertaking of payment. It is a written undertaking by a bank (issuing bank) given to the seller (beneficiary) at the request, and on the instructions of the buyer (applicant) to pay at sight or at a determinable future date up to a stated sum of money, within a prescribed time limit and against stipulated documents. The issuing bank is putting out its credit and good name for the sake of the buyer.




Buyer: Because a documentary credit is a conditional undertaking, payment is made on the behalf of the buyer against documents, which may represent the goods and give him rights in them.

Seller: Because the documentary credit is a bank undertaking, the seller can look to the bank for payment, instead of relying upon the ability or willingness of the buyer to pay.

However, because the undertaking is conditional, the seller only has the right to demand payment if he meets all the requirements of the credit. It is therefore, unwise for the seller to proceed with shipment until he is aware of these requirements and is satisfied that he can meet them.




Summary - Documentary credits, therefore:• Are an arrangement by banks for settling

international commercial transactions.• Provide a form of security for the parties involved.• Ensure payment, provided that the terms and

conditions of the letter of credit have been fulfilled.

• Mean that payment by such means is based on documents only, and not on merchandise or services involved



LETTERS OF CREDITWhat They Can and Cannot Do

• They can:Provide a means of prompt payment to the seller

provided the credit details are fulfilled.

Eliminate extensive credit investigation of the buyer, since the seller’s credit risk has been assumed by the issuing and/or confirming bank.

Assure the buyer it will only be required to pay if the conditions of the credit are met.

Provide a base for a bank to engage in temporary inventory and receivable cycle financing.



• They cannot:– Substitute for the integrity of the seller or make

background and integrity checking unnecessary.– Lend soundness to transactions that were not

basically sound in their inception.– Absolve the seller or buyer from contractual

liability.– Remove the exchange risk.– Guarantee that shipment will be made by seller.




• They cannot:– Letters of credit, by their nature, are separate

transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s); even if any reference whatsoever to such contract(s) is included in the credit. (Article 3, UCP 500).



LETTERS OF CREDIT

• A basic tenet of letters of credit is that banks handling letters of credit deal in documents and documents only. Any dispute with regard to quantity or quality of merchandise bears no relation to the bank’s responsibility to examine documents as presented under the letter of credit, and to make their decision as to the acceptability of the documents solely based upon those documents versus the letter of credit terms and conditions.



TYPES OF LETTERS OF CREDIT

Merchandise, Commercial, Trade: The majority of LCs issued are in payment for goods in shipment or current services performed. Payment is normally made against documents for goods shipped (Article 1,2, & 9 UCP500)

Standby: This type of LC functions like a guarantee. This type of credit can only be drawn against a credit agreement. It is a definite undertaking of the issuing bank, ICC 590, ISP 98




Revocable: A revocable letter of credit may be amended or canceled by the issuing bank at any moment and without prior notice to the beneficiary (Article 6 & 8, UCP 500)

Unconfirmed: Bears only the guarantee of the issuing bank. The beneficiary should look to the credit worthiness of only the issuing bank, and not to any intermediary. (Article 9, UCP 500)

Confirmed: Is a credit in which a second guarantee is added to the letter of credit by another bank. (Article 9, UCP 500)




Sight: Payment is at sight, which means that the drafts and documents are honored, if in order, by making payment without delay.

Time, Usuance: The draft honored by accepting it for payment at a future date. Payment is delayed until the maturity of the draft.

Revolving Credit: One where the amount is renewed or reinstated without specific amendment to the credit being needed. It can revolve in relation to time or value.




Red Clause Credit: Authorizes the advising or confirming bank to make advances to the beneficiary before presentation of the documents.

Transferable Credit: Can be transferred by the original beneficiary to one or more other parties. It is normally used when the first beneficiary does not supply the merchandise himself, but is a middleman and wants to transfer all or part of his rights to the actual supplier (Article 48, UCP 500)

Back-to-Back Credit: The seller, as beneficiary of the first credit, offers it as “security” to the advising bank for issuance of a second credit.



LC Parties - LC Issuance

Buyer/Applicant

IssuingBank

Seller/Beneficiary

AdvisingBank

Buyer applies for LC

Buyer’s bank issues LC and sends to seller’s bank

Sales contract

Seller’s bankauthenticates LC

and sends to seller

Sales contractSeller/

Beneficiary



LETTER OF CREDITInstructions

Date:To: BuyerGentlemen:Following are the particular details we wish to have

included in your documentary Letter of Credit, issued in reply to our Pro-Forma invoice number 2005-001, dated April 26, 2005.

Please instruct your bank to open and issue this credit in accordance with the following terms and subject to the Uniform Customs and Practices for Documentary Credits, International Chamber of Commerce Publication 500.




We have made every effort in these instructions to provide you with terms, which can be easily accommodated. If you or your bank are unable to comply with these terms and conditions, please consult with our offices prior to the issuance of the credit to avoid delay or non-shipment.

1. The Letter of Credit shall be irrevocable and issued under the rules of UCP 500.

2. The credit shall be advised/confirmed by:Seller’s BankAddress, City, State, Zip CodeABA #, Account Number




3. The credit shall be freely negotiable.4. The credit shall show as the beneficiary the exact

name of: _________________5. The credit shall be payable in USD, in the amount

of $___________.6. The credit shall be payable at ____(Sight)

________(Time).7. The credit shall show that all banking charges

except for Seller’s Bank charges are for the account of the applicant. All reimbursement charges are for the account of the applicant.




9. Confirmation charges are for the applicant.10. The credit shall show that all charges for

amendments to the credit, including related communications expenses, are for the account of the applicant.

11. Partial shipments are permitted.12. Transshipments are Not allowed.13. Shipment from: Any USA port/airport14. The expiration date shall be: ___________15. The latest shipping date is: ____________




16. Full Set “Clean on Board” Ocean bills of lading/airway bills consigned to the Issuing Bank.

17. Other documents: _______________________________________________________________.

Your cooperation is very much appreciated. Please contact us for any questions that you may have.

Sincerely,



BENEFICIARY SHOULD REVIEW LC TO VERIFY:

1. Correct Name and Address2. Sufficient Credit Amount3. Documents Required are Obtainable and

According to Terms of Sale4. Points of Shipment and Destination are

Correct5. Insurance Coverage Requirements are

Obtainable and According to Terms of Sales



BENEFICIARY SHOULD REVIEW LC TO VERIFY:

6. Shipping Date Allows Sufficient Time to Dispatch the Goods

7. Expiration Date Allows Sufficient Time for Presentation of Draft and Documents

8. Description of Goods is Correct and Simply Stated



Incoming Admin,,MESSAGE ADVICE>> PRT: _LTA9978: SEQ: 00231 LOC: intl que: SWFT020prtcTRN: 970404-000249 <<<intranet>>> 26 APRIL_2005 08:27:57.73

{1: FO1FUNBUS33AINT46520884568{2: 07001522970404KOFBKRSEAXXX2047728792979404044ON}{3: {108:IAMGR04}}

SWIFT Message Text

Output time: 04:40 Output sequence number: 084568S/FUNBUS33AINTWACHOVIA BANK NATIONAL ASSOCIATIONINTERNATIONAL DEPARTMENT

Input time: 15:22 Input sequence number: XXXXXXS/KOFBKRSEA.XXXKOREA FIRST BANK – SEOUL53-1 1-KA CHUNGMU RD.JOONG KU

Swift Authenticated Message Mac; XXXXIssue of Documentary Credit (TYPE: 700)

:27 /Sequence of total:1/1



:40A: /Form of documentary credit:IRREVOCABLE

:20 /Documentary Credit NumberMI8677 04NU000032

:31C /Date of Issue:Date: 050426

:31D /Date and Place of Expiry:Date: 050930 Place AT NEGOTIATION BANK’S COUNTER

:50: Applicant:PRIZE IMPORTERSANYWHERE, KOREA

:59: /Beneficiary:/XYZ EXPORTERSSOMEWHERE, USA

:32B: /Currency Code, Amount:538143.65 USD

:41D /Available with …. By ….ANY BANKBY NEGOTIATION



:42C: /Drafts at:90 DAYS AFTER SIGHT

:42A; Drawee:S/KOFBUS6LKOREA FIRST BANK, LOS ANGELES AGENCYSUITE 800LOS ANGELES, CA, US

:43P: /Partial Shipments:NOT ALLOWED

:43T: /Transshipments:NOT ALLOWED

:44A: /Load on board, Dispatch:DALLAS, TEXAS US

:44C: /Latest date of ship:050907

:45A: /Description of goods and/or services:DETAILS ARE AS PER YOUR PROFORMA INVOICE DATEDMARCH 31, 1997FCA DALLAS



:46A: /Documents required:+SIGNED COMMERCIAL INVOICE IN QUINTUPLICATE+PACKING LIST IN TRIPLICATE+FULL SET OF CLEAN ON BOARD OCEAN BILL OF LADING MADE OUT TO THE ORDER OFKOREA FIRST BANK MARKED FREIGTH COLLECT AND NOTIFY ACCOUNTEE+FULL SET OF INSURANCE POLICIES OR CERTIFICATES, ENDORSED IN BLANK FOR 110PERCENT OF INVOICE VALUE, STIPULATING THAT CLAIMS ARE PAYABLE IN THECURRENCY OF THE DRAFT AND ALSO INDICATING A CLAIM SETTLING AGENT IN KOREA.INSURANCE MUST INCLUDE: THE INSTITUTE CARGO CLAUSE: (A)+CERTIFICATE OF ORIGIN

:47A; /Additional Conditions:ALL BANKING COMMISSIONS AND CHARGESINCLUDING REIUMBURSEMENT CHARGES OUTSIDEOF KOREA ARE FOR ACCOUNT BENEFICIARY

:48: /Period for presentation:DOCUMENTS MUST BE PRESENTED WITHIN 21 DAYS AFTER THE DATE OFTHE SHIPMENT

:49: /Confirmation instructions:WITH



:53A: /Reimbursement Bank:S/KOFBUS6LKOREA FIRST BANK, LOS ANGELES AGENCYSUITE 800LOS ANGELES, CA, US

:78: /Instructions to paying bank:REIMBURSEMENT IS SUBJECT TO ICC URR 525ACCEPTANCE COMMISSIONS AND DISCOUNT CHARGES ARE FOR BUYER’S A/CDRAFTS MUST BE SENT TO DRAWEE BANK FOR REIMBURSEMENT AND ALLDOCUMENTS TO US IN TWO CONSECUTIVE AIR MAILS. PAYMENT UNDER THISL/C IS TO BE MADE AT SIGHT BASIS REGARDLESS OF DRAFTS TENOR

:72: /Sender t oReceiver Information:THIS CREDIT IS SUBJECT TOU.C.P. (1993 REVISION) I.C.C.PUBLICATION NO. 500.-}

{5:{MAC:FAB53E6E}{CHK:B637D2DECCDE}{DLM:}}



78: Instructions to Paying Bank:REIMBURSEMENT IS SUBJECT TO ICC URR 525ACCEPTANCE COMMISSIONS AND DISCOUNTS CHARGES ARE FOR BUYER’S A/CDRAFTS MUST BE SENT TO DRAWEE BANK FOR REIMBURSEMENT AND ALL DOCUMENTS TO US IN TWO CONSECUTIVE AIR MAILSPAYMENT UNDR THE L/C IS TO BE MADE AT SIGHT BASIS REGARDLESS OF DRAFT’S TENOR.

78: Instructions to Paying Bank:SPECIAL INSTRUCTIONS TO THE NEGOTIATING BANK:NEGOTIATING BANK MUST SEND DRAFTS TO DRAWEE BANK AND ALL DOCUMENTS OT USI.E. THE BANK OF TOKYO-MITSUBISHI, LTD., GLOBAL SERVICE BANKING DIVISION P.O. BOX 191, NIHONBASHI, TOKYO 103-91, JAPAN IN2. SPECIAL INSTRUCTIONS TO THE DRAWEE BANK:’IN REIMBURSEMENT DEBIT OUR HEAD OFFICE ACCOUNT WITH YOU

________________________________________________________________________________________

78: Instructions to Paying Bank:T.T. REIMBURSEMENT PROHIBITEDNEGOTIATING BANK MUST FORWARD DRAFTS TO DRAWEE BANK AND ALL DOCUMENTS TO US IN TWO REGISTERED AIRMAILS.WE AGREE THAT DRAFTS DRAWN IN COMPLIANCE WITH THE TERMS OF THIS CREDIT SHALL BE DULY HONORED ON DUE PRESENTATION.

78: Instructions to Paying Bank:PLS FORWARD ALL DOCUMENTS TO US.(NO.264, CHUNG CHENG 4TH ROAD, KAOHSIUNG, TIWAN, R.O.C.)UPON RECEIPT OF THE RELATIVE DOCUMENT CREDIT CONFORMED, WE SHALL REIMBURSE ACCORDING TONEGOTIATING BANK’S INSTRUCTIONS



LC Parties - LC Issuance

Buyer/Applicant

IssuingBank

Seller/Beneficiary

NegotiatingBank

The issuing bank debits the buyers account for the payment and releases the original documents

After scrutinizing the documents negotiating bank forwards them to the issuing bank

Seller presents documents under the LC to its bank

Shipment

On checking for compliance with LC terms the issuing bank reimburses the negotiating bank by debiting the buyer’s account

On receiving the payment Seller’s account is credited



Incoterms

• Considerations to keep in mind– Who has what responsibility?– More importantly who pays for what?

• Knowing the terms correctly can be very beneficial

• At the contract negotiation stage these issues need to resolved



Range of Responsibilities

Seller

Buyer

EX

W

FC

A

FA

S

FO

B

CF

R

CIF

CP

T

CIP

DA

F

DE

S

DE

Q

DD

U

DD

P

PackingForwarder FeesLoading at OriginInland FreightPort ChargesExport ClearanceInsuranceOcean FreightCharges at Foreign PortCustom ClearanceCustom DutiesDelivery to Destination



Incoterms 2000

• EXW - Ex Works

• FCA - Free Carrier – multimodal, container, air, rail, road

• FAS - Free Alongside Ship

• FOB - Free on Board (maritime only)– use FCA for all other types of carriage



Incoterms 2000

• CFR - Cost and Freight– on board only

• CIF - Cost, Insurance and Freight– on board only

• CPT - Carriage Paid to– in custody of carrier

• CIP - Carriage and Insurance Paid to– in custody of carrier



Incoterms 2000

• DAF - Delivered at Frontier (rail, road)

• DES - Delivered Ex Ship

• DEQ - Delivered Ex Quay (cleared for import)

• DDU - Delivered Duty Unpaid (place)

• DDP - Delivered Duty Paid



Incoterms 2000

• General/ Multi-modal/ Container– FCA, CPT, CIP

• Maritime Only– FAS, FOB, CFR, CIF, DES, DEQ

• Non-existent – FOB Airport (now FCA)– FOR/FOT - Free on Rail/Truck (now FCA)– C&F - Cost and Freight (now CFR or CPT)



LETTERS OF CREDITSummary

1. Submit Pro-Forma LC to Buyer

2. Review LC When You Receive It

3. Move Documents as Quickly as Possible

4. Try to Direct LC to Your Bank

5. Request Freely Negotiable LC

6. Realize Risk of Consigning Bill of Lading to Buyer

7. Banks Will Not Look to Your Contract

8. The LC is Only as Good as the Issuing Bank



THANK YOU


Economy & Finance

Method For International Financing