FORFAITING
A useful tool in Trade Finance
FORFAITING
A useful tool in Trade Finance
1. What is Forfaiting?
2. Which instruments are eligible for forfaiting?
3. Why does the Exporter like the forfaiting tool?
4. What is the advantage for the Importer?
5. Any advantage for the Importers house bank?
6. Factoring versus Forfaiting
7. Suppliers Credits versus Buyers Credits
8. Which Documents do we usually require under
an a-Forfait-Transaction?
9. Example of a typical Transaction
10. How does a discount calculation look like?
11. What are the usual terms involved in a forfait deal?
12. How can such a deal be structured in the best possible way?
13. Which other instruments can NLB InterFinanz AG offer?
14. Sample Documentation for:
- promnote
- Letter of Guarantee
- Letter of Credit
FORFAITING
A useful tool in Trade Finance
1 WHAT IS FORFAITING?
Forfaiting is a "without recourse” or "non-recourse” purchase of receivables
from Exporters which arise in context of a trade related transactions and
provide an exporter access to a lump sum of cash shortly after delivery thereby
reducing its assets and liabilities. In other words the "Forfaiter” or purchaser of
an abstract claim takes on all risks which are associated with the payment,
such as:
- Political Risk (moratorium etc.)
- Transfer Risk
- Commercial Risk
- Currency Risk
- Interest Rate Risk
- Responsibility of Collection at Maturity
As only abstract payment claims are eligible for a forfait transaction, any
objections and defenses related to the underlying transaction have to be
settled directly between the Exporter and the Importer and are explicitly
excluded from the a forfait deal.
FORFAITING
A useful tool in Trade Finance
2 WHICH INSTRUMENTS ARE ELIGIBLE FOR FORFAITING?
Every instrument which in itself constitutes an irrevocable and
unconditional payment claim (i.e. are abstract), such as:
- Promissory Notes
- Bills of Exchange
- Deferred Payment Letters of Credit
- Stand By Letters of Credit
- Irrevocable and Unconditional Payment Guarantees
In principle Book Receivables can also be forfaited if they are accompanied
by a Bank Guarantee or if the obligor is willing to issue a confirmation in
favour of the Forfaiter stating that:
- the payment claims are legally valid,
- no third party rights to the claims exist,
- neither counterclaims nor rights to set-off will be exercised,
- he irrevocably and unconditionally warrants to pay at maturity in
effective currency without deduction of any taxes, levies, duties,
charges of whatever nature,
- objections and defenses arising from the underlying transaction will
be lodged directly between Exporter and Importer.
FORFAITING
A useful tool in Trade Finance
3 WHY DOES AN EXPORTER LIKE THE FORFAITING TOOL?
■ Neither Export Credit Agency (hereinafter: ECA) nor insurance cover is
needed and consequently the administrative workload involved in an
insurance covered deal is saved.
■ No losses arising from partial insurance cover/retainer.
■ It does not burden his credit limits.
■ Forfaiting cost can be built into the commercial contract.
■ Origin of goods is irrelevant (which is not the case with ECA cover).
■ 100% of the contract value can be financed (which is not the case with
ECA cover).
■ Exporter gets 100% of the receivables off his books and thus eliminates all
the risks mentioned under point 1.
■ Often the forfaiting market offers longer tenors than ECAs.
■ Forfaiting is most of the time quicker and more flexible than ECA-covered
buyers credits.
■ No time consuming applications are required (as for ECA cover).
■ An exporter does not need to have an account/relationship with the
Forfaiter (like in buyers credit scenario).
■ For convenience purposes an exporter can settle the documentary part of
the deal through his house bank and does not have to go through the
Forfaiter.
FORFAITING
A useful tool in Trade Finance
4 WHAT IS THE ADVANTAGE FOR AN IMPORTER?
■ He can buy goods on appropriate (according to the lifetime of the
underlying asset) credit terms.
■ He can obtain credit in a variety of hard currencies in accordance with a)
his own hard currency earnings or b) his assessment of interest rate or
currency fluctuation.
■ The time consuming application and decision periods of ECA or insurance
companies are saved.
FORFAITING
A useful tool in Trade Finance
5 ANY ADVANTAGE FOR THE IMPORTERS HOUSE BANK?
■ They can for example advise the l/c through a bank of their own choice.
■ In cases where usually the Exporter asks for a confirmed l/c, they save the
request for confirmation and consequently neither burden their limits with
the advising bank nor do they have to supply any collaterals to the advising
bank.
■ They can offer to their client/Importer financing of his trade flows on
competitive terms.
■ Often importer’s house bank does not even have sufficient lines or
adequate maturities for these lines with the exporters bank.
FORFAITING
A useful tool in Trade Finance
6 FACTORING VERSUS FORFAITING
A frequently asked question is, what is the difference between factoring and
forfaiting.
Factoring is the revolving sale of all or at least a majority of a company’s
receivables to a factoring company. The acceptable tenor of the receivables is
usually maximum 180 days. A few factoring companies accept also tenors of
up to 360 days. There are two essential conditions to factoring:
1. the company that sells its receivables has to pass a credit review.
2. insurance cover for the commercial risk of the receivables has to be
obtained. Usually book receivables are acceptable.
The factoring company pays out a certain percentage of the claims i.e. for
example 80% and keeps 20% as default reserve.
Forfaiting is the single sale/purchase of a single transaction. The deal itself
has to be documented and assigned properly. The maximum forfaitable tenor
depends on the possibilities of the Forfaiters in the market i.e. their available
country and banklimits. Technically any tenors from 180 days up to 5-7 years
are feasible. There are no credit reviews of the Exporter required.
FORFAITING
A useful tool in Trade Finance
7 SUPPLIERS CREDITS VERSUS BUYERS CREDITS
If the suppliers credit is sold on a without recourse basis i.e. forfaited it’s less of
administrative work for the Exporter and his house bank then a buyers credit,
as a buyers credit requires a loan agreement; often an ECA cover is needed on
top and a risk premium for the takeover of the retainer through the Exporters
house bank has to be agreed. The supplier has to pay the premium to the ECA
and has over the full length of the financing period certain responsibilities
towards the ECA and his house bank.
In the scenario of a forfait transaction, the supplier has to get simultaneously,
at the time of contract conclusion with the Importer, a written commitment
from the Forfaiter. His obligation is then to ship within the agreed time span
and present proper documentation as agreed.
Once the Exporter has
- shipped his goods according to contractual stipulations with the
Importer, and
- presented a full set of documents according to the forfaiting
agreement, and
- assigned his payment instruments to the Forfaiter
he will receive the discounted proceeds.
FORFAITING
A useful tool in Trade Finance
8 WHICH DOCUMENTS DO WE USUALLY REQUIRE
UNDER AN A-FORFAIT-TRANSACTION?
- conformed copy of the underlying invoice(s)
- conformed copy of the underlying sales contract (financial section)
- conformed copy of the transport document
- plus:
a) In case of promissory notes or bills of exchange:
- notes endorsed in our favour "without recourse”
b) In case of a Bank Guarantee:
- Letter of assignment issued by the Exporter assigning the underlying
payment claims towards the Importer and the guaranteeing bank in
our favour.
- Notification of the assignments issued by the Exporter addressed to
the Importer and the guaranteeing bank
- Letter of acknowledgement issued from the Importer and the
guaranteeing bank acknowledging ourselves as new bona-fide-
holder.
c) In case of an L/C:
- Letter of assignment issued from the Exporter assigning the claims
arising from the l/c in our favour.
- Notification of the assignments issued by the Exporter addressed to
the advising and the guaranteeing bank.
- Letter of acknowledgement issued from the advising bank
acknowledging us as new beneficiary to the l/c (case by case)
- Letter of acknowledgement issued from the opening bank
confirming to us that they will effect payment under the l/c at
maturity in our favour and according to our instructions.
FORFAITING
A useful tool in Trade Finance
9 EXAMPLE OF A TYPICAL TRANSACTION
1. Prior to its negotiations with the Importer, it is recommendable that the
Exporter gets in touch with the Forfaiter and asks for the pricing for
financing the relative risk over the requested payment term, in order to get
the financing cost properly calculated and built into the contract value.
2. Upon signing of the sales contract, the Exporter should ask the Forfaiter for
a firm written commitment which is from a security point of view
comparable to a confirmed l/c. This written commitment contains the
conditions precedent to the without recourse purchase and fixes the
financing cost involved.
3. By now the Exporter should receive the contractually stipulated security
from the Importer/his house bank in exchange for granting a suppliers
credit. After its receipt the Exporter can start the production of the goods.
FORFAITING
A useful tool in Trade Finance
9 EXAMPLE OF A TYPICAL TRANSACTION
4. When goods are ready for shipment the Exporter has to present the
documents to the Importer (through l/c; documentary collection etc.) in
accordance with the underlying instrument.
5. A conformed (i.e. a copy of the original that contains the words "true
copy” and is duly signed on each page) copy of documents required under
the forfait contract has to be send to the Forfaiter together with a set of
assignment and notification letters (see point 8/documentary requirements).
6. After receipt of the acknowledgement of the assignments from the relevant
counterparties involved the Forfaiter will discount the receivables and
disburse funds without recourse in favour of the Exporter.
7. Now the legal relationship exists between Forfaiter and Obligor/Importers
House bank. At maturity, the Forfaiter will collect the funds under the
relevant payment instrument and is duly entitled to receive payment.
FORFAITING
A useful tool in Trade Finance
10 HOW DOES A DISCOUNT CALCULATION LOOK LIKE?
If the Exporter approaches the Forfaiter prior to his sale negotiations with the
Importer, a buyers interest rate calculation can be prepared.
The Forfaiter will then - on the basis of the actually prevailing refinancing
rates and the current risk margin for the underlying risk - make a discount
calculation that contains the value of the goods plus the cost for
discounting of the deal on a without recourse basis.
In the above example the Exporter will – on the assumption that he receives
the written commitment on 09.03.2005 and discounting takes place value
10.06.2005 – have to increase the sale price by
€ 508.281,87 in order to receive for a granted financing period of 5 years and
10 halfyearly repayments net proceeds that equal his principal i.e. his original
sale price/value of goods less cost for commitment and discounting.
FORFAITING
A useful tool in Trade Finance
11 WHAT ARE THE USUAL TERMS INVOLVED IN A
FORFAIT DEAL?
Matching Libor: refinancing cost calculated on the basis of the cost of
refinancing for every maturity/instalment.
Average Libor: refinancing cost, calculated on the basis of the cost for
the average lifetime of the transaction.
Risk Margin: applied cost for the underlying risk
Days of Grace: days additionally calculated on the original maturity as
assumed period for late receipt of funds.
Commitment Fee: Risk margin usually calculated from the date of the
written commitment until disbursement of funds.
Straight Discount: interest rate for in advance calculation of interest
(opposite of yield) comparable in terms of capital with
present value.
Discount to yield: interest rate for post calculation of interest (opposite of
straight discount) comparable in terms of capital with
future value.
Method of compounding: e.g. annually, semi-annually, quarterly, monthly
Indicates how interest upon interest is calculated.
Usually the compounding method matches the tenor of
the underlying instalments.
Simple discount to yield: no compound method is applied.
FORFAITING
A useful tool in Trade Finance
12 HOW CAN SUCH A DEAL BE STRUCTURED IN THE
BEST POSSIBLE WAY?
Usually Exporters who are aware of the forfaiting tool approach their house
banks and ask for possibilities of forfaiting. If the house bank has no own
limits and work together with NLB InterFinanz AG they will ask us for a
commitment and sell the deal to us.
It is also possible that the Importers house bank informs the Importer of our
possibilities so that the Importer can advise his Exporter to get in touch with us
parallel to the sale negotiations. Than we can advise the Exporter directly of
the cost involved in a deal and help him to structure the deal tailor made
according to the needs of the parties involved.
FORFAITING
A useful tool in Trade Finance
13 WHICH OTHER INSTRUMENTS CAN
NLB INTERFINANZ AG OFFER?
■ Commercial/Political Risk Guarantee
Sometimes the Exporter does not mind having the risk on its own books, due
to cheap inhouse refinancing. However he is not able to assess the
commercial/political risk of the export deal or his in-house regulations do not
permit to incur certain political/commercial risks.
In this case NLB InterFinanz AG is prepared to give an irrevocable counter-
guarantee for the commercial and/or political risk.
■ Silent confirmation
A silent confirmation for a sight letter of credit or a deferred payment l/c is the
irrevocable undertaking to pay at maturity of the l/c in case the opening bank
does not effect payment. It is usually asked for when the l/c does not bear a
request for confirmation, however the exporter would like to have additional
comfort.
■ Down payment financing
If an export is financed through an ECA-covered buyers credit then a down
payment is required as precondition for the ECA cover. In this case we are
prepared to make the financing of the down payment. Usually we will ask for
a deferred payment l/c as instrument which is payable against single
presentation of the down payment guarantee.
■ Pre-export financing
Subject to the underlying transaction and the counterparties involved it is
often structured on the basis of a stand by l/c.
FORFAITING
A useful tool in Trade Finance
14 SAMPLE DOCUMENTATION FOR
Promissory Notes
How does a valid promnote look like?
Date and City of Issuance Currency and Amount in Figures
Maturity Date
Name and Stamp of
Beneficiary of the Note
the avalizing Bank
Currency and Amount in Words
Authorized
Name of Bank and full Address
Signatures
Stamp and Signature of
Name and Address of Obligor Obligor
Valid Endorsement:
Pay to the order of:
NLB Interfinanz AG, Zurich
Without Recourse
Stamp of the Exporter/Seller of the note
Authorized, valid and binding signatures
on behalf of the Seller of the note
FORFAITING
A useful tool in Trade Finance
14 SAMPLE DOCUMENTATION FOR
Specimen Promissory Note – Free Draft
Place and Date of Issue Currency and Amount in Figures
On Maturity Date As there is no form-
requirement to a prom note,
against this Promissory Note we promise to pay to
it can be freely drafted.
Name of Beneficiary (i.e., Supplier) or their order
the sum of Amount in Words
effective payment to be made in Currency in words (e.g., United States Dollars),
without deduction for and free of any taxes, impost, levies or duties present or future of
any nature.
This Promissory Note is payable at Name and Address of Bank for Presentation
FOR VALUE RECEIVED
For and on behalf of
Name of Maker
Authorised Signatory/ies
Per Aval for account of
Name of Maker
for and on behalf of
Name of Guarantor/ Guaranteeing Bank
Authorised Signatory/ies
Prior to discount the Promissory Note should be endorsed on the reverse:
PAY TO THE ORDER OF
name of purchaser of the promissory note (e.g. NLB InterFinanz AG)
Without Recourse
Name of Beneficiary
Authorised Signatory/ies
FORFAITING
A useful tool in Trade Finance
14 SAMPLE DOCUMENTATION FOR
Letter of Guarantee /1
To be issued on the Letterhead of the Bank
Name
and full address
of the exporter
place date
................... ...........................
Payment Guarantee No. ...............
We have been informed that you have concluded
a contract no. ………. dated ……….
with ......(name and full address of the importer).....,
hereinafter called "the importer"
for the supply of ...(name of goods)...
at a total price of .....................…
Payment terms: XY % Down payment
XY in 10 equal half yearly instalments as follows:
Amount EURO Maturities
FORFAITING
A useful tool in Trade Finance
14 SAMPLE DOCUMENTATION FOR
Letter of Guarantee / 2
For the proper and due fulfilment of the above payment obligations a bank guarantee has to be
furnished according to the contractual stipulations. .
In consideration of the aforesaid, we ...........(name and full address of the guaranteeing
bank)............., irrespective of the validity and the legal effects of the above mentioned contract and
waiving all rights of objection and defence arising therefrom, hereby irrevocably and unconditionally
undertake to pay any amount up to
EURO ............(amount in figures)...........
(in words: EURO xxxxhundredandxxxxxxxxthousandxxxxxhundredandxxxx-only)
upon receipt of your written request for payment stating that the importer has not fulfilled his
payment obligations at maturity. Such request shall be conclusive evidence of non-payment by the
importer of the amount requested.
Our payments under this guarantee will be made in effective EURO without deduction for and free of
any taxes, imposts, levies, duties, charges, set-offs or withholdings present or future of any nature.
For the purpose of identification, your demand has either to be presented through the intermediary
of your bankers confirming that the signatures thereon are binding upon yourselves.
This guarantee shall be automatically reduced by the amounts duly paid or by our payments made
under this letter of guarantee.
This guarantee is effective as of today and shall expire, even if this document is not returned, on
........(30 days after the last maturity)......... at the latest, unless your written demand for payment
accompanied by the requested statement in accordance with the above mentioned conditions has
reached us in ...........(seat of the bank)........... by the end of that day.
We confirm that this guarantee is our legally binding obligation and that all necessary governmental
and central bank consents and approvals have been obtained and complied with in order to enable us
to remit effective Euro/US$ under this guarantee when requested. The issuance of this guarantee is
permitted according to the laws of …. the country of issuance (Bosnia, Macedonia etc.)...............
This guarantee including all rights, privileges and benefits deriving therefrom is freely transferable and
may be assigned in full or in part without any limitation, fees or charges upon prior written notice to
us.
This guarantee is governed by the laws of Germany/Austria/Switzerland/UK. We hereby submit to the
jurisdiction of the courts of …., however this shall not prejudice your rights in any other jurisdiction
where proceedings may be commenced against us.
Yours faithfully,
........................(name of issuing bank).................
(authorised signature) (authorised signature)
(name) (name)
FORFAITING
A useful tool in Trade Finance
14 SAMPLE DOCUMENTATION FOR
Letter of Credit
There are only 2 conditions to a Letter of credit:
■ the form has to be irrevocable
■ UCP 500 Revision 1993 has to apply.
