Credit Risk Management in Trade Finance

Course Overview What can you do to be more certain you will be paid and what happens when you are not paid? If you have bought someone else’s debt, are you still dependent on them obtaining payment? This course deals with the management of credit risk in international and domestic trade from the points of view of suppliers, buyers and financiers. The programme opens with a discussion of trade contracts and relationships, the mechanisms of trade finance and the nature of risk, particularly relating to credit. This leads into risk mitigation and the management of trade receivables, including credit control, legal requirements and the giving and taking of security. There is detailed analysis of trading on open account, the use of bills of exchange and of purchase and vendor finance. Case studies and illustrative examples are provided at all stages. You will learn how to: Identify and manage credit risk Deal with payment problems Discount trade receivables and employ them as security Anticipate and counter common problems Implement credit control and collection procedures Operate a sales ledger effectively Raise, discount and achieve payment of bills of exchange Administer credit and political risks insurance policies Who should attend? Staff within Credit and Risk Management Functions Administrators of Credit and Political Risks Insurance Policies Financial Controllers Trade, Export, Commodity Finance Executives Import and Export Managers Corporate Relationship Managers Senior Operations Personnel Lawyers and Staff involved in the Legal Aspects of Trade
Day 1 Introduction Trade - Overview The counterparties: seller and buyer Goods and services The contract of sale and purchase Terms of trade Terms of payment Trade Finance - Overview What it is The parties involved: seller, buyer and financier Trade finance mechanisms - Open account, including factoring and invoice discounting - Bills of exchange, including forfaiting - Medium- and long-term supplier credits - Documentary credits, including back-to-back and transferable letters of credit - Purchase finance, including vendor finance - Countertrade and commodities Where and how they are used Basic advantages and disadvantages of each Risk What it is Credit risk: the possibility of sustaining loss or damage to a business or in a transaction by non-payment Risk seen from different perspectives: seller, buyer and financier Credit risk as one element within counterparty risk, and affected by other threats: - Performance or operational risk, including documentation and contractual risk - Political and economic risks - Exchange-rate risk - Overdue interest costs - Legal risk - Market or trade risk - Reputational risk - Human error - Complexity - Fraud Management of Risk Risk Mitigation and Avoidance: General ‘Know Thyself’: operate as far as possible within known strengths and capabilities ‘Know Your Customer’: trade on terms appropriate to each customer relationship Contractual protection The nature and role of credit and political risks insurance Taking of security Credit Management What it is – fundamental responsibilities - Credit risk assessment - Invoicing and credit notes, including query and dispute resolution - Account reconciliation, including contra trading - Debt collection - Recovery action, including legal proceedings, in the event of non-payment Operational requirements of sales ledger management - Promptness and accuracy of postings - Current credit information - Sales ledger aged debt analysis Day 2 Credit and Political Risk Insurances Introduction Credit and political risk insurances: what are they? Uses, benefits, advantages Major insurers – similarities and differences Export Credit Agencies – longer-term insurance and finance Brokers: who are they and what do they do? What is insured? Credit risks; political risks; pre-credit risks What is not insured? Contractual performance risk; client risk; foreign exchange risk A Policy as a Contract of Insurance Definition of a Contract of Insurance ‘Proceed as if a prudent uninsured’ Uberrimae fidei Policy Documentation and Policy Types Policy paperwork: Proposal Form, Schedule, Terms and Conditions, Credit Management Addendum, Endorsements Policy types: Ground-up; Excess of Loss; Single risks; Top-up Essential concepts and terminology Attaching to a policy as a financier Policy interpretation Understanding terminology and wording in individual clauses Understanding how individual clauses, terms and concepts relate to and interact one with another Case studies with comparisons of definitions and clauses between different policies Policy administration How to monitor a policy Importance of credit management Declarations and overdue reporting Prompt reporting of insured buyers potentially being unable to pay Timely payment of premium Client audit Bad Debts Causes of loss Date of ascertainment of loss Waiting period Presentation of claims Claims inspection Salvage and recoveries Realisation of security Subrogation Day 3 Receivables Management Trading on Open Account Step-by-step development of typical open account transactions Risks arising - Operational and performance issues - Non-compliance with contractual, financing or insurance terms and conditions - Inability or refusal to pay or late payment, including disputes, genuine or bogus - Fraud - ‘fresh air’ invoicing, diversion of funds, ‘long firming’ Mitigants and remedies - Insurances - Competent ledger management - Non-recourse finance - Security Potential warning signs of problems ahead Case histories of problem accounts Factoring and Invoice Discounting What are Factoring and Invoice Discounting? Similarities and differences between the two - The importance of assignment of invoices - Who runs the sales ledger? - Who handles the invoices? - Who collects debtor payments? - The financing agreement: obligations of the Financier and the Client Different types of Factoring and Discounting - Domestic and international - Recourse and non-recourse Receivables discounting predominantly non-recourse, using credit insurance International Factoring and Invoice Discounting Facility Structures International Factoring and Discounting: facility types and organisations Contractual relationship between Financier, Client and debtors Contractual relationship between Financiers Operational practices and procedures International Receivables Discounting – Legal and Operational Considerations Importance of jurisdiction - Financier and Client in the same country - With export debts - With domestic and export debts - Financier and Client in different countries - With debtors in the Financier’s country -With debtors in a different country to the Financier’s Necessity of legal clarity in financing arrangements under relevant jurisdictions Operational practices from invoicing to collection: the viewpoints of Financier and Client Credit Risk in Factoring and Discounting Where does credit risk lie for the Financier and the Client? Role of credit management and credit insurance - Factoring Endorsement to a policy - Financier’s deemed knowledge of a client’s business - Credit insurance limits as debtor funding limits - Guarantee payments and credit insurance claims Case histories of problem accounts Trading on Bills of Exchange – Forfaiting, Collections and Documentary Credits Development of a transaction using bills of exchange (or promissory notes) Bills of exchange in collections and documentary credits Risks arising - Invalidity of a Bill - Collection difficulties, including refusal or inability to pay - Fraud Mitigants and remedies - Knowledge of appropriate collection procedures and actions - Local representation in the case of a foreign bill of exchange - Insurances - Competent ledger management - Non-recourse finance - Security Potential warning signs of problems ahead Case history of a problem account Trading on Bills of Exchange – Supplier Credits Export Credit Agencies (‘ECAs’): who they are and what they do Private market insurers and ECA’s – similarities and differences Supplier credits - Nature, definition and mechanisms - Insurance and finance - Documentation - Payment instruments Potential warning signs of problems ahead Case history of a problem account Purchase and Vendor Finance Considerations in the creation of these transactions Risks arising - Operational and performance issues - Concentration of risk - Non-payment by client or parties in a supply chain - Fraud Mitigants and remedies - Insurances - Competent ledger and transaction management - Security Potential warning signs of problems ahead Case histories of purchase and vendor finance Course summary and close