As the United States’ Export Credit Agency (ECA), Ex-Im is governed not only by its own rules but also those of the Organisation for Economic Co-operation and Development (30 economically developed member states adhering to free market principles). Little more than a year ago the OECD changed its rules allowing longer 15-year repayment periods for renewable water and energy projects.

Ex-Im recently became the first ECA to make use of this provision by guaranteeing City National Bank of Los Angeles’ $7.8 million loan for the sale of a solar power project by PowerLight Corporation of Berkeley, California to a private South Korean borrower (which will then re-sell power to the Korea Electric Power Corporation).

Prior to the change in OECD rules, explains Barbara O’Boyle, “this deal could have been financed another way.” But it would have been costlier and more difficult to arrange. Privatized projects like this—capital intensive and with no cash flow for repayment until the project is built—are complex to structure. But now, says O’Boyle, “better terms are available from any export agency under the OECD. This provides another commercial rationale for renewables.”

What’s the message this deal sends to other U.S. companies seeking foreign markets for sustainable energy products? That Ex-Im is very interested in making smaller environmental projects work. “We look to take some of the pieces of corporate balance sheet and add credit enhancement factors and limit transaction costs to make it more viable,” explains O’Boyle.

As O’Boyle and her colleagues note, there was a “ton of work” associated with this deal, which was conceived as a kind of prototype in going forward with future such deals. In order to make the transaction viable, Ex-Im assumed many of the legal and research costs in-house. “If the borrower had to pay for such things as independent engineers and U.S. legal counsel, fees could easily stretch up to a million dollars in big deal. We’ve been very mindful to help defray those expenses.”

The defrayment of such costs is expected to be a standard element in comparable transactions as the Bank continues to “very aggressively try to find renewables to work on.”

KeyBank

Lynne Gruel, Key Bank

The single most significant trend over the past few years in trade has been the pursuit of finding alternatives to export letters of credit. A top priority for business of all sizes, and particularly public companies, is managing working capital without incurring additional costs. When it comes to trade, one good way to do this is by getting accounts receivables off the books.

This requires innovation from bankers, to find ways to enhance working capital and mitigate foreign buyer risk.

Cleveland-based KeyBank, one of the nation’s largest bank based financial services companies with assets of approximately $95 billion, is experienced in helping its customers solve this problem. One approach, and one that the bank believes sets it apart, is its willingness to finance both short term and long term accounts receivables (typical receivable financing being in the 180 day range). “In doing this,” observes Lynne Gruel, Senior VP/Team Leader, KeyBank Global Trade Services, “we’re buying the insured promissory note or the account receivable and providing the company with immediate working capital.”

An example of this involved a middle market capital equipment manufacturer with a significant portion of its sales growth coming from international markets. This resulted in a commensurate growth in receivables, often times with longer maturities. In the past KeyBank had provided foreign buyer financing through a government supported program. “But”, says Gruel, “of late they had been looking for an alternative. KeyBank, together with private credit insurers, were able to provide a viable solution to the company’s desire for a quick response and additional working capital.” In sum, they were looking to improve their balance sheet and speed up processing.

When the exporter asked Key for financing options, it had a significant amount of receivables on the book with maturities of two years or less. “In addition, they wanted Key to purchase the receivables,” says Gruel, “and to do it in compliance with FASB requirements for true sale treatment.” This requirement resulted in a non-recourse credit facility.

“The attorneys, accountants and credit staff all worked hard on this,” says Gruel. “This was not a typical credit transaction. Considerable negotiation and structuring went into what has now grown into a very satisfactory relationship.”

One credit facility deals with receivables with maturities of two years or less. Every month the exporter gives Key a list of receivables, which the bank then decides whether to purchase. “It’s been a smooth, on-going relationship,” says Gruel. “They like it and we like it.” KeyBank’s credit risk is mitigated by the insurance underwriter, while transaction risk is managed by the company. Even though the credit facility is non-recourse, the company assumes responsibility for collection of accounts, as they want to stay close to their customers.

Last year, a second credit facility was established with this client for ‘one-off’ transactions, which did not fit the parameters of the first facility. A variety of insurance providers are used for this credit facility, and each transaction is reviewed and approved on a case-by-case basis; thus providing greater flexibility to the company.

“We see these credit facilities as part of growing and enhanced customer relationship.” explains Gruel.

Capstone Business Credit

Joseph Ingrassia

Kayon Corporation is a wholesale and retail ladies apparel company with well-known, established brands and global operations. The firm has been in business for more than 30 years with varying degrees of success over the years. The firm’s president routinely travels the world to find fabrics that best represent her brands with manufacturing operations of knits in Peru, cottons and linens in China, India and Hong Kong.

In fall of 2005, Kayon’s president and sole shareholder, Kathryn Peters was introduced to Capstone Business Credit, based in New York and specializing in funding firms that most traditional asset-based lenders would not. At that time, Ms. Peter’s had invested more than $1,000,000 of capital into the company but even with the infusion of capital was having difficulty supporting the continued growth of the company’s brands. The 2005 winter season was marked by shipments held up by offshore suppliers waiting for LCs to be issued or wire transfers prior to shipping to the United States. The lack of working capital to fund the letters of credit and wire transfers resulted in late deliveries to the company’s trade accounts and order cancellations.

In January of 2006, Kayon closed a $13.5 million purchase order/trade finance facility and factoring facility with Capstone enabling Kayon to issue letters of credit for the spring and fall 2006 lines, and with Capstone’s support, to negotiate payment plans with all of its factories for goods that had not been paid for since the summer of 2005. Capstone provided cash advances for working capital to support the company’s growth.

To date, the company is on track to increase its sales in 2007 by more than $1,000,000. It has delivered all of its goods to its customers on time and by the buyer’s delivery dates.

“The ‘cash crunch’ felt by many successful firms across a wide range of industries is real,” explains Joseph Ingrassia, managing member of Capstone Business Credit. “We help map out a financial structure that allows clients to accept growth while continuing to service existing customers.”

Citigroup

The growth in trade is coming in emerging countries and is expected only to increase. Expansion into these markets is a measure of the potential buying power anticipated to flow into these countries through on-going globalization processes. But to complete a major transaction in the present predicated on future earnings can pose a problem for the lender and poses a test of its creativity.

Citigroup addressed this challenge in a recent deal that illustrates the bank’s scope and experience in structuring complex global deals.

The air traffic agency of a large west African country decided to enhance monitoring capabilities in the wake of a major crash. Bids were sought from various international aerospace companies to install and maintain instrument landing systems in multiple airports. A major U.S. company, working through its European affiliate, is highly favored to win the $26 million business with the guarantor of the financing scheduled to be the national Finance Ministry.

The wrinkle in the plan was that the country had a high risk profile due to a history of not honoring debt obligations. At the same time, OECD institutions were restricted in their ability to participate in the transaction. Private risk insurance was a possibility but would have been very expensive and was ultimately judged to be insufficient to adequately defease cross-border and credit risks.

Citigroup got involved in the transaction through its American aerospace client.

“The key,” recalls Bill Morrissey, Director, North America Trade, Citigroup, “was hard currency flows owed the country paid to IATA by airlines over-flying the country. That constituted $18 million annually. The air traffic agency and the Ministry of Finance had to agree to assign those revenues to Citigroup.” Issuing to a lender legally assignable rights to over-flight fees had been used successfully before in other countries such as Albania, the Republic of Georgia, and Ghana, but this was the first time such an approach was done in west Africa.

Late in the process a major European export credit agency agreed to guarantee repayment but the country judged Citigroup’ s deal advantageous. Even with an ECA guarantee, there would have been repayment risk (e.g. potential civil disturbances that would result in re-routing air traffic outside the air corridors of the country, as was the case in Serbia) that the bank would have to reserve capital against. “But a sovereign guarantee like this is comprehensive,” explains Stuart Roberts, head of North America Trade Sales, Citigroup. “There’s no need to reserve our capital and we’re able to correspondingly reduce our fees.”

The deal is structured so that several forthcoming payments are kept in on-going debt reserve with excess IATA funds remitted to the country air traffic agency.

“What this deal illustrates,” concludes Dave Conroy, global head of Trade Sales, Citigroup, “is Citigroup’s creativity. Because of the depth of international experience and industrial expertise we have, we are particularly well suited to find innovative ways to handle cross-border risk. In this instance, our client was selling equipment to a buyer in a high risk market. Given our industry knowledge, we knew there was an international governing body outside the country with access to a revenue stream that could potentially service the loan and help mitigate the risk. This allowed to think laterally in structuring this high risk deal.

“We’ve got many experienced people and teams around the world who can find solutions to very complicated risk mitigation factors. We can ‘follow all the bouncing balls’ with the financial capital and human capital to make complex trade deals work.”

Wells Fargo HSBC Trade Bank

When a civil engineering contractor with domestic and international clients began increasingly looking overseas to diversify earnings and grow its business, it turned to Wells Fargo HSBC Trade Bank for help. The company’s global growth strategy meant it would need to issue standby letters of credit to support bid, performance and advance payment bonds typically required on foreign contracts.

The civil engineering construction service the company provides to its foreign customers is instrumental in improving local infrastructure and expanding social services such as housing and schools. Such international projects required the company to be able to access supplemental financing capability. A complicating factor was the complexity of the existing lending structure, with multiple lenders and potential inter-creditor issues that could prolong and even derail negotiations. Further, there was limited unencumbered collateral (outside of receivables on foreign contracts) available to support new lenders/facilities.

Issuing the requisite credit standbys under its existing domestic revolving facilities would create capacity constraints and restrict access to working capital for domestic projects. The company therefore sought a stand-alone facility to support its standby needs, as a cost-effective alternative to restructuring the existing facilities.

The Trade Bank’s approach was to allow the company to leverage its only unencumbered assets (foreign receivables) to issue the standbys needed to bid on and complete foreign projects. Following this course of action, the Trade Bank was able to structure a stand-alone credit facility of $20 million using the Ex-Im Bank’s new Fast Track Program. An important factor in Ex-Im’s approval was the structure proposed by the Trade Bank, which increased Ex-Im’s comfort level with the complexities relating to the payment mechanism on foreign receivables.

One of the top users of the Ex-Im Bank’s Working Capital Program, Wells Fargo HSBC Trade Bank is also one of only 9 banks approved to use Fast Track. The Fast Track Program enables small- and medium-sized U.S. exporters to obtain larger Ex-Im Bank guaranteed working capital loans in less time.

JPMorgan Chase

Martha Gentry

In January 2006, when JPMorgan Chase transacted a $250 million asset-based credit facility for a U.S. exporter that included a $25 million guaranteed loan from Ex-Im Bank, it became the first lender to close a deal under Ex-Im Bank’s Fast Track program that had recently rolled out to help small- and medium-sized U.S. exporters obtain larger working capital loans in less time.

Ex-Im’s Fast Track lending program expedites the process required to secure loan amounts over $10 million for U.S. companies who are experiencing significant demand growth from foreign buyers and need to sustain growth through access to larger working capital loans on a time-sensitive basis.

As Martha Gentry, who heads the JPMorgan Chase Global Trade Services Working Capital Guarantee Program, says: “We happened to have a suitable request for financing and were ready as soon as the program became available at the end of 2005. The timing was perfect for all of us.”

In JPMorgan Chase’s case, the client is a manufacturer experiencing strong international growth with a concurrent strong need for working capital financing and a growing amount of work-in-process. The Fast Track program is ideal for this client as it allows higher advance rates against work-in-process than normal asset-based or conventional bank financing would permit. Fast Track allows JPMorgan Chase to take inventory that is work in process as collateral, and gives the exporter the necessary working capital to complete their goods for export.

“This kind of structured financing is a great way for us to help American exporters compete globally,” Gentry notes.

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