The days when trade was an exotic undertaking, reserved for only the biggest of players, are long gone. Globalization has transformed American manufacturers, regardless of size, into participants in the international market. This change has come in little more than a decade--faster, perhaps than some would have welcomed--but there is no turning back.

Trade finance keeps this flow of goods in play and it, too, has been transformed of late from mostly Letters of Credit issued by a handful of global giant banks to a dynamic marketplace of new products, new players and new approaches.

In our comprehensive survey, WORLD TRADE senior contributing editor Richard Barovick, a longtime observer of the trade finance scene, provides a guide to who’s got money to underwrite trade and how to get it.

Uncle Sam has a full toolkit for trade finance

While government agencies, as their critics love to say, may move slowly, and spend a lot of time playing catch-up with the more dynamic marketplace, they offer one huge benefit: the ability to take risks that private lenders often can’t handle. They fill gaps in the marketplace that help exporters land business otherwise beyond reach.

What’s more, government makes an extra effort to make resources available to smaller and mid-sized exporters, particularly where banks, finance companies, or private credit insurers aren’t interested in their business.

Today’s federal trade finance arsenal comprises three agencies--the Export-Import Bank, the Small Business Administration, and the Agriculture Department. The bottom line for trade finance programs at all three agencies: if the borrower doesn’t pay, Uncle Sam will.

Export-Import Bank

The Export-Import Bank, commonly called Ex-Im Bank, focuses primarily on exports to the emerging markets and Third World countries, and mostly supports sales of manufactured goods. It finances about 3,000 transactions a year, and on average has supported annual sales of some $15-16 billion in recent years.

Ex-Im has its highest visibility in exports to Mexico, but also does large dollar volumes in China, Brazil, Turkey, Korea, Indonesia, and other growth markets. Its support for business in Russia and Africa has been growing, reflecting special initiatives.

For exporters in short-term finance (where payments run from 30 to 360 days), Ex-Im delivers insurance programs that are suitable typically for sales of such items as tractor parts, chemicals, or consumer goods. Its most popular insurance program is a multi-buyer policy that covers the payment risk of several, or many, of an exporter’s overseas customers.

For those selling machinery and equipment, using medium-term finance (payments typically of five years), the Bank offers insurance and guarantee programs to protect lenders, and in some cases the exporters themselves, against failure to pay.

In addition, Ex-Im Bank helps with working capital finance, where smaller exporters need to buy materials, or fabricate their products, for an order. It partners with banks and finance companies, offering guarantees on their loans. This working capital, or pre-shipment, finance often fills a gap where an exporter has already used up its credit lines, or where the lender is unfamiliar, or just uncomfortable, with international transactions.

The Ex-Im Bank profile has changed somewhat in recent years, but it remains the world’s leading export credit agency (in the view of bankers and leading exporters). In short-term insurance, it has been somewhat displaced by the steady growth of private credit insurers, who now handle the larger part of the business. Seven underwriters (four home-grown, three European “transplants”) compete in the American market.

But, in medium-term equipment deals (guarantees or insurance), it is indispensable. The private credit insurers do a bit, but not much. And, when global markets slip into turmoil, private insurers and lenders pull back, Ex-Im then becomes the lender of last resort, taking more risks to keep the wheels of global commerce turning.

Meanwhile, small business is a growing priority. Congress requires the Bank to do at least 20 percent of its transactions (in dollar terms) with smaller firms. In response, it has fine tuned its insurance programs, tried to reach out to more working capital lenders, and built up a network of “city-state” government partners to generate business and process applications.

Some smaller firms do a lot. Air Tractor, in Olney, Texas, a maker of agricultural aircraft, relies on Ex-Im to close several deals a year. San Antonio Trade Group, a Texas construction equipment trading firm, does two or three dozen deals a year, mostly in Mexico, with Ex-Im Bank medium-term support.

The bulk of the business is delivered through insurance brokers and lenders. A group of 30-35 brokers, primarily boutique specialty firms, place most policies and help process the claims, while the Ex-Im regional offices handle some. Ex-Im works with 100-120 banks and finance companies each year in structuring equipment deals, offering working capital loans, and using insurance coverage.

Small Business Administration

The Small Business Administration plays an important role in supporting over 100 community banks nationwide that offer working capital loans for export transactions. SBA and Ex-Im Bank have worked out a division of the market, with SBA doing the smaller deals, and Ex-Im the larger.

Furthermore, the two U.S. agencies, which work closely together in some cases, recently agreed to co-guarantee loans up to $2 million when SBA hits its per-transaction ceiling. Here the exporter works through its existing SBA-backed lender, and SBA brings in Ex-Im to make a larger credit possible.

SBA, unlike Ex-Im Bank, has an extensive nationwide network of offices, and has placed export finance specialists in several of them. It works with over 100 community banks, mostly smaller lenders, and a few finance companies, to offer export support. Ex-Im thus tends to work with the larger, more internationally active banks, while many lenders in SBA working capital have a domestic focus.

Agriculture Department

The Agriculture Department is a bit of a sleeper for manufactured goods exports. It plays a major role in financing exports of bulk farm and forestry products (feed grains, cotton), but, is increasingly supporting the sale of value-added or processed items

For exporters of wine, canned, frozen and boxed foods, chocolates, and snack foods, therefore, the Department is now a helpful resource. Like Ex-Im Bank and SBA, it uses its capacity to issue guarantees on transactions to make them happen. But it has a somewhat unique way of doing business.

First is its organizational structure. Export finance is managed by the Foreign Agricultural Service, or FAS, the Department’s export arm with actual financing is delivered by the Commodity Credit Corporation.

Second, while the FAS has offered guarantees on letters of credit issued by foreign banks for the past 30 years, for the past five years it has supported transactions that have an open account structure (where payment is due on presentation of an invoice), a much riskier practice. The program guarantees only 65 percent of the foreign buyer’s obligation, which means the exporter carries 35 percent of the risk. But, the exporter is dealing with buyers that it knows, and the Department is counting on the exporter’s credit judgment.

Thirdly, FAS finances sales only to certain countries and up to specific dollar ceilings. That means when it announces its annual “program” for each target country, exporters have to respond in a first-come, first-served environment. It means moving quickly.

Commerce Department

The Commerce Department plays a growing facilitator role in export finance. It operates a nationwide network of Export Assistance Centers that help smaller and mid-size firms navigate through the challenges of selling abroad. Companies looking for banks to work with can get help in their search.

And, it has an Advocacy Center that tackles the tougher deals, often in situations where foreign competitors are getting strong support from their home governments. The Center takes a pro-active stance, and can arrange an Ex-Im Bank “letter of interest,” an expression of support at an early stage that is an effective sales tool. Ex-Im has agreed to move quickly when the Department seeks its help.

The Commerce unit also manages its own staff at the multilateral lending agencies, such as the World Bank, and the Asian and Inter-American Development Banks. That gives it a local presence to spot opportunities, and work with exporters in putting together a winning sales and finance package.

An important tool it brings in is the Trade and Development Agency, a small U.S. unit, in Arlington, Virginia, that can provide training grants, sometimes a crucial sweetener in closing a deal.

In addition, Commerce manages an inter-agency group called the Trade Promotion Coordinating Committee. The TPCC, as it’s called in Washington, was created by Congress in 1992, and ever since has been fine-tuning the export programs of a dozen U.S. agencies.

More resources for middle market exporters

For the middle market or smaller exporter, or even the firm that is just starting to dip its toes into international waters, there are now plenty of resources out there to work with in financing sales.

The big news is that exporters of machinery and equipment, who sometimes had to scramble to find a bank to work with during much of the 1990s, now have more than adequate choices.

Exporters turn to their own bank first, the sensible thing to do, since banks try to accommodate their customers when they can. But, if their banks don’t handle trade deals, or their minimum transaction size is too high, a growing roster of lenders is now available.

What has changed? Two things, really. First, some banks have adjusted their attitude or strategy. And second, more banks and finance companies have entered the field, employing that strategy, to help U.S. exporters land equipment sales in emerging markets.

The recent strategy, pursued by about twenty lenders, is to set aside what bankers call “relationship banking,” their traditional insistence on providing credit only to existing customers, and to do “one-off” deals, transactions with exporters (or foreign buyers) that are not otherwise clients.

And, behind much of the new trend is a pair of institutions--the Export-Import Bank in Washington and its New York-based strategic ally, the Private Export Funding Corporation (PEFCO).

Ex-Im takes the risk through its insurance and guarantee programs, and does some or a lot of the credit analysis, while banks and finance companies put up the money, and do some credit analysis (on the likelihood of repayment).

PEFCO, meanwhile, buys export loans that have Ex-Im Bank’s risk support and has created a secondary market for equipment deals, thus enabling lenders to reliquify their portfolios, recycle their funds, and make room for the next transaction.

Three lender groups have emerged to work with Ex-Im Bank, and in many transactions with PEFCO, to ratchet up the volume of U.S. machinery and equipment exports.

One is a small roster of multi-state banks that now support both one-off deals and traditional transactions with existing in-house customers. M&T Bank (headquartered in Buffalo, NY) and PNC Bank (headquartered in Pittsburgh, PA) are the leading players, closing over 50 deals apiece each year, sometimes more.

M&T Bank bought Baltimore-based Allfirst Bank in 2003, and centered its trade banking there. Allfirst, with a long history in trade finance, had been a pioneer in one-off deals, and M&T stuck with the strategy. It markets the business nationwide and overseas (on the buyer side), supporting transactions with buyers in Mexico, Central-South America, and Africa. PNC Bank has worked with Ex-Im Bank for over 30 years, also markets nationwide and overseas.

A second group is a cluster of foreign-based banks that have set up dedicated units just to finance U.S. equipment sales with Ex-Im support. Most active is Toronto Dominion Bank, one of Canada’s largest, which set up trade offices in Houston, Baltimore, and New York, and handles 60 or more Ex-Im transactions annually. A lot of the sales are in Mexico, but others are in Turkey, Asia, Africa, and elsewhere.

RZB Bank, one of Austria’s most active international lenders, set up a finance company subsidiary (RZB Finance) in New York six years ago with a focus on Ex-Im deals. It closes 15-20 a year, and supports sales in Mexico, Egypt, Ghana, Romania, and elsewhere.

The third group is a growing finance company segment, now gathering visibility in Ex-Im Bank business. Most of these firms were launched by ex-bankers with a long history and lots of know-how in trade, and most work closely with PEFCO. They focus entirely on U.S. equipment exports.

Interestingly, they are a clear response to U.S. bank consolidation. As Brett Silvers, president of Hartford, Connecticut-based WorldBusiness Capital, put it: “Pockets of expertise were available within larger financial institutions, but they were often ignored by management, so the expertise has been transplanted.”

WorldBusiness Capital, launched early in 2003, finances equipment exports to Latin America, Eastern Europe, and Asia. Uniquely, it also lends to small business projects in emerging markets in tandem with the finance programs of the U.S. Overseas Private Investment Corporation, whose role is to encourage investments in these places.

The company also targets financing of dealer-distributor networks for U.S. exports in key emerging markets.

Meanwhile, smaller and mid-size exporters can also turn to the services of a nationwide network of trade finance arrangers, firms that help put a deal together, bring in an appropriate bank, and use Ex-Im Bank programs, private credit insurance, or other resources, to cover the risk.

Many double as export credit insurance brokers, which gives them added expertise in risk mitigation. And, while they often work on a nationwide basis, some generate most of their clients in the region where they are located.

In California, John Keevan-Lynch, an ex-banker, heads Provident Traders, in Philo (San Francisco), which focuses mostly on Latin American transactions, and doubles as a broker. In Santa Monica (Los Angeles), Gary Mendell, a former corporate finance executive, runs Meridian Finance Group, also a broker.

And in Pasadena, Michael Stoddard (Trade Source International), ex-Bank of America, puts deals together for both exporters and banks, and has an international bank network in key markets (Philippines, Egypt, elsewhere) that he uses to structure transactions.

In Beverly Hills, Michigan, Donald Keesee (Keesee & Associates), worked at Ex-Im Bank and in the corporate world (Deere, Ford, American Motors), and has been a pioneer in trade credit brokerage and arranging. In Houston, Michael Hosny (The Structured Trade Group) was in corporate finance (IBM) and insurance underwriting (FCIA). He doubles as a broker, and is involved in a number of complex transactions.

In Greenville, South Carolina, Wayne Trotter, an ex-banker (Chemical Bank) and State Department official, set up the state’s export program, then his own shop, Export Financial Services, a broker and arranger.

The trading world’s entrepreneurial spirit appears to be alive and well in banks, finance companies, and arrangers that support the smaller and middle market exporter. Their success stories can be found in the Ex-Im Bank Credit Committee minutes, online at www.exim.gov.

Big banks joust for future of trade finance

The Millennium heralded a new century, and ushered in a dramatically altered global trade finance scene.

Ever since, the Internet has been dominant in shaping and reshaping how letters of credit, payments and collections are managed. Exporters and importers are big beneficiaries--enjoying quicker service, lower costs, fewer discrepancies, less hassle, more control, formidable reports, and far better cash management.

But, for a handful of large U.S. banks, and a few foreign contenders, the new age has meant a fierce race for a piece of the action in the giant U.S. trade finance marketplace. The stakes are high: further concentration among the major players in the market is expected.

Heavy investments in technology are a critical hurdle. Lee Kidder, a consultant to banks at Tower Group in Greenwich, Connecticut, says projected bank spending on trade services-related software and systems in 2005 could hit $3 billion. And, the largest participants will account for most of it.

“This is a field where size really does matter,” says Bruce Proctor, Senior Vice President and Head of Global Trade Services at JP Morgan Chase Bank.

Kidder figures that three banks--JP Morgan, Bank of America, and Citibank--may account for nearly 50 percent of the letter of credit market, including import and export LCs, and standby LCs (used as guarantees).

But, other sizable U.S. institutions are prominent too. Among them: Wells Fargo Bank, Wachovia Bank, The Bank of New York, and U.S. Bank. Plus, three overseas groups are very active--HSBC Bank (London), ABN AMRO Bank (Amsterdam), and Standard Chartered Bank (London).

The list goes on. National City Bank (Cleveland), with a substantial Midwest presence, has ratcheted up its trade services. Larger regional banks, such as Union Bank of California and Bank of the West, have sizable customer bases on the import side. In fact, an estimated 200 banks have a toe in the U.S. trade services waters.

Globally, the concentration among banks appears strikingly narrow. Kidder says perhaps only ten institutions account for 75 percent of the global LC market.

Traders still migrating to the Web

At the same time, the migration of importers and exporters from the traditional paper world of letters of credit and trade documents to the electronic world keeps accelerating.

Sanjiv S. Sanghvi, President of Wells Fargo HSBC Trade Bank, in San Francisco, says 80 percent of its customers now create their letters of credit through the Internet. The web has enabled the bank to bring together trade services, foreign exchange, and treasury management through a single portal.

Use of the electronic product is filtering down steadily to mid-sized and smaller companies. “The smaller firms are often quicker to make the shift,” says JP Morgan Chase’s Proctor. “They don’t have the baggage of investments in previous technology. No IT staffs, legacy hardware or software systems to preserve.”

What’s more, multiple levels of sophistication are available. The smaller importer-exporter often employs only a piece of the system’s capability, such as a simple Web application, while a larger, or more savvy, trader is likely to interface its own back office operations (accounting, receivables, payables) with its bank’s trade web portal.

Technology keeps advancing

The big banks enhance and fine-tune their technology relentlessly. JP Morgan Chase, for example, produces quarterly update releases, based on feedback from clients. It says it has 85 people on the job in a dedicated technology team, mostly based in Asia.

And, says Sanjiv Sanghvi at Wells Fargo HSBC Trade Bank, “There’s been a big change in bank portals. It’s no longer just a matter of what the electronic products are, but how they are integrated with other products, such as credit, foreign exchange, or investments.” Wells Fargo stresses its ability to customize each customer’s use of its applications package.

Then too, independent software and systems vendors retain an important role, though many have not survived. The largest banks invest heavily in their own proprietary systems, but even they acknowledge using some outside suppliers.

Trade Technologies, in Austin, Texas, offers programs to manage payments, automate document production, and move electronic data among banks and traders. TradeBeam, in San Mateo, California, has been a leading supplier of transport-logistics software and systems, but moved into trade finance in 2004. Its LC product is gaining market share as a “white label” program for banks, and an open account management program is being rolled out.

The road ahead: Two stages

For now, letter of credit use is shrinking as an option, while world trade expands. So the net effect is not yet dramatic.

But, as Paul Oldshue, Executive Vice President and Manager of the International Banking Group at U.S. Bank, points out, trade is now a large part of the U.S. economy, “so it’s viewed with more comfort, less distrust and concern.” That means the protection of an LC isn’t chosen as often, even though it’s still useful in some markets, such as China, he added.

Banks have adjusted their technology accordingly. “Open account use is growing, so when our clients access our trade portal, they can select ‘LC’ or ‘Open Account,’” said Oldshue. “We see the ability to offer an open account supply chain program as increasingly important, so we’ll roll out a new complement of products shortly.”

And large retailers, with their huge market influence, are dictating a shift away from letters of credit, which cost more.

Still, letters of credit are embedded in East Asian business culture. Suppliers in Taiwan, Hong Kong, and Thailand take the LC to their local bank, which relies on it to lend them pre-shipment working capital. That’s one reason why the Asia-to-U.S. supply chain generates the largest import LC volume on the planet.

However, the big banks, such as JP Morgan Chase and Wells Fargo HSBC Trade Bank, which run huge processing centers in Hong Kong and neighboring countries, are moving to a new strategy: their electronic systems convert purchase orders to letters of credit or open account automatically, while they use their presence on the ground in East Asia to finance the local suppliers.

That’s where Stage Two may just be coming into sight. This combination of electronic information flow and the security of working on both ends of a transaction, with buyer and seller, creates a “club” that sharply mitigates risk.

Two clubs are already out there. One is TradeCard, based in New York, which has largely bypassed the letter of credit by requiring cross-border buyers and sellers to play by a set of rules and, in many cases, evaluating (underwriting) them up front for risk assessment. TradeCard focuses heavily on Asia-to-U.S. trade flows.

The other is Bolero, based in London, which, as a membership organization, has a legal rule book and makes users sign agreements, while offering an electronic platform that supports members’ exchange of trade documents. Users are large banks and large corporate traders.

Then there’s UPS, the transport-logistics behemoth, which is increasingly visible in trade finance. UPS Capital, its finance arm, bought a bank in 2002, issues its own letters of credit, and merges the physical and financial supply chains.

As one banker (perhaps with a twinge of envy) put it: “UPS already knows the customers and the suppliers, and it controls the goods.” That may be the ultimate risk mitigation--no pay, no delivery.

Sidebar: Chairman Phillip Merrill Drives Ex-Im into New Arenas

When Philip Merrill was named President and Chairman of the Export-Import Bank of the United States on September 30, 2002, his task was to awaken a slumbering institution armed with $100 billion to lend (over a 5 year authorization) but constrained by an uncertain mission and sluggish administration. A private sector businessman (publishing) with extensive public sector service (primarily in the Departments of Defense and State) and a longtime friendship with Vice President Dick Cheney (who attended his swearing in ceremony), Merrill was clear from the get-go about his mandate.

Taking his lead from the Bush Administration’s guiding principles for government agencies (that they should be ‘citizen-centered, results-oriented, and market-driven’), Merrill announced that under his tenure Ex-Im would be attentive to implementing a customer-first culture, reduce loan cycle time to 20 days, and augment the bank’s activities in the ‘basic’ economy (airplanes, tractors, pipelines and the like) with support for companies engaged in the new economy of cyber, bio and medical technologies.

In three years at the helm, this seasoned veteran in the ways of Washington has presided over a raised Ex-Im’s profile in the universe of trade finance. Its role is particularly vital as small U.S. manufacturers find themselves involved in world trade. Of the 2,500 transactions the bank conducts annually, eight out of ten are typically with SMEs. “We are trying our very best to reach out to those who might export on an occasional basis,” Merrill explains. “This bank is small business oriented.”

And it is increasingly looking favorably at deals directed to the new market economies. “Southeastern Europe in particular---countries like Romania, Ukraine, and Bulgaria,” Merrill explains. “And countries such as India and Vietnam, where there’s an increasing interest in foreign direct investment.” He cites, for example, the bank’s $1.6 billion deals in Romania where, like in Kazakhstan, there’s a particular attraction to direct investments in road building projects. His instinct about Russia is “more positive than negative” and the bank is “willing to do business there” although he points out that the inability to enforce contracts makes this impossible in China.

“The United States has an $11 trillion economy,” emphasizes Merrill in summing up the role of Ex-Im in this mix. “Almost three times larger than that of our nearest competitor, Japan.” The prime driver of this spectacular performance, says Merrill, is America’s “amazing capacity for productivity growth and economic reinvention.” Enabling this country’s next generation of emerging global traders to transition onto the world market with acceptable levels of exposure that would otherwise be impossible is the driving vision at Ex-Im.-- Neil Shister