|                                                                                                                                                             |  | TRADE FINANCE TECHNIQUES: FORFAITING IN THE NIS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           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|**BISNISHome PageSearchBISNISEmbassyReportsCountryReportsIndustryReportsPublicationsSourcesof FinanceLeadsand EventsExchangeRatesState ExportsOtherSources** |  | June 1997by Keeci TownsendCompanies from the NIS and other emerging markets frequently need capital equipment to
modernize their operations and expand output.  At the same time, they may not have the cash
necessary to pay for the entire piece of machinery up front.  They need financing, but often
operate in economies where interest rates make domestic commercial credit unaffordable.  In
financing sales to such buyers, U.S. exporters should not overlook forfaiting, a medium-term
financing technique commonly used in many emerging markets, which is now beginning to find
application in the NIS.In a forfaiting transaction, a bank or specialized forfaiting company agrees with an exporter to
purchase a promissory note or draft drawn on a foreign buyer and guaranteed by a bank in the
buyer's country.  The bank or forfaiting group pays the exporter after shipment of the goods and
receipt of the original debt instrument and other predetermined documents.  The payment is on a
non-recourse basis, absolving the exporter of liability if the buyer defaults.  The buyer gets its
equipment right away, but pays for it over time--as profits are generated.  The bank's fees are
built into the transaction.How It Works
In a forfaiting transaction, the buyer must first agree to the terms of the financing, including the
cost of financing, debt repayment structure, and the length or "tenor" of the loan.  The cost of
forfaiting varies by the country in question, the length of the loan, and the repayment structure. 
Repayment is often on a semiannual basis, although other payment schedules can be negotiated. 
Ballooning payments (which become progressively larger until repayment is complete), bullet
payments (the entire amount at once), and even monthly payments are possible.  Upon acceptance
of the financing offer, the buyer's financial obligation is evidenced by a promissory note, bill of
exchange, or draft drawn under a letter of credit as agreed by the exporter and the foreign buyer.In most cases, debt instruments used in forfaiting must be "avalized," or guaranteed, by a
recognized financial institution in the buyer's country.  Russian banks that have recently taken
part in forfaiting transactions include Inkombank, International Moscow Bank, Mosbusinessbank,
Uneximbank, Imperial Bank, and Tokobank.  Since NIS market conditions and bank policies
change frequently, it cannot be assumed that these banks will necessarily participate in forfaiting
in the future.After shipment of the goods, the exporter presents shipping documents along with the avalized
debt instrument to a bank or forfaiting group designated in advance.  The exporter endorses the
debt instrument over to the financial institution.  Upon authentication and acceptance of the debt
instrument, the financial institution or forfaiting group disburses funds to the exporter at a
discounted value.  The exporter receives the value of the draft less the cost of financing.  The
financial institution then either holds the avalized promissory note or sells it in specialized
international debt markets.A typical forfaiting deal is arranged for loan repayment terms ranging from 180 days to five years,
depending on the country where financing is arranged and the amount of  the debt.  The cost of
this type of financing can be considerably lower than financing available in the buyer's country.  In
addition to the financing of capital equipment, forfaiting has been used to finance the purchase of
commodities for short tenors, although commodities are only financed for up to one year.Forfaiting in the NIS
The international market for NIS forfaiting debt is currently limited, although recent deals have
been completed for Russia and Kazakstan.  Most transactions in these two countries are for a
maximum of 180 days, although some have been constructed on an exceptional basis for up to
two years in Russia and one year in Kazakstan.  The market's appetite for risk from the NIS is
constantly changing and is very sensitive to local political and economic developments.  As
economic, legal, and banking conditions improve in the NIS, however, the forfaiting market
should open up new opportunities for the future.Forfaiting in its modern form was developed by West European exporters and their banks to
finance equipment sales to Eastern Europe in the 1950s and 1960s, and has been used in
developing markets since the mid-1970s.  U.S. exporters have been slower to adopt this form of
financing than their European competitors, although things are changing.  More U.S. exporters
are making use of this proven trade finance tool in their international sales negotiations.  They find
that they can use it to provide flexible payment terms to their buyers without hindering their
company's cash flow or exposing it to international country and buyer risk.  This article expresses
the views of the author, and should not be construed as a statement of U.S. Government policy. 
For more information on trade finance in the NIS, readers should contact a recognized financial
institution with experience in the NIS.  For lists of banks active in various NIS countries, visit
BISNIS Online at http://www.mac.doc.gov/bisnis/bmibl.htm.Keeci Townsend is an International Marketing Officer for LaSalle National Bank in
Chicago.This report is provided courtesy of the Business Information Service for the Newly
Independent States (BISNIS)