Forfaiting and Letter of Credit

For a long time forfaiters established as a prerequisite for a book receivable to be forfaited that it was represented by a bill of international format (promissory note or bill of exchange) duly subscribed by the debtor and guaranteed by his banker. Only recently has the forfaiting market gradually enlarged to cover maturities longer than five years and shorter than six months. Up to a few years ago this would have been considered as operating limits.

As a result of that, forfaiting can also now be used as an alternative to the advising bank’s confirmation provided that the letter of credit (LC) beneficiary obtains, soon after its notification, a commitment from a reliable forfaiting house to discount the LC proceeds on a without-recourse basis.

Even in the case of a sight LC forfaiters do intervene issuing ‘silent confirmations’ in favour of the LC beneficiary when the advising bank does not add its confirmation either because the risk involved is too high or because the issuing bank does not allow it.

Forfaiting will expand rapidly in the whole short-term area and the reason for that relies on the following:

• The short-term potential market is very big if compared to the long-term one, whose size is limited to a few kinds of goods such as machinery, equipment and turnkey plants.

• The use up to now of forfaiting in that area has been only marginal since many exporting companies did not feel it as a real need

Clearing the books

Most people are still used to keeping short-term receivables and to collecting them at their maturity but I expect this policy will change in the near future because all companies doing so show a negative impact on their balance sheet, i.e. a large exposure in receivables from sales in one side and a high level in debts towards banks in the other.

The only way for those companies to improve their balance sheet is a greater use of forfaiting. In fact, the use of this instrument gives all exporting houses a lot of benefits and specifically allows them to:

• Make free all the capital invested in receivables and employ it to grow and to develop business;

• Reduce the indebtedness towards banks thus saving interest costs and improving ROI index;

• Avoid delays on collection or eventual losses on book receivables due to political and commercial risk.

In fact forfaiting does not limit its effect on solving liquidity squeeze problems, but it gets the exporting companies free from all risks connected with the payment of receivables at their respective maturity. It is therefore wrong to compare the cost of forfaiting to the cost of other types of financing as many people do.

In this regard it is advisable to emphasise once again that:

• Forfaiting is not at all a financing but a purchase-sale of credit instruments (e.g., bills, promissory notes, book receivables, etc).

• The discount rate applied in a forfaiting contract does not identify interest payable in advance and as such deductible from the face value but the parameter to be used to calculate the purchase price of a bill or a book receivable, based on its present value;

• The net proceeds of a forfaiting transaction is effectively the price paid by a forfaiter to become the new beneficiary of the payment obligation he has purchased.
  

Let us talk now about the modalities to follow when you want to sell a book receivable on the forfaiting market. As a rule forfaiters ask for bills guaranteed by a domestic bank in the importing country through an aval or a separate letter of guarantee or a documentary credit or a standby LC. But in the short-term field the most common documentation is without any doubt the LC payable at 60-90 days sight or from shipment date.

If this is the case, the procedure the exporting house has to apply is quite simple and consists of four steps:

I step: Sign the supply agreement and soon after the forfaiting contract.

Once the supply agreement has been entered between the buyer and the seller, it is advisable for the latter to get a commitment from a reliable forfaiting house to discount on a non-recourse basis his claims under the LC. This commitment will list the specific terms under which the forfaiter undertakes to purchase the LC claims, i.e.:

• discount rate, possibly on a straight basis thus waiving the fluctuation risk on Libor rate on account of the seller;

• grace days;

• commitment fee;

• documentation required;

• expiry date, i.e., the latest date within which the required documentation has to be presented at the counters of the forfaiter.
  

II step: Ship the goods and negotiate relevant documents under the LC. The LC is a very delicate instrument and to make it work, the seller must take care that all LC terms have been satisfied and that all documents complied with; evidence of that is needed for the forfaiter to materialise the transaction.

III step: Send the forfaiter all documents required under the forfaiting contract, i.e.:

• conformed copy of the LC and of any subsequent amendment thereto;

• letter of assignment of the LC claims under Article 49 of UCP- ICC Publication no. 500;

• confirmed copy of ‘notification of assignment’ addressed to all parties involved, i.e. advising bank, issuing bank, applicant, etc;

• confirmed copy of some specific documents, such as:

– commercial invoice
– transport document
– negotiating bank authenticated message confirming that all documents under the LC
have been received and found in conformity with the LC terms and fixing the due
dates for the LC payment.

IV step: This step concerns the control by the forfaiting house of the documents received and this normally requires three to 10 days depending on the complexity of the deal and on the timing to get the necessary answers from the LC issuing bank. Once the check is completed, the forfaiter arranges for an immediate remittance of the LC net proceeds to the seller on his bank account.

Actions:

1. The buyer and the seller sign the supply agreement.
2. The seller gets a forfaiter’s commitment to purchase the LC claims and both sign the
relevant contract.
3. The buyer gives instructions to his banker to open a deferred payment LC and notify it to
the seller through a correspondent local bank.
4. The seller ships the goods as per the supply agreement and then presents all the documents required under the LC at the advising bank.
5. The advising bank sends the documents to the issuing bank who negotiates the credit and
releases a swift message to the presenting bank stating that all documents are in order and comply with the LC terms.
6. The seller assigns the forfaiter all his rights deriving from the LC claims according to
Article 49 – UCP 500, and asks him to provide the seller’s banker with the agreed LC net
proceeds as per the forfaiting contract.

LC vs Forfaiting - Indian Context - Part 2

There are bankers who however feel that an LC and forfaiting in combination can be helpful to the exporter; an export LC is not, of course, a substitute or direct competitor to forfaiting. Rather, forfaiting supplements the export LC as it provides financing in case of deferred payment or acceptance LC. Reinhard Langerich, a retired banker from Denmark who is still a member of the ICC Banking Commission, also says an LC can be forfaited. Bankers feel that where an acceptance LC calls for a bill of exchange, the bill of exchange should be avalised by the same bank that has issued/confirmed the LC.

Where the LC is available for acceptance or deferred payment, the exporter – that is, the LC beneficiary – can get a commitment from a reliable forfaiting house to discount the LC proceeds, which is assigned (under article 49 of the UCP) to the forfaiter on a non- recourse basis. The LC itself can serve as an evidence of debt/guarantee for forfaiting purposes where it is available for deferred payment and does not require a bill of exchange and thus obviates avalisation.

Is Forfaiting Negotiation?

Or, vice versa, is negotiation forfaiting? No. Negotiation may or may not be without recourse as forfaiting is. In negotiation there may be no assignment. In negotiation the exporter may not be free from LC payments administration and collection as in forfaiting. For negotiation, a bill of exchange or promissory note is not required, nor is avalisation or a letter of guarantee. Negotiation may be under reserve or against the exporter’s indemnity, but still it is popular because negotiation requirements are not difficult to comply with.

The avalisation or letter-of-guarantee requirement in forfaiting is cumbersome. In negotiation, full-face value may be advanced and interest may be charged on the value given later when LC payment comes in, for a period between the date of value given and the date of trade payment received. Negotiation is cost-effective for short-term financing.
In the case of even medium or long- term financing, for which forfaiting is suitable, forfaiting may still not be preferred because of pricing, and alternate methods may be used to secure financing, like tangible collateral from the exporter or a bank guarantee. Guarantee and negotiation play an important role in India’s export financing market.

LCs may remain a better option than forfaiting for the following reasons: LC usage is governed by UCP rules and facilitated by the ISBP. The existence of UCP rules and ISBP clarifications help exporters prepare and assert compliance. There are non- legal LC payment dispute resolution mechanisms available to the exporter, such as Docdex.

An LC has the advantages of irrevocability, transferability, assignment, negotiation, confirmation, discrepancy waivers and amendment with the exporter’s consent or
initiative, all offered by the UCP – which make the LC a safer payment mechanism and a more cost-effective financing mechanism. There is a risk of discrepancies, but the discrepancies can be rectified or waived.

Negotiation under LCs for post- shipment finance is easily workable, easily available, and easily affordable. It may be without recourse. Banks have skills and experience for
negotiation. Negotiation is thus a popular and traditional local alternative to forfaiting, which may be a foreign service for which local skills may not be available. Negotiation is indigenous; forfaiting may or may not be indigenous. In India, there is an attempt to “Indianise” forfaiting: the RBI rules to regulate foreign forfaiting is an attempt in this direction. Local bankers in India are developing forfaiting skills, but still negotiation is popular – and more popular in India’s banking system, which is the country’s leading LC market. Nothing succeeds like negotiation in India.

An LC has the potential to cover the risks forfaiting covers. It can be confirmed to cover political/transfer risks. It can be issued in the home currency of the exporter to cover foreign-exchange risk. If not in the home currency then with the help of hedging techniques, the LC can work well as a risk-management mechanism.

An LC can serve as collateral for back-to-back LC and pre-shipment finance, called packing credit in India’s banking language. An LC can facilitate credit insurance with maximum cover at minimum cost. An LC can be issued and handled by indigenous banks, even in developing countries or emerging economies – that is, LC service is not imported for local marketing. Forfaiting, on the other hand, may be a foreign service.

An LC is easily accessible, affordable, usable and more beneficial – hence preferable. India’s exporters are mainly small businesses. They don’t offer long credit periods, so they don’t need pricey and cumbersome forfaiting. For them, an LC is a tr ade necessity while forfaiting is a luxury. Its self-handling by the exporter can be learned easily, or its handling can be outsourced.

LC stipulations can be mutually contracted by the exporter and his or her buyer for specificity, clarity and relevancy; for convenient LC compliance management and ustoms compliance management; and for effective cost management, delivery management and risk management. The best example of LC popularity and forfaiting failure is India, where forfaiting has not become popular because of its faulty marketing – faulty because it is not consistent with the businesscharacteristics of India. You may be able to take your forfaiting service to India because the RBI permits it, but you may not be able to take the exporter in India, who is an LC addict, to your localised forfaiting service if you set up arbitrary or ineffective eligibility and marketing criteria.

Foreign forfaiters must acclimatise forfaiting to the Indian environment. The same criteria set in Europe or the United States may not work in India. So it is necessary to adopt the marketing approach - to sell what the buyer needs, the way the buyer likes it - and not the selling approach - to sell what you want to sell, the way you want to sell it.

Read the first part of LC vs Forfaiting - Indian Context here!

LCs versus Forfaiting - Indian Context- Part 1

Forfaiting in India became available in India’s financial market from 1992 when the country’s central bank, Reserve Bank
of India (RBI), which administers the country’s foreign-exchange matters and regulates banking, allowed foreign forfaiters to market their service and allowed the indigenous banks, authorised to deal in foreign exchange by the RBI (and hence called authorised dealers in India’s banking language), to broker and market the foreign or imported forfaiting services.

Of course, there is use of both foreign forfaiting skills and indigenous marketing skills in India. The Export- Import Bank of India (Exim Bank) has collaborated with a foreign forfaiter, WestLB, to form a joint venture named Global Trade Finance, to market forfaiting services in India. Exim Bank has local knowledge while the foreign forfaiter has forfaiting skills.

The foreign forfaiters and their Indian agents are touting the advantages of forfaiting to Indian exporters with such slogans as “change a credit sale into a cash sale with forfaiting”, “take cash without recourse in forfaiting”, “make a long-term credit sale to boost exports and still maintain cashflow with forfaiting”, “no risk of documentary discrepancies in forfaiting as with LCs”, “instant cash for deferred payment”, “balance sheet not burdened by accounts receivables”, “helpful in doing business with riskier countries”, “interest-rate and exchange- rate fluctuation management in forfaiting”, and so on.

But, despite its inherent advantages, forfaiting is still not terribly popular among Indian exporters, particularly smaller ones, or among India’s international traders. The main reason is that the minimum transaction amount prescribed by foreign banks offering forfaiting services is too high for an average exporter in India, often $1m. And pricing is a problem.

The LC is ubiquitous and indigenous, while use of forfaiting services is neither worldwide nor widespread and is often by big exporters only. Of course, in other parts of the world too, forfaiting is struggling, even in Western Europe where it originated.

But the International Chamber of Commerce has standardised only LC practice through its UCP 500 and ISBP 645, not LC-based forfaiting. The long- time existence and effectiveness of the regulatory UCP is one reason why the use of LCs remains a more popular option than forfaiting. LC financing is a standardised practice, while forfaiting is generally an arbitrary practice.

And while it is not yet clear how fully the forfaiting market will embrace the new market practice guidelines, documentary credit bankers around the world have, on the other hand, become addicted to the Paris-based ICC’s UCP rules, which have proven very successful in regulating documentary credit practice and indirectly very helpful in promoting international trade.

However, in India, forfaiting practice falls under the control of the RBI, which is the foreign-exchange manager for and on behalf of the government of India.
Forfaiting in India involves foreign exchange and is therefore under foreign- exchange management by the RBI.

LC or Forfaiting?

On the question of export LCs versus forfaiting, one of the main differences is that the importer arranges for the issue of a documentary credit by a bank in the importer’s country as a means of providing an assured payment to the exporter, whereas in the case of a forfaiting transaction the exporter obtains the forfaiting commitment from a bank in the exporter’s country as a way of offering credit terms to the importer coupled with payment security to the exporter.

Documentary credits provide above all a secure means of payment, with, in some cases, short-term credit facilities, whereas one of the principal objectives of forfaiting is to provide credit – traditionally medium-term credit – to the importer, as well as giving the importer assurance of payment through the forfaiting bank’s commitment to
negotiate without recourse.

None of this is absolute. Also, of course, payment under documentary credits depends essentially on presenting conforming shipping documents and related documentation, a procedure that seems to cause more and more anger and hair-splitting (ie, the current debate over clauses of bills of lading in the ICC Banking Commission). In the case of forfaiting, the exporter is saved all this, since the documentary requirements are simpler.

Read the second part of LC vs Forfaiting - Indian Context here..

Beware of the LC Scam - Part 2

The Scam

A scammer is always careful to stipulate that a Letter of Credit must be irrevocable, negotiable, transferable, assignable, preferably revolving, and that he be named the Beneficiary. This is so that if by any chance the victim actually does purchase a legitimate LC, it can be easily handed over to the swindler with no recourse. Once that is accomplished, the swindler has every right to present himself to the issuing bank in order to obtain a Draft; however, in most instances the swindler insists that the victim obtain and hand over the Draft as well.


Supposedly, the LC will then be entered into a Trade Program (HIGH-YIELD INVESTMENT PROGRAM or HYIP) where it will be used to generate impossibly huge profits in an impossibly short time ("impossible" because the entire planet would go broke if their claims were true, or we'd all be wheeling around wheelbarrows full of cash to buy a loaf of bread). The victim is supposed to receive around 50% of the profits, and the Trader receives 50%. From this they are each to pay their respective INTERMEDIARIES.

Forfaiting: While a Letter of Credit may be forfaited (also known as export factoring, the international trade equivalent of factoring), that is not a procedure to be taken up by the inexperienced. Without an intimate knowledge of trade finance, trade law, international politics and economics, and a career-based understanding of banks and banking, you can quickly find yourself up the creek without a paddle.

Fraudsters truly enjoy using the term "forfaiting." I believe that this is because, especially when the native language of their intended mark is English, the term "factoring" is too readily understood. Nothing appeals more to the psyche than an exotic term, and swindlers make full use of this all too human trait.

The scam is that one can purchase Letters of Credit either from banks or from Beneficiaries for far less than the face value (value at maturity), then "forfait" them at enormous profit. Just how this is done is never really explained and any attempts at getting an explanation are artfully turned aside or simply fabricated, or the SECONDARY MARKET sale is inserted into the scam.

The usual swindler approach involves persuading the target that a Letter of Credit can be purchased at enormous discount in exchange for the victim's funds, and that a few weeks or months later this same financial instrument will be worth hundreds of thousands more or can be sold for hundreds of thousands more. Sometimes the numbers slip into the hundreds of millions.

Another form of patter would have you believe that you can purchase a Letter of Credit at Top-euro Bank for only 25 or 45% of the full value, immediately walk across the street to Prime-euro Bank and sell it for full value, then turn around and do the same thing the following day. The reason the swindler can do this is by special contract or dispensation with Top-euro, and you can be a lucky participant because the swindler likes you so much.

A favored ploy is to insert the bogus term CUTTING HOUSE into the structure of the scam. Once again, this mixes a straight out Letter of Credit scam with the High-Yield Investment scam. In this scenario, the victim is told that LC's are BANK GUARANTEES, aka BG's or PBG's (Prime Bank Guarantees). According to the swindler, Bank Guarantees are printed out in bulk by the Cutting House, an alleged establishment much like a printing company that spits out financial instruments like the Treasury prints money, and does this on demand for Top or Prime European banks such as the one with which the so-called TRADER has a contract.

If the Trader has a contract with or is "connected" to the so-called Cutting House, then the victim is made to feel he has really hit the jackpot.

The Trader needs your funds to purchase the bulk LC's/BG's on a FUNDS-FIRST basis so they can be SEASONED overnight (seasoning actually takes at least a year), then sold to the Secondary Market the following day. The much-used statement is that this can be accomplished 40 times a year, except for the period between November 15th and January 15th of the following year. Why? Because supposedly all trading comes to a halt during that time.

Another scam is to purport to be a PROVIDER of Letters of Credit. The phony Provider has a special in with Top or Prime banks and can obtain Letters of Credit on the victim's behalf. Most of those who fall for this are victims who are not creditworthy enough to apply for an LC through regular channels, or people who have no working knowledge as to how LC's are really used and therefore believe that there is some magic way to turn them into majestic profits. In this type of scam the value of the LC is almost always in the 100's of millions of dollars.

There are yet more scams involving Letters of Credit, some of which are particular to Standbys and some of which involve fraud committed by financial institutions, exporters, importers, and any entity that has access to Letters of Credit in all their formats. For every type of Letter of Credit, there is an attending scam.

Beware of the LC Scam

Letter of Credit Basics

Letters of Credit became necessary when trade between countries made it impossible to simply do business by handshake. They were initially introduced by the merchant banking system in Europe, and grew out of earlier contracts such as the "chop" in Asia and the personal "house" emblem embossed in hot wax used throughout Europe and Arabia.

Originally, a Letter of Credit (LC) was quite literally that - a letter addressed by the buyer's bank to the seller's bank stating that they could vouch for their good customer, the buyer, and that they would pay the seller in case of the buyer's default.

They were used then, as they are now, for any transaction wherein one or more parties to the transaction requires the comfort zone of guarantee of payment by a reputable bank. One may request a Letter of Credit for a transaction involving goods or services where the parties are on the other side of the world, or just across the street.

Nowadays, LC's are formatted to provide fill-in spaces for the various documentary requirements of international or domestic business. An LC is issued by a bank on behalf of one of it's creditworthy customers, whose application for the credit has been approved by that bank. (See sample of Letter of Credit Application, Guaranty Bank, Texas)

The sequence of information on an LC and the trade terms used are set forth in the standards established by INTERNATIONAL CHAMBER OF COMMERCE (ICC). The rules and language are very specific and cannot be changed, and are spelled out in the ICC's Uniform Customs and Practice for Documentary Credits - ICC Publication 500, or UCP500.

The parties to a Letter of Credit are

(1) the Buyer (the applicant)

(2) the Buyer's bank (the issuing)

(3) the Beneficiary (the seller/payee)

(4) the beneficiary's bank (the ADVISING BANK).

(5) the CONFIRMING BANK (often the same as the advising bank)

The LC outlines the conditions under which payment (credit) will be made to a third party (the Beneficiary). The conditions are specified by the buyer and may include insurance forms, Way Bills, Bills of Lading, Customs forms, various certificates - i.e. whatever documents the Buyer feels are necessary to safeguard the integrity of the purchased product or service upon delivery.

It is the responsibility of the issuing bank to ensure, on behalf of its client (the Buyer), that all documentary conditions have been met before the Letter of Credit funds are released.

In effect, a basic Letter of Credit is a financial contract between the bank, the bank's customer, and the beneficiary, and this contract* involves the transfer of goods or services against funds.

*Not to be confused with the private contract between the Buyer and Seller. The private contract between the Buyer and the Seller is not included in the list of documents that must be physically presented for approval prior to release of payment.

In order to get paid, the Beneficiary must present a DRAFT, or BILL OF EXCHANGE, plus the documents specified on the LC, to the advising bank. The documents are then forwarded to the issuing bank for approval. Upon notification of approval, the advising bank pays the Beneficiary the amount due, and processes the Draft through normal banking channels back to the issuing bank who then credits the advising bank for funds disbursed, just like any check.

Please understand that the LC is a contract whose terms and conditions must be met, and that it is NOT a check. While a LC may be NEGOTIABLE, TRANSFERABLE, and ASSIGNABLE, it is the Draft created against the LC that is paid, and this Draft is issued by the same bank that issued the LC.

It's also important to understand, as you will see under The Scam below, that a LC can be either REVOCABLE or IRREVOCABLE.

The terms and conditions of a Revocable Letter of Credit can be changed by the issuing bank at any time without notice for its own reasons, and therefore cannot be confirmed as good and payable. It's impossible to guarantee that any financial instrument whose conditions of payment can be changed without notice will be payable at any given time. Until the terms and conditions are solidified, the requirements the Beneficiary must adhere to in order to receive payment are up in the air.

An LC may be written for a short period of time, covering one shipment of goods and one single payment, or may be written as a REVOLVING LETTER OF CREDIT such that it renews as periodic shipments and attending documents are received and payment is released thereon. This is useful if the shipments are to be made periodically over the term of say, a year, as agreed upon between the Buyer and Seller in their private contract. (Note: a valid Letter of Credit never carries the term "one year and one day" which is a meaningless term created by fraudsters).

The maturity date on a Letter of Credit is the date on which the full value of the credit is payable.

Regardless of the terms and conditions of the LC, the buyer has to either have the funds on deposit in his bank to cover the full value, or has to have made other arrangements with his bank to cover the full value. A Letter of Credit cannot be purchased for only a small percentage of the face value and then cashed across the street for the full face value, a popular form of swindle-speak.

In the case where the Buyer has made arrangements to reimburse his bank - the issuing bank, at a later date for payments made by the issuing bank upon approval, the LC is called a DEFERRED PAYMENT or USANCE LETTER OF CREDIT, in which case the Buyer can obtain his goods and pay the issuing bank at a later specified date.

In international trade, a popular method of obtaining immediate funds against a Letter of Credit, for whatever financial reason the Beneficiary may have, is FORFAITING. The term "forfaiting" is noted here because it is so often used by swindlers, as opposed to "export factoring."

By using a forfaiting company or the forfaiting department at his bank, a Beneficiary can turn over all claims to the LC and in turn receive an amount less than the full value of the LC at maturity. The difference between the full value of the LC at maturity and the amount the forfaiting company pays for it is called the DISCOUNT. The Discount rate is based on a bevy of conditions including the creditworthiness of the Beneficiary, that of the issuing bank, and the stability and reputation of the country in which the issuing bank is located.

The Beneficiary goes on his merry way with immediate cash in hand, and the forfaiting company assumes all risks and benefits of the LC.

An in-depth review of all Letters of Credit with all their attending terms and circumstances of use will eventually find it's way into this dictionary. For now, and for the immediate purposes of outlining the scams listed below, the only other two LC's you need to understand are Commercial / Documentary Letters of Credit and STANDBY LETTERS OF CREDIT.

How does the scamster makes use of the Letter of Credit? Read it here!

Structured Commodity Financing - Partnerships Required

The interest of the financial community in investing in developing countries and emerging market economies is huge. Yet, a large majority of enterprises in these countries have poor access to finance, obtaining loans with short maturities and high interest rates. The reason is simple: there are not enough appropriate investment vehicles.

International financing can often be structured around commodity flows, allowing low-cost, revolving trade finance, and medium to long-term project finance. The potential for such structured commodity finance deals is currently underexploited. The legal and regulatory framework in many countries hinders effective deals. Local banks are not able to provide sufficient support. The international development assistance community is virtually absent. New sovereign risk insurance facilities could be one answer.

Concerted action is needed on multiple fronts:

• Governments need to review their laws and regulations.

• Domestic banks, in tandem with regional development banks, need to improve their ability to engage in structured finance deals.

• The international community could reexamine the balance sheet of its actions in developing countries, in favour of the facilitation of private business.

• International banks and agencies need to support the creation of appropriate conditions.

What is Structured Commodity Finance?


Structured commodity finance (SCF) is a sophisticated commodity-based financing technique, specifically designed for commodity producers and trading companies doing business in the developing markets. Introduced in the early 1990s, SCF continues to play an important role, providing liquidity management and risk mitigation for the production, purchase and sale of raw, semi-refined or semi-processed materials.

SCF funding solutions include a variety of pre-export finance, toll finance, countertrade finance, and others. SCF can be applied across part or all of the commodity trade value chain: from producer to distributor to processor, and of course, the physical traders who buy and deliver commodities in the international and domestic markets.
SCF financing is primarily based on performance risk and as such is particularly well suited for companies doing business in what are considered higher risk markets and industries.

Understanding performance risk
Unlike traditional financing which looks to the flow of funds and the sources of the money, SCF looks to the flow of the goods and their origins – with repayment realized from the export and sale of commodities in hard currency countries. In other words, the lender’s risk assessment is primarily related to the company’s ability to perform – to produce and deliver commodities, even under unstable or uncertain political and financial circumstances. Hence the term ‘performance risk’.

By focusing on the individual transaction structure and the company’s performance capability, as opposed to their balance sheet, SCF provides an alternative and cost- effective financing tool to companies in the commodity arena, and to commodity producers and trading companies doing business in the developing markets. The value-added of SCF solutions is their built-in ability to provide maximum security to all the parties to a transaction – producer, trader and lender – essentially by converting payment and sovereign risk into performance risk.

Evaluating performance risk

By combining a pragmatic approach to performance risk with extensive country and industry knowledge, a good commodity finance bank should be able to design individual structures for each commodity financing opportunity. Due diligence should entail a series of on- site visits to the producer, often involving third party experts such as
engineers and industry specialists in order to accurately assess the company’s ability in three critical areas:

• Technical ability to produce or distribute the commodity, in terms of physical conditions, capacity and management

• Financial ability, in terms of generating current assets in order to meet payroll, acquire necessary supplies and maintain plant and equipment

• Legal ability to enforce the contract, regarding the right of the lender to realize repayment in a hard currency country at the time of delivery

Who are the players?

A wide range of companies stands to benefit from SCF programs, including local producers, international and regional trading companies and financial institutions.

A proven tool with a pragmatic take on risk

The lender’s risk is related to the company’s ability to perform liquidity management are local producers of commodities in the developing markets, who are provided working
capital for purchase of raw materials, specialized or additional equipment, or other essentials for producing and delivering on a given contract. International and regional trading companies: There is a vast group of these companies doing business in the developing markets that would benefit from pre-export financing. With SCF risk litigation, companies that source all their raw materials in a single country, for example, or from a single provider are able to lay off some of their risk on the lender. Here a trading company may want to accommodate a commodity producer with an advance payment in order to ensure a steady flow, but fears exposure to a certain company, industry or country. When mitigated with SCF, advance payment financing enhances the ability for the trading company to do business – without an unnecessary
increase in market, commodity and political risk.

Financial institutions:

For the lenders, SCF presents an opportunity to add desirable new customers and expand into markets that are simply not accessible through traditional channels. Furthermore, a comparison of SCF financing in developing markets, versus traditional methods, quickly reveals that repayment by an offshore off-taker, rather than by the borrower, has historically proven to be a more effective tool against payment risk. In fact, SCF stipulations for physical evidence of the ability to perform, confirmed by special expertise as well as country and commodity knowledge and full legal documentation, often add up to transaction credit ratings that are actually higher
than individual corporate and country ratings.

Why SCF is important in Asia

Today in Asia, the need for financing is more critical than ever before. Although trade flows and commodity prices continue to increase, local financial institutions often are
unable to take on the additional credit risks. As result, local commodity producers and even multinationals who are active in this region often find themselves unable to
obtain financing. In China alone, there are many companies in the commodity producing business who do not have access to the capital markets. With structured commodity finance gaining in popularity, companies and traders in the commodity producing industry can have access to a whole range of alternative financing solutions, with a single, overriding goal – to provide assistance in markets where conventional methods fail.

Whether you are a producer seeking pre-export finance, a trading company in need of a borrowing base facility, a major oil company looking to unload your buyer’s risk, or you are seeking any other type of commodity trade finance product, there are institutions these days like Citigroup, BNPP etc with the necessary commodity expertise and knowledge to provide you with customized solutions to your business problems.

Forfaiting Explained

What is Forfaiting?
Forfaiting is the purchase of a series of credit instruments such as drafts drawn under time letters of credit, bills of exchange, promissory notes, or other freely negotiable instruments on a "non- recourse" basis (non-recourse means that there is no comeback on the exporter if the importer does not pay).

The Forfaiter deducts interest (in the form of a discount), at an agreed rate for the full credit period covered by the notes. The debt instruments are drawn by the exporter (seller), accepted by the importer (buyer), and will bear an aval, or unconditional guarantee. The guarantee will normally be issued by the importer's bank, but some strong corporates can be accepted without a bank guarantee.

In exchange for the payment, the Forfaiter then takes over responsibility for claiming the debt from the importer. The Forfaiter either holds the notes until full maturity (as an investment), or
sells them to another investor on a non-recourse basis. The holder of the notes than presents each receivable to the bank at which they are payable, as they fall due.

When should Forfait be used?
Forfaiting is used for international trade transactions. Normally, a Forfaiting house would not expect to handle transactions worth less than $100,000. Traditionally, Forfaiting is fixed rate, medium term (one to five years) finance, but Forfaiters have become very flexible about the terms they will accept. Some houses will accept paper with tenors up to ten years; and in other cases for shorter periods, down to 180 days.

The market for paper generally ranges between one and ten years, depending upon the country/importer financed and the guarantor. Payments will normally be made semi-annually in arrears, but most Forfaiters will accommodate payments which are made quarterly, semi-annually, annually, or on a bullet basis.

These can include capital and interest repayment holidays. There is no need to have a ready-made transaction to sell the Forfaiter. Many houses structure deals themselves, and will advise on credit terms, which debt instruments to ask for, and help price the deal.

What information does a Forfaiter need?
The Forfaiter needs to know who the buyer is and his nationality; what goods are being sold; detail of the value and currency of the contract; and the date and duration of the contract,
including the credit period and number and timing of payments (including any interest rate already agreed with the buyer). He also needs to know what evidence of debt will be used (either promissory notes, bills of exchange, letters of credit), and the identity of the guarantor of payment (or avalor).

What documents are required by the Forfaiter from the exporter?
Usually required are:
a) Copy of supply contract, or of its payment terms
b) Copy of signed commercial invoice
c) Copy of shipping documents including certificates of receipt, railway bill, airway will, bill of lading or equivalent documents
d) Letter of assignment and notification to the guarantor
e) Letter of guarantee, or aval The aval is the Forfaiters' preferred form of security of payment of a bill or note. For an aval to be acceptable, the avalizing bank must be internationally
recognized and credit worthy.

The aval may be placed on the face of the note. Sometimes a guarantee is issued instead of an aval, particularly in some countries that may not recognize the aval as legally binding. Usually it
is provided in a separate letter. Alternatively, the Forfaiter may be happy to accept a blank endorsement by a guarantor. Standby letters of credit may also be used.

The most important point to remember is that any guarantee should be IRREVOCABLE, UNCONDITIONAL, DIVISIBLE, and ASSIGNABLE.

Once the Forfaiter has all this information, indications or quotations can be given immediately by phone or fax. A commitment can be given prior to contract or delivery, and options can be
given to assist the exporter in the final negotiation of the contract.

What are the commonly used debt instruments?
Many U.S. exporters prefer to have the importer's bank open a letter of credit to cover their debt under a supplier's credit. The bank issues a deferred payment letter of credit that specifies a series of one or more time drafts which the bank will accept (guarantee) upon presentation of the usual documents required by an LIC. The letter of credit does not have to be transferable, or confirmed by the advising bank in the exporter's country; but it must be subject to the Uniform Customs and Practice for Documentary Credits (UCPDC) of the International Chamber of Commerce, Paris (UCP 500).

Promissory notes or bills of exchange (or drafts) are actually the most commonly Forfaited debt instruments. Under a Forfaiting agreement, a promissory note or bill of exchange/draft is issued for each installment of the supplier's credit thus documenting the existence of a claim of the exporter on the importer that is totally abstract: that is, it is unconditional irrevocable, and
divorced from the underlying trade transaction.

How much will it cost?
As far as possible, Forfaiters will ensure that the buyer, not the seller, incurs charges involved in a Forfait transaction. Sometimes this will involve changes to the structure of deals concluded, but Forfaiters stress their flexibility in tailoring deals to suit the exporter's needs. When faced with competition for the contract, exporters may choose to absorb some of the fees or financing cost to make the transaction more attractive to their buyer. Charges depend on the level of interest rates relevant to the currency of the underlying contract at the time of the Forfaiter's commitment, and on the Forfaiter's assessment of the credit risks related to the importing country and to the avalizing (or guaranteeing) hank

Briefly, the interest cost is made up of:

• A charge for the money received by the seller, which covers the Forfaiter's interest rate risk.
In effect, this covers the Forfaiter's refinancing costs and is invariably based on the cost of funds in the Euromarket. Forfaiters calculate this charge on the LIBOR (LIBOR is the
London Interbank Offer Rate) rate applicable to the average life of the transaction. On a five- year deal, for example, repayable by ten semiannual installments, the average life of the
transaction is 2-3/4 years. The LIBOR rate for this period would be used.

• A charge for covering the political, commercial, and transfer risks attached to the avalor/guarantor. This is referred to as the margin, and it varies from country to country, and
guarantor to guarantor.

• Additional costs (which are also included in the Forfaiter's calculations) include a "days of grace" charge; and when necessary, a commitment fee. Days of grace are an additional
number of days interest charged by the Forfaiter which reflect the number of day’s delay normally experienced with payments made from the debtor country. These range from none
to, say, 10 days on some countries.

How soon does an exporter get his money?
Many houses claim that exporters get 100 per cent finance in about two days after presentation of the proper documents. Practices vary between houses.

So how does it all work in practice?
In a typical Forfait transaction, the sequence is as follows:

The exporter approaches a Forfaiter who confirms that he is willing to quote on a prospective deal, covering the export in x months' time bearing the aval of XYZ Bank.

If the transaction is worth $1M, the Forfaiter will calculate the amount of the bills/notes, so that after discounting the exporter will receive $1M, and will quote a discount rate of 'n' per cent.

The Forfaiter will also charge for 'x' days grace and a fee for committing himself to the deal, worth 'y' per cent per annum computed only on the actual number of days between commitment and discounting. The Forfaiter will stipulate an expiry date for his commitment (that is, when the paper should be in his hands).

This period will allow the exporter to ship his goods and get his bills/notes avalized and to present them for discounting. The exporter gets immediate cash on presentation of relevant
documents, and the importer is then liable for the cost of the contract and receives credit for 'z' years at 'n' per cent interest.

Many exporters prefer to work with Forfait brokers who, because they deal with a large number of Forfait houses, can assure the exporter of competitive rates on a timely and cost effective basis. Such brokers typically charge a nominal 1% fee to arrange the commitment. This is a one- time fee on the principal amount and frequently is added to the selling price by the exporter. The broker frequently consults with the exporter to structure the transaction to fit the Forfait market.

How does Forfaiting compare with officially supported export credits?
An interesting comparison may be made between Forfaiting and official supported credits, (through the country's Eximbank).

It should be remembered, that Forfaiting is a complementary method of finance to officially supported export credits. Nevertheless, Forfaiting does offer exporters some real advantages over EXIM.

Forfaiting allows the exporter greater flexibility in structuring a deal, particularly where goods are being supplied from a country where EXIM requirements on local and foreign content cannot be met under existing regulations. Further, if a buyer insists on 100 per cent financing (only 85 per cent finance is available under EXIM rules), then Forfaiting could supply the remaining l5 per cent.

Typically, unless it is a very large or complex deal, a Forfaiter will be able to indicate within a couple of days whether financing is available or not. It may take longer for EXIM to come
through with a commitment.

In addition, Forfaiting is 100 per cent without recourse. Once the Forfaiter has bought the paper, the exporter can collect the cash and even forget the entire transaction. Finance can also be obtained for countries that are off cover from official export credit insurance (and there are no insurance premiums to pay).

Finally...

Forfaiting provides a flexible, creative alternative to traditional international trade financing methods, and is particularly useful for transactions with buyers in developing nations.
This USER'S GUIDE can be used by the credit manager to explain the mechanics to sales personnel and overseas importers. It also may be useful in explaining Forfaiting to company
executives to whom the credit team reports.

As a final note to the credit manager: When the corporate treasurer says the costs of Forfaiting are above the cost of funds, remind him that Forfaiting eliminates:

COUNTRY / POLITICAL RISK
Lack of foreign exchange in a country
Default of a sovereign entity
General moratorium on external debt
Cancellation or non-renewal of export or import licenses
Delay in transfer of payments War, civil war, or other events that prevent a buyer from making payments
CURRENCY / TRANSFER RISK
After a foreign buyer makes the required payment in local currency the funds cannot be converted to the currency required by the sales contract and transferred to the country of the exporter
FINANCIAL / COMMERCIAL RISK
Risk of nonpayment on an export credit by a buyer or borrower in the event of Bankruptcy, insolvency, protracted default, and / or failure to take up the goods that have been shipped according to the sales contract

Sample Bill of Exchange The bill of exchange, commonly referred to as the draft or the bill, is an unconditional order in writing, signed and addressed by the drawer (the exporter usually) to the drawee (the confirming bank or the issuing bank usually), requiring the drawee to pay the drawer a certain sum of money at sight or at a fixed or determinable future time.
The draft is widely used in international trade, most frequently in the payment against a letter of credit (L/C). It is also used in the open account without any L/C involved.

Drafts Drawn On the Bank:

The "No." (number) in the sample draft may be used for the exporter's reference number. Blank drafts are available at the paying bank.
First of Exchange (Second Unpaid) and
Second of Exchange (First Unpaid)

In practice, it is not uncommon that two drafts are drawn on the drawee bank in a letter of credit (L/C) to ensure that at least one draft reaches the drawee when they are dispatched separately. The issuance of more than one draft in a letter of credit follows the same logic as in the issuance of bill of lading in more than one original.

At times even three drafts may be drawn on the drawee bank, this practice was not uncommon before in certain countries. In contrast, normally one draft (sola bill) is issued in a documentary collection where the draft is drawn on the importer.

The sample draft shown here is the first draft, marked "First of Exchange (Second Unpaid)" and the number "1".

In the second draft, if any is issued, is marked "Second of Exchange (First Unpaid)" and the number "2". Some drafts may not be numbered "1" or "2".

Instructions Every Exporter Should Give To The Buyer Before Issuing LC
Exporters often land up in problems when the buyer issuers them an LC which is ambiguous and imprecise. In order to avoid the unpleasantness of the Documents getting rejected at the banks, it is better to the follwoing instructions to the LC issuers so that all transactions relating to LC and exporter's sale go through smoothly.

Dear Buyer,
We have indicated below those terms and conditions that we would find acceptable in a letter of credit issued by your bank.
Your efforts to gain compliance with these terms and conditions in the issuance of this letter of credit will ensure prompt dispatch of your order.
If your bank is unable to issue the credit within the following guidelines, please contact us providing information on those areas that must be altered. This will eliminate needless delay and costs involved with amendments after the credit has been opened. Only those items marked with an "X" will apply.
1. [ ] The letter of credit is to be irrevocable and subject to the Uniform Customs and practice for Documentary Credits, as published and updated from time to time by the International Chamber of Commerce.
2. [ ] The letter of credit is to be [ ] Advised [ ] Confirmed by our bank: AAA Bank Attn: International Operations
SWIFT No. ABA.:
3. [ ] The beneficiary is to be shown as:
4. [ ] The letter of credit is to be payable upon presentation of drafts drawn at: A. [ ] At sight B. [ ] ___ days after the date of the transport document (i.e., 90 days after date of B/L) C. [ ] ___ days after sight (i.e., 90 days after sight) D. [ ] Other: ____________________________ 5. [ ] The letter of credit is to be available by negotiation with any bank.
6. [ ] The letter of credit is to be payable in: [ ] mention currency here in ISO code like USD, EUR
7. [ ] The amount of the letter of credit is to be specific as: [ ] "Not to exceed “_____________ [ ] "About “_______________
8. [ ] The following documents are normally provided if required in the letter of credit. Please avoid the requirement for any other documents without prior agreement on our part. A. [ ] Signed Commercial Invoice, one original and ______ copies. B. [ ] Packing List in ______ copies. C. [ ] Negotiable Marine/Air Insurance policy or certificate in duplicate for 110% of invoice value covering all risks and war risks and ____________________________ D. [ ] Full set of clean on board ocean bills of lading issued to order of : __________________________ E. [ ] Clean air waybill consigned to: __________________________________________ F. [ ] Other documents:
9. [ ] The letter of credit is to specify shipment of: ___________________________________________ ____________________________________________
10. [ ] Shipment is to be: [ ] FOB ___________ From: __________________ [ ] CFR ___________ To: ____________________ [ ] CIF___________ [ ] EXW__________ [ ] Other __________ (i.e.: FCA, FAS, CIP, etc.)
11. [ ] The Bill of Lading is to be marked: [ ] Freight Prepaid [ ] Freight Collect
12. [ ] Transshipments: [ ] Are permitted [ ] Are not permitted
13. [ ] Partial shipments: [ ] Are permitted [ ] Are not permitted
14. [ ] Latest Shipment Date __________________
15. [ ] Latest Presentation Date of Documents to the Negotiating bank to be ____ days after each shipment date.
16. [ ] Expiration Date of letter of credit to be __________________
17. [ ] The letter of credit should specify that all banking charges outside the country of the applicant are for the account of the [ ] applicant [ ] beneficiary.
18. [ ] letter of credit to be transferable.
19. [ ] Other special instructions.

Some More Shipping Terms!

Marine Insurance Clauses A&C:Clauses A covers most risks of losses during transit as opposed to Clauses C which is a restricted form of cover.

Mates Receipts: A document that is issued by the Mate of the vessel as the cargo is loaded on board. The Mates Receipt will usually contain remarks regarding the condition of the cargo or its packaging. Traditionally, Mate's Receipts form the basis of the bill of lading which is subsequently issued.

Mother Vessel: Typically, a large container or unitized load vessel which services the main hub (large transhipment ports) of a liner service. See feeder vessel.

Multi modal: Bill of lading, similar to through transport/combined transport bill of lading. It covers the transport of goods through different modes of transport such as rail, truck, ship, for example.

Notify Party: Is the party who needs to be notified regarding the delivery of the cargo. Usually, the bank will be the consignee and the notify party will be the bank's client i.e. the receiver of the cargo.

NVOCC - Non Vessel Owning Common Carrier: A party who takes on the liabilities of the carrier, but who does not own or operate the vessel. Sometimes described as a contractual carrier as opposed to a physical carrier.

On Deck Stowage: A clause appearing in a bill of lading or charter party, which states the cargo will be loaded on the deck of the vessel is usually carried at the cargo owner's risk. Cargoes that might get damaged because of waves washing over the decks, sea spray and other elements of the weather should not be carried on deck. Cargo owners may have difficulty exercising a claim for damage of the cargo against the carrier for an on-deck stowed cargo.

Owners Bill of Lading: A bill of lading issued by, or on behalf of, the Master or owner of the vessel. This makes the owner directly responsible for the carriage of the cargo. This is best from a cargo owner's point of view.

Panamax: A vessel of the optimum size for transiting the Panama Canal. Usually able to carry from 55,000 to 80,000 tonnes of cargo.

Part Shipment: Where the total cargo may be split into smaller parts and carried on different vessels or voyages.

P & I Club - (Protection and Indemnity Club): The ship owner's liability underwriter, which usually covers liabilities such as damage to or loss of the cargo in transit. Also the organization which will, in some cases, post financial bonds to release a vessel from arrest. Often, a Club will issue a letter of guarantee, which is generally considered as good as a bank guarantee.

Place of Receipt: The place (usually the container yard) where the cargo has been received by the carrier for shipment.

Port of Loading: The port at which the cargo is loaded on board the ship.

Port of Discharge: The port where the cargo is discharged from the vessel.

Port of Delivery: The port where the cargo is delivered by the carrier to the consignee or to the bill of lading holder. This could be an inland container terminal.

Ro-Ro: (Roll on, Roll off): A vessel that is designed for trailers to be driven off the ship through ramps on the side, bow or stern of the vessel.

Said to Contain: A clause appearing on a bill of lading stating that the shipowner does not know precisely what is inside the container. It indicates that the description of the cargo appearing on the bill of lading is what the shipper declared as being its contents. Shipowners have no liability if the contents of the container at the point of delivery are different to those described on the face of the bill of lading provided there is no evidence that the goods were stolen in transit.

Seal and Seal Numbers: The seal is usually a strip of metal or plastic which fits around the locking bars in such a way that if the container is opened the seal will have to be broken. It should therefore be a visable sign of the container being broken into. The seal number is a set of numbers or alphabets identifying the seal. This information often appears on a bill of lading. A container with its original seal intact is an indication that the container has not been breached in transit. At least that is the theory - IMB experts know of numerous ways in which a container can be breached without any sign that the original seal has been broken into or interfered with.

Shipper:The party who ships the cargo - usually, but not always, the seller or exporter.

Shippers load stow and count: Similar to "Said to Contain". With the insertion of this clause on the bill of lading, the shipowners try to avoid liability for any damge that may occur, as the loading, stowage or the number of packages inside the container is the responsibility of the shippers, provided there is no evidence the loss or damage occured in transit.

Stowage Plan: A diagram that indicates where the different cargoes are loaded on board a ship.

Suezmax: A ship designed with optimum dimensions to transit the Suez Canal, typically between 120,000 and 200,000 tonnes deadweight.

Tanker: A vessel designed to carry bulk liquid cargoes. There are different types of tankers such as chemical carriers, vegetable oil carriers, product tankers and crude carriers. Crude carriers carry crude oil. More refined oil products are carried in product carriers. Chemical tankers have specially lined tanks to carry chemicals. Vegetable oil tankers are designed to carry products such as palm oil and other vegetable oils. It is unusual to load an oil cargo on a tanker not designed for the trade. Tankers do not carry dry bulk or general cargo.

Time Charter: An agreement by which the shipowner agrees to hire his vessel to a charterer for an agreed period of time, and is paid hire by the day, usually fourteen days in advance. In many time charterparties, a charterer is authorized by the shipowner to sign and release bills of lading on his behalf.

Through Transport Bill of Lading: Similar to a Multi Modal or a Combined Transport Bill of Lading. The liability of the carrier remains for the complete chain of transport covering many different modes such as truck, rail and ship.

Transhipment: Where a cargo is discharged from one vessel and subsequently loaded on to a different ship for transport to the destination. Some letters of credit will specifically not allow for transhipment because transhipment might damage the cargo. Transhipment is a custom of the containerized trade where a container may be loaded on a feeder ship, then on to a mother ship and back to a feeder ship before it reaches its destination.

VLCC (Very large Crude Carrier): A large crude oil tanker usually capable of carrying over 200,000 tonnes od crude oil.

Voyage charter: An agreement by which the shipowner agrees to let his vessel to the charterer for a voyage, in return for which the charterer pays the shipowner freight on a lumpsum or per tonne basis. In a voyage charter party the shipowner usually retains greater control over the issue of the bill of lading.

Warehouse to Warehouse: Associated with insurance policies indicating that the insurance policy covers loss or damage to the cargo form the shippers' warehouse to the consignees' warehouse.

ULCC (Ultra large Crude Carrier): A crude carrier which is capable of carrying, usually over 300,000 tonnes of cargo.

Under Deck Stowage: Cargoes which are loaded in the holds of the vessel, under deck, protected from the sea and weather.

Get Familiar With Some Common Shipping Terms

Bunker Adjustment Factor (BAF): Indicates that the freight rate may change depending upon movements in the price of bunkers. Bill of lading holders should be aware that if the BAF comes into effect, additional sums might need to be paid before the ship owner delivers the cargo to the bill of lading holder.

Booking Note: A contract of carriage giving the conditions negotiated between the cargo owner and the ship owner/charterer.

Cape Size: Vessels having the economically optimum size to go around the Cape of Good Hope. Typically over 80,00 tonnes deadweight.

Carrier: The party that undertakes the liability to carry the cargo to the destination, on the terms, conditions and exceptions stated. Beware of a carrier, which does not have the financial capacity or, insurances in place, to meet its liabilities on your cargo.

Cellular Container Vessel: A ship which is built, exclusively, to carry containers. A container vessel cannot carry break-bulk cargo, general cargo and definitely not bulk liquids unless containerized.

Charter Party: Contract of carriage between the shipowner and the charterer detailing the terms and conditions of carriage. It provides inter alia for the amount and mode of payment of freight/hire, lien on the cargo and the issuance of bills of lading.

Charterparty Bills of Lading: Bills of lading, which are subject to the terms, conditions and exceptions of a charter party. It binds the bill of lading holder to the terms of a contract, which the holder may have no knowledge of. It may allow the carrier to hold on to the cargo if there has been a breach of the terms by the charterer, such as non-payment of freight, demurrage, etc.

Clean on Board: A statement by the carrier on the bill of lading that a cargo has been received without damage on board the ship. He is thus bound to deliver the cargo at the destination in the same condition.

Claused Bill of Lading: A bill of lading which contains remarks with respect to the condition of the cargo or the payment of freight. A claused bill of lading is not usually accepted under letters of credit, which call for a clean bill of lading.

Combined transport bills of lading (or a through transport bill of lading): This is a bill of lading, which covers the transport of a cargo through different modes, for example, truck - ship - train - truck. The carrier remains liable from the point of delivery of the cargo to the final destination stated on the bill of lading. This is not usually applicable to bulk liquid cargo flowing through pipelines! It is usually associated with unitized cargoes like containers. It is not to be used for bulk liquid cargoes except where they are loaded in special containers or by other unitized means.

Conline Bill of Lading: A bill of lading usually used for liner shipments.

Container Numbers: Every container has a unique number, which identifies the container. The first four digits indicate the owner of the container. There is a system of check digits that can confirm whether the container number is genuine. In today's containerized transport it is impossible to try and locate a cargo without a container number. Bankers, beware of bills of lading for container cargoes without container numbers.

Container Seal Numbers: When a cargo is stuffed into a container, the container is sealed. The seal has a seal number, which identifies it. The seal number is often on the shipping documents. If a seal is found broken at the point of discharging, it would normally indicate that there is a possiblity that the container was broken into in transit.

Consignee: The party to whom the cargo on the bill of lading is consigned to. In cases where the cargoes are financed by letters of credit, the consignee is usually the financing bank.

Currency Adjustment Factor (CAF): If this appears on the shipping documents, it would indicate that if the currencies in which the freight is paid fluctuate widely then the ship owner might apply a currency adjustment factor to the freight. Unless this additional sum is paid, the ship owner may hold on to the cargo.

CY/CY (Container Yard to Container Yard): Indicates that the duration of transit covered by the bill of lading is from the container yard, where delivery of the container was taken by the carrier, to the container yard where the container is to be delivered to the consignee.

Dates - Received for Shipment: The date that the container (usually) is received by the carrier for shipment. Some letters of credit allow for payment upon the containers "being received for shipment" by the carrier. In practice, it may be the case that the names of the vessels stated on a received for shipment bill of lading might not be the ones that finally carry the cargo. This notation does not mean that the cargo has been loaded on board the ship.

Dates - Loaded on Board/Shipped on Board: The date the cargo physically goes on board the vessel. This is often the date which is manipulated by sellers, NVOCCs and ships agents to match the final date of shipment specified in the letter of credit.

Dates - Issue of Bill of Lading: The date the bill of lading is issued by the carrier. Under a letter of credit, the presentation of the documents have to take place usually within a specified period after the date of issue of the bill of lading.

Deadweight (DWT): A unit of the vessel's carrying capacity including cargo, stores and provisions.

Demurrage: A payment in damages by the charterer to the shipowner if the vessel exceeds the agreed period for loading or discharging the cargo. In certain circumstances the shipowner has a lien on the cargo for the payment for demurrage and may try to prevent delivery of the cargo until demurrage is paid.

Feeder Vessel: Typically, large mother ships transport containers between the main hubs (large transhipment ports) around the world. Feeder ships carry the cargoes to and from the main hubs to the ports of origin and destination. In containerized shipments, the name of the vessel appearing on the bill of lading may be either the feeder vessel or the mother ship.

Fixture Recap: A summary in short form, between brokers, of the terms of a charter party, which have been negotiated and agreed between their respective principals. The charter party is a formality and usually follows much later. Cargoes are often carried based upon the fixture recap.

Free in: Where the cargo owner pays for the costs of loading the cargo on to the vessel.

Free out: Where the cargo owner pays the costs of discharging the cargo from the vessel.

Free in/out stowed (FIOS): A combination of free in and out, but including the costs of stowage of the cargo on board a ship.

Freight pre-paid: A clause on a bill of lading which indicates that the freight has been paid to the shipowners. In practice, the freight is often paid after a freight pre-paid bill of lading has been issued. A freight pre-paid bill of lading in the hands of a third party consignee would be deemed to be prima-facie evidence that the freight has been paid.

Freight Collect: A clause that appears on the bill of lading indicating that freight is to be paid before the cargo is delivered to the consignee at the discharge port. If this freight is not paid the owners may be able to execute a lien on the cargo for freight.

General cargo vessel: A vessel capable of carrying break-bulk general cargo as opposed to containerized/unitized cargo.

Gross Registered Tonnage (GRT): A unit based on a calculation of the volume of certain enclosed areas of a vessel. It has nothing to do with weight.

Handy size: Handy size refers to bulk carriers usually from 10,000 to 35,000 tonnes deadweight.

Liner discharge (Liner out): Where the ship owner is obliged to pay the costs of the discharge of the cargo. This term appears on the bill of lading.

Liner in: Where the ship owner is obliged to pay the costs of the loading of the cargo. A term that appears on the bill of lading.

Liner Terms: A combination of liner in / liner out.

LO/LO: A vessel where the cargo has to be lifted off the ship or lifted into the ship as opposed to RoRo.