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Structured Trade Finance 8-1

This document discusses various types of structured trade finance, including international leasing, lines of credit, project finance, and development finance institutions. It focuses on international leasing, describing operating leases which allow short-term usage of equipment, and financial leases which transfer ownership risks to the lessee. Cross-border leasing can structure deals between lessors and lessees in different countries, while export leasing insurance provides political risk coverage for international leasing transactions.

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185 views15 pages

Structured Trade Finance 8-1

This document discusses various types of structured trade finance, including international leasing, lines of credit, project finance, and development finance institutions. It focuses on international leasing, describing operating leases which allow short-term usage of equipment, and financial leases which transfer ownership risks to the lessee. Cross-border leasing can structure deals between lessors and lessees in different countries, while export leasing insurance provides political risk coverage for international leasing transactions.

Uploaded by

subash1111@gmail.com
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Key terms/issues

• Trade finance • Supplier credits


• Pre-shipment finance • Short-term
• Medium-, long-term
• Working capital insurance/guarantee • Bank loans
• Invoice discounting
• Export factoring
• Forfaiting
• Buyer credits
IBUS 3530:
International Trade Finance

Structured Trade Finance


Structured trade finance
• Prearranged or tailor-made trade financial techniques or structures
• Designed for individual transactions or projects,
• Arranged by, or in cooperation with, specialized financial institutions.

• Types:
• International leasing
• Cross-border leasing
• Export leasing insurance
• Lines of credit and local currency finance
• Project finance
• Joint venture
• Development finance institutions
• Multilateral development banks
International leasing
• Leasing is a means of delivering medium-term finance
• a contract between the lessor providing an asset (equipment) for usage to the lessee for a
specified period of time, in return for specified payments.
• with legal right to use the goods for a defined period of time
• but without owning or having title to them.

• Benefits:
• ‘buyer’ could be 100% financed, flexible annuities and not affect the existing credit limits.
• option to replace the equipment with newer versions and may also benefit financially from tax
benefits in their country.

• Two categories: operating and financial


International leasing
• Operating lease
• Lessee: using the equipment
• Lessor: risk of ownership with corresponding rights and responsibilities
• who buys insurance and undertakes responsibility for maintenance.

• Duration: much shorter than the useful life of the equipment


• Present value of all lease payments is significantly less than full equipment value.

• Equivalent to rental and the equipment remains on the books of the lessor.
International leasing
• Financial lease
• Lessee: uses the equipment for most of its economic life, bearing all ownership risks
• Option to purchase the equipment at the expiry, at an agreed and often nominal cost.

• Lessor: expects to recover capital cost of the investment along with interest and profit
• ‘full payout lease’

• Under the tax laws of most countries, the equipment has to stay on the books of the lessee.

• International Accounting Standards Board (IASB):


• A lease as financial if it transfers substantially all the risks and rewards to lessee.
• All other leases are classified as operating.
International lease
• The equipment is usually delivered directly from the supplier to the lessee once
• sales contract between supplier and lessor signed
• leasing contract between the lessor and the lessee signed

• Up on approval of the delivery by the lessee:


• Lessor remits the payment to the supplier.
• Risks, rights and obligations in connection with the use of the equipment rest with the lessee and/or
lessor.

• Security for the lessor:


• the equipment with the leasing contract,
• sometimes with a limited or full supplementary repurchase agreement with the manufacturer/ supplier.
International leasing
• At the end of the lease period:
• the equipment is either returned to the lessor or
• the lease is extended for a new agreed period;
• an option for the lessee to buy the equipment at the prevailing market value
at that time or at a fixed percentage of the original lease value.
International leasing
• Domestic lease:
• Local leasing company in the ‘buyer’s’ country buying equipment from a foreign supplier
• Local currency and with other parts of the contract adapted to local conditions

• Foreign leasing company


• To deal with continued responsibility for any contractual repurchase, partial guarantee or other
undertaking from the foreign seller.
Cross-border leasing
• Lessor and lessee located in separate countries
• ‘cross-border leasing’ or ‘structured leasing’

• May be structured to take maximum advantage of differences in tax and


depreciation rules between countries.
• Sometimes structured to involve more parties
• An investor in a third country who might legally be the formal owner of the equipment, thereby
creating depreciation in several countries on the same equipment.
• Big ticket deals: aircraft, mainframe, ships, railway carriages and other transport vehicles.

• Local authorities have tried to prevent the excessive use of such tax-driven arrangements.
International leasing
• Legal ownership:
• tax implications.
• commercial and political risks
• legal and economic consequences in the event of damages and claims from any third party -
governed in accordance with local laws.
• In industrialized countries, applicable laws for governing the lease contracts are becoming increasingly
similar. In other markets, the lease is usually arranged through a local leasing company to avoid risks.

• A cross-border lease can be arranged in most international trade currencies,


based on floating or fixed interest rates.
Export leasing insurance
• Many ECAs offer cover for export leasing in two forms:

• Operating lease policy


• based on a less than full payout and no transfer of title at the end of the lease period, with a value
depreciation cover to be borne by the lessor.
• covers periodic and fluctuating lease payments
• covers political risks after a repossession period due to government actions, including
expropriation, confiscation and licence cancellations, up to 95%.

• Financing lease policy


• based on a non-existing residual value at the end of the lease period.
• requiring a 15% advance payment from the lessee with equal (plus interest) or annuity-based
repayments and with coverage of up to 95% of each lease payment as they fall due.
Key terms
• International leasing
• Operating lease
• Financial lease
• Cross-border leasing
• Export leasing insurance
• Lease transaction
• Local leasing company
• Foreign leasing company

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