Merchant banks active in exporting

Press, 30 August 1978, Page 30

Merchant banks active in exporting

Many varying definitions exist of what constitutes a merchant bank. The name was originally given to traders in the United Kingdom and in particular those larger institutions which were able to offer finance to assist the movement of goods both domestically and internationally. Such organisations offered their services to other smaller merchants requiring some form of financing to enable them to sell their products. Basically the larger merchants which originally had been operating solely as trading organisations entered the field of financing the movement of trade and thus became merchant bankers. As far as New Zealand is concerned the services of such organisations were initially of some assistance to New Zealand exporters dealing with the traditional United Kingdom and European markets but as New Zealand’s trade has moved to new markets such as Japan, the Middle East and the United States, the services of the British merchant banks has tended to become of less relevance. In 1971 the New Zealand Government gave permission for overseas companies to invest in New Zealand financial intermediaries. Under the guidelines laid down a small number of merchant bankers was established by the end of 1972. Marac was one of the first in the field. Not all merchant banks in New Zealand provide a full range of export / import financing, and this article therefore covers the ser-, vices offered by Marac Corporation, Ltd. Services Merchant banks in New Zealand have put together under one roof a multiplicity of services provided by various other financial intermediaries in the community such as trading banks, sharebrokers, management and investment consultants, confirming houses, factoring companies, local finance companies, etc. The New Zealand merchant banks tend to have a small team of expert people who provide a very personal service specifically designed to handle the special requirements of the organisations involved in handling trade transactions and particularly export selling. To many exporters preshipment finance is a major and continuing problem and is one of the most difficult types of working capital to arrange. Typically pre-shipment funds are required to pay local or overseas suppliers, to fund work in progress, to buy and hold additional raw materials, to gear up for one off or special production runs or to cover the cost of holding the finished product pending the availability of shipping and so forth. Pre shipment finance Pre-shipment finance by merchant banks is designed to meet these particular requirements and is usually available for up to three months prior to shipment. It is a standard practice for the repayment to be made at the time the export goods are shipped but

quite often a post shipment financing facility is also provided so that the proceeds of the export sale repay the pre-shipment advance with a further period of credit then provided to the overseas buyer.

Pre - shipment advances are usually made for between 50-90 per cent of the value of the export contract depending on the credit term and security being offered. Although not all pre-shipment finance requires security, merchant banks usually prefer security by way of a letter of credit, a firm order from the end buyer (supported say by EXGO credit cover), personal guarantees, or perhaps a debenture. Local money market Merchant banks provide pre-shipment finance in a variety of ways and some of the methods used are detailed below:— Pre-shipment finance in New Zealand dollars is ' available to larger organisations (usually public companies) through the domestic commercial bills market by way of trade bills — to cover a specific raw material purchase from a local supplier — or on an acceptance credit basis to provide working capital which may not necessarily be directly related to a specific export order. The maximum term is usually 90 days, occasionally up to 180 days and interest rates vary depending on market conditions then prevailing. The commercial bill market is one of the few true markets in New Zealand with movements in the interest factor genuinely reflecting supply of and demand for short term money. This market is currently providing New Zealand companies with about S2OOM on a continuing. basis. Trade bills are usually unsecured because the bills of exchange themselves carry the names of two major independent and credit worthy companies. Acceptance credits with only one name together with that of the merchant bank may require additional security. Off-shore finance Manufacturing exporters frequently use imported components or raw materials in the production of a finished article for subsequent export from New Zealand. These imported raw materials may require a considerable preshipment cash outlay. Merchant banks are able to assist exporters to overcome this problem and generate working capital through the manufacturing period by financing such imports for up to 180 days. The merchant bank is able to establish a letter of credit in favour of the overseas supplier where this is required and arrange for payment to be made directly to the foreign supplier and offer extended payment terms to the New Zealand manufacturer. Wherever possible this type of finance is related to a post shipment facility to provide a self liquidating advance. This form of finance may be arranged in New Zealand dollars depending on the availability of New Zealand dollars to the merchant bank or in a foreign currency being the currency of the invoice or in some other major convertible currency. Such flexibility enables the ex-

porter to minimise currency exposure risks and take advantage of favourable interest rates.

Where an exchange risk is present the merchant bank will offer its advice, and, if available, obtain foreign exchange cover on behalf of the exporter. Under certain circumstances, and with the prior approval of the appropriate regulatory authorities, special large scale preshipment facilities may be able to be arranged between the merchant bank and an overseas bank to cover an exporter’s financing needs during the typical cycle of raw material acquisition — manufacturing/processing - shipping - receipt of export proceeds. This type of facility requires considerable cooperation between the merchant bank and the exporter but, when established can be of major assistance as foreign currency risk can be completely avoided and (usually) very attractive interest rates apply. On occasions such a facility may be able to be arranged on a “revolving” basis which is of particular significance to exporters supplying overseas buyers on a long term contractual arrangement. Bank guarantees Exporters may require short term increases over and above normal overdraft limits to cover special pre-shipment financing requirements. In such circumstances merchant banks may be able to provide the exporter’s bank with a guarantee to support the temporary overdraft excess. Finance company Several merchant banks are affiliated to or have connections with finance companies and it is possible that smaller exporters may be able to be accommodated by way of a short term advance from such a source for pre-shipment financing requirements. Although the cost under such circumstances would probably be higher than an exporters bank overdraft facilities, when used as a temporary source of credit (the cost of which may be reflected wholly or partly in the export sale price) such a funding method may well be quite viable. The finance companies do not normally have access to preferentially priced funds for lending to exporters as do the trading banks through their reiiquification facilities available from the Reserve Bank of New Zealand. However, although preferential rates may not always be available the finance companies in general will look towards making an advance to an exporter in preference to other potential clients in the nonexporting field. Finance companies may also be able to assist exporters providing lease and hire purchase finance on plant and equipment or motor vehicle fleets to smaller exporters to free up working capital for application to export financing requirements. Post shipment finance Few New Zealand exporters can really afford to offer extended payment terms to all their overseas

buyers and to carry the cost of such extended credit themselves. Ideally exporters should endeavour to sell against irrevocable sight letters of credit. Inevitably however, many exporters find themselves in a competitive situation and are forced to sell on less favourable terms than this.

Basically a post shipment finance facility ensures that exporters are paid at the time of shipment on the same basis as if they were negotiating against a sight letter of credit with the overseas buyer then receiving credit terms of up to 180 days depending upon the normal trade credit terms in the particular export market involved and the type of goods being exported. Post shipment finance offers benefits to exporters such as improved cash flow, elimination of foreign exchange risk provided the export bill is met on due date, and a possible competitive edge in international markets. The basic method of financing is by way of discounting or negotiating export bills on either a continuing, seasonal, or once only basis. Merchant banks will handle presentation of the bill for acceptance, release of shipping documents and the collection of export sale proceeds. The payout to the exporter by the merchant bank is funded by a variety of methods:

(a) On the local money market as outlined above. (b) By discounting a bill of exchange drawn by the exporter with one of the local trading banks in New Zealand which have extended export bill discounting facilities to the merchant bank.

(c) By floating a bill of exchange on the American acceptance market and remitting the net proceeds to New Zealand. This method is most commonly used for larger transactions where the merchant bank has a relationship with an American bank which holds pre-signed bills of exchange. Against authenticated telex messages the American bank will accept a bill of exchange and sell it on the market crediting the net proceeds to the merchant bank’s account.

The merchant bank may be able to provide the finance on a with or without recourse basis to the exporter. No recourse finance is less usual but some exporters with EXGO credit insurance may obtain finance on a full no-recourse basis or partial recourse basis by assigning their policies to the merchant bank. As a general rule Marac is not prepared to handle export finance unless acceptable credit cover is available in respect of the overseas buyer. Where the exporter requires no-recourse financing a buyer credit arrangement may well be seen as probably a better solution. Here the merchant bank regards its credit risk as being directly with the

overseas buyer and lends on the credit standing of that buyer not the exporter. If security is needed it is given by the overseas buyer. This type of arrangement can be complicated and would be regarded as an exception rather than the norm. International factoring The services of the Export Guarantee Office are well known to most New Zealand exporters but the cover provided by EXGO is not necessarily as comprehensive as appears at first sight and there are a number of potential problems which can occur, particularly if exporters do not take the trouble to read and comprehend thoroughly the provisions of the standard EXGO policy which naturally is designed to cover a wide range of typical commercial transactions but which, unless specifically amended, may exclude “special situation” requirements. International factoring is becoming an increasingly used method of handling international trade transactions. Factoring involves the financier undertaking the collection of the export debt on the basis of no recourse on the exporter for the credit risk involved i.e., the factor accepts 100 per cent credit risk. Marac is a member of the International Factors Group which covers many of New Zealand’s main trading partners such as Australia, U.S.A., Canada, Japan and most European countries. International factoring is designed to facilitate sales on an open account basis and also to relieve exporters of the time and expense involved in administering their export receivables. Exporters receive a complete credit control service, with credit decisions being made by companies similar to Marac which are on the spot in the overseas buyers (i.e. the New Zealand exporter’s customer) country. Normally credit decisions are made by return telex. Credit approval is given for 100 per cent cover against insolvency, normally for open account transactions (although sight and term draft methods can also be effectively handled) to reduce costs and time still further. Exporters’ overseas agents are encouraged to set up a close working relationship with the factoring group’s member company in the country to which the exporter is selling so that on obtaining orders the agent may immediately request credit cover. When credit is approved the exporting company despatches the goods in the normal way on its usual terms but endorses invoices with instructions that payment should be made to the particular factoring company in the country to which the goods are being shipped. It makes no difference to the factor whether the invoice is in New Zealand dollars or the currency of the buyer or even a third currency. The exporter retains complete control over the choice of currency of invoicing. Should the overseas buyer fail to pay owing to insolvency the exporter will not be involved in difficult or pro-

tractad collection procedures. Payment will autoniatically' be received on the agreed maturity date <normally 90 days after the original due date), the pnoblem of eventual cdliectfcn being the sole responsibility of the factor. Whdte the factor undertakes to pay the exporter on an agreed date the exporter may wish to avail himself of funds at an earlier stage. Subject to any overriding arrangements between the overseas buyer and the factor, the exporter may enter into an agreement wWch will allow for both credit cover and financing. The average cost for export factoring is around 1 per cent of transaction value depending upon turnover, average invoice value and other relevant items. For this charge the exporter wtl receive complete credit protection, and obtain storings from not having to run his own export ledger and export credit conCrol department Other services requirements frequently go beyond their financing and merchant banks', dealing internationally berth as traders in their own right and financiers can offer considerable knowledge and experience to« their clients. Merchant banks can arrange for credit checks on prospective overseas buyers or agents, offer advice on foreign exchange, costing, insurant: e, customs procedures, siiggest potential buyers or [new sources of supply, andl in some instances, actually sell the goods on consignment. Most merchant banks are able to offer a flail range of banking type i services including negotiations, collections, open account payments, etc. Because some merchant banka: may be both traders ancs financiers, they understand jail aspects of an export transaction and are well-placed to offer advice on marketing, distribution and supply, the use of representatives or agents, the establishing of foreign branches) or affiliates. | Export • incentives Increased expoit sales taxation incentives and other taxation benefits continue to be avaf able to exporters using a merchant bank's export faefl'ities. Consortium arrangements As the invoice value of New Zealand exports continues to rise there are large export companies emerging which are unable to obtain their total fitnancing requirements front one source. Such companies may be financially strong but their requirements so large that a single bank or merchant bank ma|y be unable to service thiit requirement within its “house limit.” It is now becoming an increasingly common practice for merchant banks to service such clients on a joint v.feiiture or consortium basis.

To illustrate this nange of services, an example of the various facilities (provided by Marac Corporation, Ltd, is detailed bellow.

Marac Corporation is an agent for a marine insurance company and is therefore able to insure goods on behalf of the exporter. It is also a licensed customs agent in its own right capable of handling and preparing shipping documents as well as arranging shipping, air freighting, etc. As mentioned previously, Marac Corporation is a member of an international factoring group and can offer credit cover on overseas buyers as a possible alternative to EXGO cover. In instances, however, when EXGO cover is the preferred method of credit insuring overseas trade debt, Marac is able to arrange policies on behalf of exporters and assist in the negotiation of claims. Combined with its various financial plans export clients have access to a “full service” export package. Marac Corporation also has affiliate companies in Australia and Hong Kong which are able to provide a funding base from those countries and, combined with a document courier service, offer a very efficient method for the dispatch of shipping documents. As can be seen Marac Corporation’s services go beyond the exporters’ immediate financial needs and the constant endeavour is to develop a range of services suited to each export client’s particular requirements.

This article has been written for •‘The Press” by Desmond L. Snelling, South Island manager of Marac Corporation, Ltd, the merchant banking subsidiary of Marac Holdings.