Clarissa Dann reflects on her past four years of attending ITFA’s forfaiting and trade finance conferences and observes that this vital tool in the receivables armoury has huge potential.
You have to hand it to the International Trade and Forfaiting Association. In the run-up to their 42nd annual conference (this time in Dubai), I find myself reflecting on how this professional body has used the basic purchase of future payment obligations on a without recourse basis to inspire an entire global community.
Part of the family
This personal reflection is partly down to a certain amount of self-indulgence on my part. I took up the TFR helm on 1 August 2011 and found myself in Vienna a month later at the then IFA’s 38th incarnation of what has always been a high point of the receivables finance calendar.
The passion for education shone out back then – thanks to chair Paolo Provera and vice chair Sean Edwards – this was a crash course in trade finance par excellence, and was the start of something of a love affair with this committed and passionate network of trade financiers. As one Russian first-timer put it last year at the 41st conference in Barcelona, “I feel I have gate-crashed somebody’s wedding, and have been made to feel part of the family.”
In the beginning
Having put the trade into its forfaiting title in Barcelona last year, what was formerly the IFA has achieved a lot since its formal foundation with officers and committees on 4 August 1999 in Zurich and launch at the Heidelberg conference a month later.
With previous chairs having included Lucio Matassoni (now at OCBC and formerly at SMBC), and FIMBank’s Margrith Lutch-Emmenegger, current chair Paolo Provera (formerly of ABC Bank and now exploring new opportunities) took up the helm in 2009 and set about uniting the different geographic regions and developing the ITFA’s Asian reach (Bank of China having representation on the Board). A multi-linguist (I was trying to work out what language Provera did not speak), he is widely regarded as “one of those guys that enabled people to make things happen with fabulous people skills”.
It’s what you call it
“What’s forfaiting?” I am repeatedly asked, when those outside this eclectic industry quiz me.
Eyes glazed over when I started talking about straight discounting and I don’t go there with formula used to work out the net value of a discounted debt. I explain that it is a very important tool in the receivables finance armoury which takes us into supply chain finance country before outlining what you can do to get paid more promptly if you are supplying pickles to Lidl.
Forfaiting is generally regarded as the buying or selling of the right to future payment through discounting of future cash flows, but the inclusiveness of the term has sometimes led to confusion over what it can mean. It can cover a wide range of receivables, it may or may not be trade related, it includes the discounting of letters of credit (LCs) or other payment obligations, but traditionalists tend to see forfaiting as trade finance through and through because of the need to have an underlying rationale for the business.
UniCredit’s global head of trade products Markus Wohlgeschaffen (a regular as a panellist and a speaker), thinks forfaiting has suffered from an issue of “not being disciplined in our nomenclature”. “I find it bizarre that people see forfaiting as a special animal – it’s just a tool,” he explains. But it still suffers from identity challenges.
Wohlgeschaffen says this is one of the reasons for the ICC Banking Commission’s project to create a consistent and common understanding of supply chain finance.
Edwards, representing ITFA views, has been part of the drafting group and contributed the definition of forfaiting. “When you put up all the component parts in the spotlight and you set them alongside the other receivables purchasing techniques such as factoring, you quickly see that there is nothing outdated or irrelevant about forfaiting. The skills, conceptual approaches and structures sometimes get overlooked by some trade financiers or are simply used under a different name.” He continues, “In both cases, the wider trade finance industry could be missing a trick so looking at the essence of this technique is a very worthwhile exercise.”
Historically, forfaiting for many has been, says Edwards, “a matter of promissory notes and bills of exchange funding the export of capital goods”. He adds, “That those markets still exist is often forgotten by many critics. Large export markets such as Germany have thriving forfaiting communities as do large parts of Asia where the preferred instrument is the letter of credit.”
Impacts and outcomes
The beauty of forfaiting is that it allows suppliers to offer longer-term payment terms to buyers without adversely impacting their liquidity or inflating their balance sheets. “It’s one of the most important instruments to unleash trapped liquidity,” confirms Wohlgeschaffen.
“I find the ITFA is one of the most active organisations that delivers tangible results and the fact they have enlarged it with a ‘T’ shows they really understand what is going on in trade,” he enthuses. He cites the adoption by the ICC Banking Commission of the Uniform Rules of Forfaiting (URF800) in January 2013 after three years of drafting as a “huge achievement”.
Another example of the body’s forward thinking is how to attract new talent into the industry. Having launched the so-called “Young Professionals Network” in Barcelona, work is well underway to build a strong network of junior colleagues to foster the education and career development of the next generation of trade financiers and forfaiters in trade finance.
Volumes and price compression
The inexorable rise of open account trading is directly correlated to the long-term growth of forfaiting. This, combined with the ever growing tendency of suppliers to provide stretched payment positions will, say observers, lead to increased take-up of the instrument.
However, right now, most providers confirm that forfaiting volumes “have dropped” although unlike the Factors Chain International statistics, there is, as yet, no repository of global forfaiting statistics; there are efforts being made to change this with the assistance of the Asian Development Bank (ADB). The main reason for the slowdown in activity is the slump in commodity prices. Says Wohlgeschaffen, “At UniCredit we have experienced reduced volumes of forfaiting transactions, but if we ignored the commodity trade finance sector there would actually be an increase.”
London Forfaiting Company (LFC) director Tony Knight makes the point that “there is far too much liquidity chasing a narrow group of countries as a consequence pricing in, for example, Turkey, bears no relation to the risk.”
Sources of business
A number of institutions have “discovered” sub-Saharan Africa, where there is still a requirement for classical trade finance products and, for the most part, a good performance record. While most would agree that in Angola and Nigeria, the reverse is at play because of the collapse in oil price, Knight observes that the other smaller countries in sub-Saharan Africa, where LFC enjoys a regular flow of business, “have attracted growing interest, again putting downward pressure on pricing while there is no discernible pick up in credit metrics”.
It was at last year’s ITFA conference in Barcelona where Afreximbank president elect Dr Benedict Okey Oramah told delegates, “Opportunities therefore exist for forfaiters willing to take African payment risk. In this context I believe that Africa will underpin the rebirth of forfaiting business. Africa will be forfaiting’s new frontier”.
It is not all doom and gloom on pricing, however. Knight adds, “We still attempt to generate the majority of our business from well-established relationships with a number of export clients. While this entails more work (structuring advice, letters of credit, FX), it brings added value and builds upon the relationship with the exporter.
On pure forfaiting, Knight says LFC has no pressure to trade if it does not feel the opportunity is right. “We have a diverse risk appetite and strong liquidity as such LFC employ trading as a portfolio management tool. This enables LFC to take a considered view on transactions that do not readily fall within the volume trade finance market. As a consequence there is less competition and a pick-up in pricing.”
From Knight’s perspective, “there is no point trying to compete in the volume countries such as India and China”. LFC looks further afield or at different aspects of the trade cycle and interjects where it sees an opportunity, or when there is a correlation between risk and margin.
'R' is for...
You may hate it, but you may need to learn to love it. I am, of course, talking about regulation. In this environment ITFA would not be giving its members a proper service if it did not get stuck into the various issues affecting the wider trade finance industry.
One of these has led to a very concrete solution being provided by ITFA. CRR (the Capital Requirements Regulations, one of the measures which enforces the new Basel III rules in Europe) obliges banks to obtain legal opinions on the effectiveness of any credit risk mitigants (CRM) they use. One such CRM is the sub-participation agreement. ITFA, working with BAFT, commissioned and negotiated a generic market legal opinion with Sullivan & Worcester on the BAFT MPA which avoids the need for each bank to obtain its own opinion or at the very least significantly reduces the scope and therefore expense of any such opinion. All ITFA members are expressly allowed to rely on the opinion.
ITFA has also assisted BAFT in the United States to lobby the US authorities to avoid sub-participation agreements being classified as swaps under the Dodd-Frank legislation.
Joining the 21st century
One of the current impediments to forfaiting’s wider adoption is the difficulty in documenting and evidencing the debt. “Until there is an absolutely standardised document for every trade document in the world, forfaiting will stay manual,” says Knight. UniCredit’s Wohlgeschaffen is concerned about the lack of progress on the digitisation of forfaiting and sees this as a collective responsibility. “We want to offer clients the facility to upload the data that represents an invoice without being forced to present a paper one”, he says. “We are in the process of revamping our trade finance IT platforms and we have partnered with IT vendors to support this endeavour. Whatever our corporate clients upload, be it an invoice or an LC, it will be possible to initiate and execute a forfaiting transaction,” he concludes.
All that needs to happen now is for everyone else to do the same.
