Letters of Credits Tools to Mitigate Risk, Expand Your Market and Satisfy Performance Requirement

May 15, 2013

Speakers Dennis Brown Senior Advisor Silicon Valley Bank

Jimmy Gan Senior Director and Business Manager Silicon Valley Bank

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Agenda Letter of Credit: Definition

Standby Letters of Credit

Commercial Letters of Credit

Case Studies

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Poll Question

Have you experienced using a letter of credit before?

A. Yes

B. No

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Letter of Credit Definition

Uniform Commercial Code (UCC) Definition:

Letter of Credit" means a definite undertaking that satisfies the requirements by an issuer to a beneficiary at the request or for the account of an applicant or, in the case of a financial institution, to itself or for its own account, to honor a documentary presentation by payment or delivery of an item of value.

(The issuing party substitutes its credit for that of the applicant)

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Understanding Your Role in a Letter of Credit Transaction

Applicant Buyer Importer Tenant Bidder Borrower

Beneficiary Seller Exporter Landlord Auctioneer Lender

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http://www.google.com/url?sa=i&rct=j&q=client&source=images&cd=&cad=rja&docid=OAcFFsVO_7UG6M&tbnid=Qrfm0zMhe7nt_M:&ved=0CAUQjRw&url=http://cogentpayroll.com/Testimonials.htm&ei=89JXUZiYKsvvigLz8YD4Cw&bvm=bv.44442042,d.cGE&psig=AFQjCNHuPvY41fVVVz-_ICYkLwWGlNllXA&ust=1364796513415781

Parties to a Letter of Credit - Domestic

Applicant

y

Beneficiary Issuing Bank

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Parties to a Letter of Credit - International

y

Beneficiary

Issuing Bank

Advising Bank

Applicant

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Types of Letter of Credit

Irrev

ocab

le O

r Rev

ocab

le

Standby Letters of Credit

Financial Letters of Credit

Performance Letters of Credit

Commercial Letters of Credit

Import Letters of Credit

Export Letters of Credit

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Standby Letters of Credit

Standby Letters of Credit - Overview

Not a primary source of payment

Not meant to be drawn upon

Support an obligation Financial Performance

Subject to either ISP98 or UCP600

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Purpose of Standby LCs Domestic Rent or lease obligations

Bid

Performance

Advance payment

Warranty

Workmans Comp

Commercial paper

Securitizing assets/credit

enhancement

Credit support / loans

Acquisitions

Environmental liabilities

International Customs bonds

VAT (Value-Added-Tax) bond

Rent or lease obligations

Bid

Performance (project of financial)

Advance Payment

Tax liabilities

Warranty

Credit support / loans

Acquisitions

Environmental liabilities

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Draft drawn on issuing bank

Signed statement from the beneficiary certifying one or more conditions specified below: Applicant has failed to perform its obligations under the lease agreement dated XXX. Applicant has failed to pay invoices within 30 days and are now past due. Applicant has not complied with the terms and conditions of contract no. XXXX. Applicant has been awarded the bid but has failed to sign the contract or has failed to provide the required performance bond.

Standby L/Cs Typical Required Documents

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Allows clients to fulfill contractual and governmental obligations

Acceptable substitute for bid, performance bonds and warranty bonds

Serves and supports a bank guarantee

Applicable for domestic and international transactions

Benefits of Standby Letter of Credit

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Commercial Letters of Credit

Important Factors to Consider

Cost

Incoterms

Payment terms

Risk

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Incoterms 2010

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Incoterms 2010

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Sight Instrument payable upon presentation or demand Extended Payment Terms

Deferred Enables the buyer to take possession of the title documents and the goods by agreeing to pay the issuing bank at a fixed time in the future Usance or Time Draft Payment available against acceptance of a term bill of exchange or in certain usages by deferred payment Mix Payment Any combination of sight and/or extended payment terms

Payment Terms

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Cash

Advance

Letters of Credit

Documentary Collections

Open Account

Payment Risk Hierarchy

High

High

Seller / Exporter Buyer / Importer

Low

Low

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Cash in Advance Process

Send Title Documents

Negotiate Sale

1

2

3 Buyer Seller

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Open Account Process

Send Title Documents

Negotiate Sale

1

3

2 Buyer Seller

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Remitting Bank Presenting/

Collecting Bank

Documentary Collection Process

Send Payment

Send Payment Se

nd P

aym

ent

Negotiate Sale

1

2

3

4

5

6

7

8

Buyer Seller

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Letter of Credit Issuance Process

Advising/Confirming Bank Issuing Bank

Buyer Seller

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Letter of Credit Settlement Process

Advising/Confirming/Negotiating Bank Issuing Bank

Send Payment

Send Payment Se

nd P

aym

ent

Buyer Seller

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Commercial Letters of Credit - Overview

Primary payment instrument

Involves goods or services

including licensing rights

(media/software)

Domestic or International

Subject to UCP600

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Typical Required Documents of Commercial Letters of Credit

Draft drawn on issuing bank

Signed commercial invoice

Packing List

Transport document Ocean Bills of Lading Airway Bills Courier Receipt

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Letter of Credit Characteristics

A Letter of Credit by its nature is a separate transaction from the sale or other contract on which it may be based

Banks deal with documents and not with goods, services or performance to which the documents may relate

Adheres to independence principles

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SVB client functions as the Beneficiary

Sight or Extended Term (30 days, 60 days, 90 days etc.)

Payments for goods or services

Domestic or International

Export Letters of Credit

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SVB client functions as the Applicant

Sight or Extended Terms (30 days, 60 days, 90 days etc.)

Payment for goods or services

Domestic or International

Import Letters of Credit

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Excellent cash forecasting instrument Exporter controls payment

Risk-mitigation tool Substitute buyer risk with foreign bank risk

Irrevocable Non-cancellable unless all parties agrees

Financing Vehicle Discounting of accepted draft

Benefits of Export Letters of Credit

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Applicant has control on conditions of payment Applicant dictates documentary requirements and conditions on the letter of credit

Risk-mitigation tool Bank pays only upon submission of complying documents

Keeps the supply chain healthy Assurance that shipments have occurred as evidenced on the documents

Benefits of Import Letters of Credit

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Case Studies

Case Study 1

Background: International Private Equity had a deal to purchase a division of a large Chinese company. The seller wanted the buyer to set up an escrow account for the full purchase price of $ 200 million.

Need: The CFO of International Private Equity wanted to manage cash carefully and only disburse funds at closing.

Concern: The seller needed some assurance that the buyer was serious about the purchase.

Solution: International Private Equity requested SVB to provide the seller a Standby Letter of Credit for $50 million to assure buyer that they are serious about the purchase.

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Case Study 2 Background: Amazingly.com has expanded operations and is looking for office space in Australia to house about 50 new employees.

Need: Landlord requires the tenant to provide security in the form of either cash or a bank guarantee from a local Australian bank.

Concern: The CFO wants some assurance that they can get their deposit back when no longer needed. He also does not want to deal with a foreign entity to retrieve the security deposit.

Solution: Amazingly.com provides the landlord with a bank guarantee backed by Silicon Valley Banks Standby Letter of Credit to satisfy the landlord and at the same time provide satisfaction to the CFO that he can get his cash back when the Standby Letter of Credit expires.

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Case Study 3

Background: Nicely Tailored.com sells high-end dresses on line. The CFO wanted open term arrangements while the suppliers required pre-payment.

Need: The CFO wanted to manage cash and mitigate delivery risks. He needed a solution that will assure the supplier payment protection.

Solution: The CFO requested Silicon Valley Bank to issue an Import Commercial Letter of Credit as form of payment for products shipped

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Case Study 4

Background: Screenwaver has a subsidiary in China with a buy/sell operation. They are completely committed to supporting the subsidiary.

Need: The subsidiary needed about $ 1 million in working capital to support their operations.

Concern: Strict exchange controls in China may prevent the CFO from repatriating their USD back if sent over to the subsidiary.

Solution: SVB issued a Standby Letter of Credit on behalf of Screenwaver in favor of Shanghai Pudong Development Bank to support an RMB credit facility for the subsidiary to pay for bills and payroll. Screensaver is able to keep the USD in the US.

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Case Study 5

Background: Alpine Semiconductor sells analog chips globally. They have a few clients that dont carry the credit profile to warrant open account terms.

Need: Alpine Semiconductor needs to mitigate their buyers payment risks.

Issue: Some buyers are pushing back on pre-payment terms that Alpine Semiconductor has been requiring.

Solution: Alpine Semiconductor required their buyers to issue Export Commercial Letters of Credit in their favor through Silicon Valley Bank.

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Case Study 6

Background: Super Software has an interest in bidding on a project in Qatar to provide mobile banking solutions.

Need: Super Software needs to provide a bid security in the form of cash, cashiers check or bank guarantee in local currency to the Qatar customer.

Issue: CEO would like to avoid dealing with currency risk and fluctuations on having to convert it back to USD.

Solution: Super Software requested Silicon Valley Bank to issue a Standby Letter of Credit to a correspondent bank in Qatar to support the bank guarantee that will act as bid security.

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Summary

Definition of a letter of credit

Types of letters of credit

Understanding your role in the transaction

Look for terms such as bonds, bank guarantees, VAT-taxes, customer, vendor, supplier

Reach out to your Product Advisor

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Questions?

Biographies

Dennis Brown

Dennis Brown functions as a Senior Trade Finance Advisor in the International Group responsible for providing guidance and delivering tools to clients as they venture into cross-border markets. Brown joined Silicon Valley Bank in 2010. He has experience in both trade operations and business development from the beginning of his banking career in 1981 as an export letter of credit analyst. He later cross-trained to other international functions including import letters of credit, standby letters of credit, and bankers acceptances. In 1997, Brown settled to a business development role and has since remained in this field. Brown obtained a Bachelors of Science from the University of San Francisco. He resides in Cypress, CA but makes the Bay Area his second home.

Dennis Brown , Senior Trade Finance Advisor, Silicon Valley Bank dbrown@svb.com 949.754.0838

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mailto:dbrown@svb.com

Jimmy Gan

Jimmy Gan, Senior Director and Business Manager, is responsible for the Global Trade Finance Division at Silicon Valley Bank. With 39 years of Trade Finance experience, he heads a team of highly qualified professionals committed to providing business active in global trade markets with a value-added service offering. Gan joined Silicon Valley Bank in 1997. During various mergers, acquisitions and alliances among Wells Fargo, HSBC Trade Bank N.A, Standard Chartered Bank, First Interstate Bank of California and United California Bank, he spent 16 years as a Vice President in their Trade Finance groups. He started his trade banking career at China Banking Corporation, Manila, Philippines. Gan obtained a Bachelors of Science Degree in Industrial Management Engineering with a minor in Mechanical Engineering from De La Salle University, Manila, Philippines.

Jimmy Gan, Senior Director and Business Manager, Silicon Valley Bank jgan@svb.com 408.654.7110

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mailto:jgan@svb.com

Contacts

Silicon Valley Bank - Letter of Credit Team

Jimmy Gan Sr. Director / Bus Mgr Gbl Trade Tel. no. 408-654-7110 Email: jgan@svb.com Alice Daluz Market Manager Tel. no. 408-654-7120 Email: adaluz@svb.com John Dossantos Trade Finance Manager Tel. no. 408-654-6274 Email: jdossant@svb.com Ravi Kiran Goli Trade Finance Manager Tel. no. 408-654-7777 Email: gkiran@svb.com

Standby Letter Credit Sivaram Eswaran Tel. no. 408-654-5545 Email: seswaran@svb.com Enrico Nicolas Tel. no. 408-654-7127 Email: enicolas@svb.com Linda Wu Tel. no. 408-654-7716 Email: lwu@svb.com Evelio Barairo Tel. no. 408-654-3035 Email: ebarairo@svb.com

Commercial Letter of Credit Ray Robles Advising/Amendment Tel. no. 408-654-5083 Email: rrobles@svb.com Margaret Wong-Document Examination Tel. no. 408-654-7788 Email: mwong@svb.com Jing Yu Document Examination Tel. no. 408-654-7176 Email: jyu@svb.com Edmund Juri Document Examination Tel. no. 408-654-5079 Email: ejuri@svb.com Cesar Agoncillo Tel. no. 408-654-7268 Email: cagoncillo@svb.com

Advisors Managers

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mailto:jgan@svb.commailto:adaluz@svb.commailto:jdossant@svb.commailto:gkiran@svb.commailto:seswaran@svb.commailto:enicolas@svb.commailto:lwu@svb.commailto:ebarairo@svb.commailto:rrobles@svb.commailto:mwong@svb.commailto:jyu@svb.commailto:ejuri@svb.commailto:cagoncillo@svb.com

SVB Product Advisory Team

Senior Advisors Ed Sauve esauve@svb.com 949-754-0816

Carla Winfield cwinfield@svb.com 617-630-4154

Dennis Brown dbrown@svb.com 949-754-0838

Associates Justine Nguyen jbguyen@svb.com 949-754-0821

Tim Ferris tferris@svb.com 617-630-4198

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mailto:esauve@svb.commailto:cwinfield@svb.commailto:dbrown@svb.commailto:jbguyen@svb.commailto:tferris@svb.com

This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

2013 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademark.

Disclaimers

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Letters of Credits Tools to Mitigate Risk, Expand Your Market and Satisfy Performance RequirementSpeakers AgendaPoll QuestionLetter of Credit DefinitionUnderstanding Your Role in a Letter of Credit TransactionParties to a Letter of Credit - DomesticParties to a Letter of Credit - InternationalTypes of Letter of Credit Standby Letters of CreditStandby Letters of Credit - OverviewPurpose of Standby LCs Standby L/Cs Typical Required DocumentsBenefits of Standby Letter of CreditCommercial Letters of CreditImportant Factors to ConsiderIncoterms 2010Incoterms 2010Payment TermsPayment Risk HierarchyCash in Advance ProcessOpen Account ProcessDocumentary Collection ProcessLetter of Credit Issuance ProcessLetter of Credit Settlement ProcessCommercial Letters of Credit - OverviewTypical Required Documents of Commercial Letters of Credit Letter of Credit CharacteristicsExport Letters of CreditImport Letters of CreditBenefits of Export Letters of CreditBenefits of Import Letters of CreditCase StudiesCase Study 1Case Study 2Case Study 3Case Study 4Case Study 5Case Study 6SummaryQuestions?BiographiesDennis Brown Jimmy GanContactsSilicon Valley Bank - Letter of Credit TeamSVB Product Advisory TeamDisclaimers