THE SHIPPING NEWS
With trade on the rebound in Asia, bankers are squeezing out costs and starting to innovate.
By Abe De Ramos

Economists frequently say that trade has a more powerful impact on civilization than war. But to Simon Ng, CFO of Prosperous Tools, a Singapore industrial equipment manufacturer, trade and war look suspiciously like the same thing. Sitting on his desk is a lucrative contract signed by a manufacturer of precision engines in Bangalore. But Ng is mulling the dangers of the deal. For one, his bank is balking.

The customer's bank controls the import component of the deal, and is now pressuring to get its hands on the full document-set of the transaction. This has upset Ng's bankers, who he particularly needs this month for a concession on interest payments due to lagging receivables from six of his major clients in Southeast Asia. The last thing Ng wants to do is rock the boat. He is mulling these problems when the phone rings. It's the director of sales calling from south India. "Great news!" says the director. "Three more contracts for delivery next month. We opened a whole new market." He adds: "The financing should be no problem, right?"

Trade financing has always been a matter of relationships, particularly in Asia. Compelled to operate in the world's most difficult market for trade financing outside of Africa, Asian CFOs depend on their banks to devise complex structures to guarantee that goods are shipped and bills are paid. While the problems in Asia are much the same as in other parts of the world, they're magnified in this region.

Political, economic and currency risk can haunt seller and buyer relationships from year to year. Receivables are notoriously difficult to collect. Local companies face sharp competition from MNCs who enjoy cosy global banking relationships. Given these difficulties, solid and enduring methods of doing business have developed that sometimes seem as sturdy as porcelain. That's fine - unless, like Ng, you're required to arrange financing for your company's push into a new market.

While the territory is tough, signs of improvement have emerged in two crucial areas. First, the plain vanilla side of the business is getting cheaper, mostly because of automation.

Although it's early days yet, new Internet-based techniques to unify the component parts of a trade finance deal are already taking some of the cost out of a transaction. Partly because of the threat of automation to what has always been a relationship-based business, bankers have begun offering more innovative methods to get trade finance deals done, even in difficult markets. Ng, take heart.
   
The Trade Bounce

There's another reason bankers are willing to work with their customers - trade in Asia is on the rebound. SG Securities in Singapore expects that China alone will sell goods worth US$223 billion in 2000, almost equivalent to the forecast exports of Malaysia, Thailand, Indonesia and the Philippines combined. According to Goldman Sachs estimates, exports from Singapore, Hong Kong, South Korea and Taiwan will grow 19 percent collectively this year, compared to 8 percent the year before, while imports are expected to surge by 29 percent, compared to 16 percent last year.

A lot of this is being driven by expectations for stimulation of Asian exports as a result of China's entry into the WTO. SG economist Hu Biliang says China will open its markets and attract multinationals to set up factories in China, boosting import volumes. SG expects China's imports alone, at an estimated US$180 billion this year, to grow 15 percent and 18 percent over the next two years. Cecil Carder, head of North Asian trade services at Bank of America in Hong Kong, says: "China's payment and banking procedures lend themselves towards the letter of credit (LC) process, so its membership in the WTO is certainly very favorable for this product."

The rest of Southeast Asia should expect nothing less. The Asean Free Trade Area (AFTA) agreement takes effect at the start of 2001. Although watered down from its initial target to reduce all tariffs to 0 to 5 percent, the agreement should help boost regional trade nonetheless. "With the lowering of tariffs among the Asean nations and the entry of China into WTO, one can expect further growth in Asian trade both globally and intra-nationally," says Michael Goh, assistant general manager for trade and commodity finance at Japan's Sumitomo Bank in Singapore.

All this expected activity has set the stage for an expansion in demand for trade finance. And banks have gone out of the way to market themselves more aggressively than in years before to capture the upcoming business. They have set up dedicated trade service offices, started to invest in web-enabled trade finance facilities, and dangled credit lines.

Party Time

And as any banker will admit, it's a business that needs innovation. A traditional LC-based trade transaction currently involves at least 13 parties, and getting goods shipped from buyer to seller under LC terms is an 11-step process that requires copy-furnishing and transporting documents back and forth to several parties. When discrepancies emerge between documents, which isn't that rare, the paperwork multiplies. Technology promises to automate the entire trade financing spectrum, to try to make it paperless, thus faster, less prone to human error, and cheaper. Indeed, that's already happening.

Ernesto Dela Cruz, finance director at the US$2 billion-a-year semiconductor maker Amkor/Anam Philippines says his savings from automating his LC applications with banks have amounted to "easily US$1,500 a month." William Lo, CFO of Hong Kong-based VTech Holdings, an electronic toy manufacturer, says an LC approval process that used to take two days to complete now takes no more than 30 minutes. This is because documents that banks need from the company - among others, financial statements, projected income statements, basic information about operations, list of major stockholders, description of current and future projects - can now be shared on-line. "In the past," Lo says, "we had to type an application form and then have it signed by authorities, and then sent by messenger to the bank. And then the bank will receive it, and then prepare a letter of credit for us. But now we can do it electronically, and it can be done in half an hour."

The greater ease and efficiency in basic transactions also reduces the profit that banks can make on these plain vanilla type of transactions. Automation is happening at three levels: between a bank and a trader, between two traders, and among all the players in trade finance - including shipping companies, insurers, customs and lawyers.

It has a long way to go yet, but on-line trading communities such as bolero.net are gaining in popularity. bolero.net, which was set up by a network of international banks, went through trials with 120 companies last year. One of the participants was Mitsui, the Japanese trading giant with annual turnover of US$116 billion. The company evaluated bolero.net against paper systems on four separate chains of transactions, including shipments of porcelain figures from Spain to Japan; cars from Japan to Belgium; dairy products from Singapore to Japan; and tires from Japan to Hong Kong. Following the trials, it found it saved money and time in almost every case and plans to adopt bolero.net in most of its trades.

But while MNCs like Mitsui focus on savings to the exclusion of all else, most Southeast Asian companies still put relationships first. This goes for CFOs and treasurers, who still value the traditional relationships they develop with their bankers. In other words, web-based innovations aren't likely to make a CFO switch banks or give their current trade finance bank more business. "Making it Internet-able is a convenience, it's a plus," says Robbie Azcarate, vice-president for finance and treasury at RFM, a US$321 million-a-year Philippine food and beverage conglomerate. "It makes us say, 'Wow, you're already there, it's good.' It's a convenience item, but it will not induce us to bank more." He continues: "What's more important is the relationship we have with that bank - meaning the kind of support they give us, the kind of facilities they give us on our overall business - and the competitiveness of their rates," says Azcarate.

Asir Vatham, group treasurer at consumer goods company Hindustan Lever in Bombay, echoes the sentiment. "To me, technology comes only after the commercial aspect, meaning how you negotiate the rates with banks." Hindustan Lever has been using the same banks for its trade finance activities for the past 60 to 70 years.

Indeed, as a complete move to the web is still years off for trade finance, these kinds of relationships will continue to be paramount for bankers. "In order to automate the entire process," says Alan Wilkinson, head of trade services at HSBC, "that includes having a compliance engine to check electronic documents." He adds: "That's something which is being worked on and will happen, although it won't happen for all documents all the time."

Basil Chan, CFO of Singapore-based Datacraft Asia, a communications and networking systems company, agrees. Although Datacraft is deeply embedded in the electronic revolution, Chan says the company's LC transactions are still largely manual. "I don't think it has come to a point where it is electronically done. I'm sure it will come, but at the moment I still see LC documents and I still sign them."

Wilkinson is more frank than most bankers about his bank's development of Internet services in trade finance. "There are some people that argue that if you're not there first," says Wilkinson, "then you will lose your business. I don't think that's the case."

He adds: "Our message to customers is we're working very seriously on these initiatives. We want to make sure that we get it right." But to do it right, he argues, the bank needs to offer a comprehensive, end-to-end Internet service, and that's just not possible in Asia today, he says.

Wilkinson sees the ultimate role of the Internet as a facilitator to, not a replacement for, essential banking services, at least until more advanced systems are devised. "Credit scoring is the way forward," says Wilkinson. Credit scoring is credit evaluation done by computer rather than banking personnel.

But banks are long way to creating a foolproof system. Says Wilkinson, "You need to create very, very deep databases of past history in order to develop a credit scoring model. And that's what banks are doing at the moment."

Basis and Tenors

The arrival of the Internet has had the effect of making bankers more creative in their approach to the business. With new pressures on margins, the good news is that bankers are more willing to do innovative deals that are structured to strip some of the risk out of transactions in volatile markets.

"One important lesson to the banks is the unreliability of placing so much emphasis on financial statements in determining a lending decision," says Michael Goh, assistant general manager for trade and commodity finance at Japan's Sumitomo Bank in Singapore. "More crucial to the decision is where the funds will go to, and the source of repayment. Thus the popularity of structured deals, in particular structured trade deals."

To begin with, bankers are now more rigorous about matching the trade finance tenors to the customer's trade cycle. In the past, it would have been normal to come across trade finance tenors of 180 days whether or not a customer sold on cash or 180-day terms.

John Murphy, head of trade and commodities finance at Standard Chartered Bank in Singapore, says banks now look at the cycle a lot more closely than they did before. Limiting the tenors by matching them to the customer's trade cycle gives bankers a better view of the fulfillment of the trade transaction.

"If a customer does default on a payment, then it is probably because something has gone wrong, and banks can then investigate more thoroughly," he says. "As for documentation, banks are tougher on releasing one set of documents of title direct to buyers. There is a trend to want to control full document sets. In addition, banks are becoming more sticky about the export leg of a transaction. If a bank opens the import letters of credit, then they are more likely to insist on seeing the export leg routed through them as well."

Amita Jhangiani, head of regional trade services at Deutsche Bank in Singapore agrees. "There's been much need to look at the underlying trade flow, the buyers and the sellers, and to be very sure that any perceived risk is appropriately covered, maybe by an additional document, or maybe by a bit of insurance thrown in, and that tends to be wrapped up and structured."

The Receiving End

To be sure, banks have a better appreciation of trade receivables. One trade finance structure that is growing in popularity is to back the borrowing with current and/or future cashflows, which are pooled together to go straight to repayment. This works best when the exporter approaching a bank for, say, packing credit, a type of pre-export financing, has one or more trade partners that are clients of the same bank. "If an exporter has a buyer in the US," says Carder of Bank of America, "that's actually our import LC coming into the region." The power of that underlying commercial transaction is very strong, certainly stronger than balance sheet financing, he says. "Since the crisis, we have implemented some pre-export and post-shipment financing around the LCs which we issue," he says.

Financing the trade of commodities, from steel to energy to edible oils, is also commonly structured. Again, such financing relies primarily on the payments to be received from the transaction being financed, and not on the creditworthiness of the borrower. Structuring the transaction becomes important and requires a sound understanding of the goods financed.

Some of these financings can be complex, involving not just the purchase and sale of the commodity, but the transportation, warehousing and conversion of the commodity from a raw form to a finished product.

Aside from giving banks an underlying security, structured trade finance transactions also make sure that banks do not overextend credit. "Goods financed are usually on a pre-sold basis involving acceptable counterparties, but in certain cases, they may be on an unsold basis," says BNP's Koh. "The bank finances the purchase (import) using the proceeds of the sale (or export) as collateral. In this way, the amount financed is based on the size of each transaction, and not on the balance sheet of the trader."

One sure way to attract banks is to combine receivables with an insurance policy to mitigate the risk of the transaction. This involves more cost for the borrower, but it's an effective grease to a banker's hand. "There has always been a need for insurance. In fact, we are confident that buyer payment insurance services are likely to grow exponentially in the next few years," says Murphy.

Jhangiani lauds two deals by Indonesian company Asia Pulp and Paper that did just that, and earned a total of US$250 million. The deals, one private and another public, involved APP pooling its existing and future trade receivables from American and European buyers, and then getting an insurance policy that would take care of the payments in case APP couldn't do so (see "From Junk to Gold," DealWatch, October 2000). "That's a true structured deal, but in addition to APP, you don't have a lot of other deals that have been closed because they have not been sizeable enough," she says.

In the end, bankers will have to ask, will any of this make a difference to Simon Ng at Prosperous Tools? Possibly, because bankers are learning in the new market for trade finance in Asia that they have to be flexible to remain profitable. "We recognize," says Wilkinson at HSBC, "that the world never stood still, but the adage is even more appropriate to this day and age than it ever was before."

Abe De Ramos is a senior writer for CFO Asia