M&T Bank

INTERNATIONAL TRADE INTERNATIONAL TRADE SERVICESSERVICES

Country RiskCountry Risk

Risk of Doing Risk of Doing Business in Buyer’s Business in Buyer’s CountryCountry

Commercial RiskCommercial Risk

Risk associated with Risk associated with the Individual or the Individual or Institution Institution responsible for responsible for PaymentPayment

Parties to a Letter of CreditParties to a Letter of Credit

BuyerBuyer SellerSeller

Issuing BankIssuing Bank

Advising BankAdvising Bank

SellerSeller

ExporterExporter

BeneficiaryBeneficiary of letter of of letter of creditcredit

BuyerBuyer

ImporterImporter

ApplicantApplicant for for letter of creditletter of credit

Issuing BankIssuing Bank

Opens or issues Opens or issues the letter of creditthe letter of credit

Substitutes its Substitutes its credit-worthiness credit-worthiness for that of the for that of the buyerbuyer

Advising BankAdvising Bank

Notifies seller:Notifies seller: letter of credit has letter of credit has

been openedbeen opened seller is seller is

beneficiarybeneficiary

Authenticates and Authenticates and forwards letter of forwards letter of credit to the credit to the beneficiarybeneficiary

May be a local bank May be a local bank chosen by chosen by beneficiarybeneficiary

May be a May be a correspondent correspondent chosen by issuing chosen by issuing bankbank

Confirming BankConfirming Bank Confirms letter of Confirms letter of

creditcredit Must pay beneficiary:Must pay beneficiary:

if all conditions of if all conditions of letter of credit are letter of credit are satisfiedsatisfied

whether or not whether or not issuing bank paysissuing bank pays

Confirmation Confirmation requested by requested by beneficiary (if beneficiary (if unsure of unsure of issuing bank issuing bank or its or its country)country)

Usually a Usually a local bank local bank chosen by chosen by beneficiarybeneficiary

Negotiating BankNegotiating Bank

A bank, usually in the locale of the A bank, usually in the locale of the beneficiary, that chooses to advance beneficiary, that chooses to advance funds to beneficiary against presentation funds to beneficiary against presentation of documents required by terms of L/Cof documents required by terms of L/C

Indirect Parties to an L/CIndirect Parties to an L/C

Customs House Broker or Freight Customs House Broker or Freight ForwarderForwarder

Usually unnamed in the Usually unnamed in the letter of creditletter of credit

Facilitates transaction:Facilitates transaction: coordinates the coordinates the

transportation of transportation of merchandisemerchandise

Trade Agreements:Trade Agreements:Underlying Sales ContractUnderlying Sales Contract

What merchandise will be purchasedWhat merchandise will be purchased In what quantityIn what quantity At what priceAt what price Shipping method (sea, air, rail, etc.)Shipping method (sea, air, rail, etc.) When it will be shippedWhen it will be shipped Who will insure it (buyer or seller)Who will insure it (buyer or seller) How and when payment will be madeHow and when payment will be made

Methods of PaymentsMethods of Payments

Cash in Letter of Documentary OpenCash in Letter of Documentary Open

Advance Credit Collections AccountAdvance Credit Collections Account

Most Advantageous to Most Advantageous to the Exporterthe Exporter

Most Advantageous to Most Advantageous to the Importerthe Importer

To provide adviceTo provide advice Review transactions, country Review transactions, country

information, business customsinformation, business customs

To provide financingTo provide financing Supporting sales, purchases and Supporting sales, purchases and

investmentsinvestments

To mitigate riskTo mitigate risk Country Risk & Commercial RiskCountry Risk & Commercial Risk

What is the Bank’s Role?What is the Bank’s Role?

The handling by banks, on The handling by banks, on instructions received, of instructions received, of documents in order to:documents in order to:

Obtain acceptance and/or paymentObtain acceptance and/or payment Deliver commercial documents Deliver commercial documents

against acceptance and/or against against acceptance and/or against paymentpayment

Deliver documents on other terms Deliver documents on other terms and conditionsand conditions

DOCUMENTARY COLLECTIONDOCUMENTARY COLLECTION

Documentary CollectionsDocumentary CollectionsAdvantages to the ExporterAdvantages to the Exporter

Seller retains title to goods until payment Seller retains title to goods until payment or acceptanceor acceptance

Relies on banks to collect payment from Relies on banks to collect payment from buyerbuyer

Commercial - Used to provide for paymentCommercial - Used to provide for paymentby a bank to a named beneficiary against theby a bank to a named beneficiary against thedelivery of documents.delivery of documents.

Standby - Used to assure performance byStandby - Used to assure performance bythe applicant. It is the applicant. It is notnot expected to be drawn expected to be drawnupon by the beneficiary.upon by the beneficiary.

Common TypesCommon Types of Letters of Creditof Letters of Credit

A definite undertaking issued by the bank A definite undertaking issued by the bank of applicant to pay the beneficiary at of applicant to pay the beneficiary at sight or at maturity.sight or at maturity.

A letter of credit is a bank’s undertaking A letter of credit is a bank’s undertaking to pay the beneficiary even if the to pay the beneficiary even if the applicant cannot do so.applicant cannot do so.

It is a primary payment mechanism.It is a primary payment mechanism. Failure to meet all terms and conditions Failure to meet all terms and conditions

can result in the loss of the bank(s) can result in the loss of the bank(s) undertaking(s) to pay.undertaking(s) to pay.

Commercial Letter of CreditCommercial Letter of Credit

Commercial Letters of CreditCommercial Letters of Credit

Specifies documents the seller must Specifies documents the seller must produceproduce

Specifies amount of time seller has:Specifies amount of time seller has: to actto act to present proof of actionsto present proof of actions

Protects both partiesProtects both parties

The letter of credit is available for payment The letter of credit is available for payment after examination of conforming after examination of conforming documents.documents.

Sight Letter of CreditSight Letter of Credit

Letter of credit with drafts that are payable Letter of credit with drafts that are payable at a fixed or determinable future date, at a fixed or determinable future date, normally within 180 days. This type of normally within 180 days. This type of letter of credit generates bankers’ letter of credit generates bankers’ acceptances. Financing costs of the acceptances. Financing costs of the transaction can be borne by the buyer or transaction can be borne by the buyer or seller. seller.

Time Letter of CreditTime Letter of Credit

When a Time Letter of Credit is used you may have When a Time Letter of Credit is used you may have a desire to get paid sooner than the maturity. This a desire to get paid sooner than the maturity. This can be done through the use of a Discount Letter of can be done through the use of a Discount Letter of Credit. You get paid at document presentment and Credit. You get paid at document presentment and the Bank waits the term.the Bank waits the term.

Sales Advantage:Sales Advantage: Now you can provide your buyer with short term Now you can provide your buyer with short term

financing solution.financing solution. Costs are often paid for by the buyer.Costs are often paid for by the buyer.

Discount Letter of CreditDiscount Letter of Credit

Pricing Indication for Confirmation, Acceptance & Discount of a $400,000180 day time L/C from ABC Bank International

EXPORT L/C FEES:

Advising Commission: $75.00Confirmation Commission: $3,000.00

Payment Commission: $500.00EXIMBank Pre-Presentation Insurance: $1,120.00

EXIMBank IBCL Insurance: $6,280.00Acceptance Commission: $3,000.00

$13,975.00B/A Discount Charge: $9,200.00

Total/Percent of Total: $23,175.00 5.79%

RATES:

L/C Amount: $400,000.00Tenor (in Days): 180

Quarters Outstanding: 2 (Quarters from issuance to expiration)B/A Discount Rate: 4.6000% (Today's B/A or LIBOR financing rate)

Sample Discount Letter of Credit Pricing

Most import letters of credit fall into this Most import letters of credit fall into this category. Undertaking by issuing bank to category. Undertaking by issuing bank to pay the seller. Exporter looks at the credit pay the seller. Exporter looks at the credit standing of the issuing bank and assumes standing of the issuing bank and assumes the political risk of the issuing bank.the political risk of the issuing bank.

Advised Irrevocable Letter of Advised Irrevocable Letter of CreditCredit

The confirming bank (usually the seller’s The confirming bank (usually the seller’s bank) adds its undertaking to the credit. bank) adds its undertaking to the credit. Confirmation costs are added and are often Confirmation costs are added and are often borne by the buyer. The exporter looks at borne by the buyer. The exporter looks at the credit standing of the confirming bank the credit standing of the confirming bank which assumes the commercial and political which assumes the commercial and political risk of the issuing bank.risk of the issuing bank.

Confirmed Irrevocable Letter of Confirmed Irrevocable Letter of CreditCredit

Standby Letter of CreditStandby Letter of Credit

Standby letter of credit – a documentary Standby letter of credit – a documentary letter of credit that is used to undertake to letter of credit that is used to undertake to pay if the applicant does not meet or fails pay if the applicant does not meet or fails to perform an obligation. It is generally not to perform an obligation. It is generally not a primary payment mechanism and is not a primary payment mechanism and is not intended to be drawn upon.intended to be drawn upon.

Uses:Uses:

- Bid Bonds- Bid Bonds - Performance Bonds- Performance Bonds

- Advance payment - Advance payment - Assuring payment- Assuring payment

- Loan warranty- Loan warranty

Advance Payment Advance Payment StandbyStandby

Standby Letters of Credit can by used when a Standby Letters of Credit can by used when a buyer is required to make an up-front payment buyer is required to make an up-front payment to the supplier, in advance of the actual supply to the supplier, in advance of the actual supply of goods or construction of a facility. In such of goods or construction of a facility. In such circumstances, the buyer may require a circumstances, the buyer may require a separate assurance, issued by the supplier’s separate assurance, issued by the supplier’s bank, that the advance payment will be bank, that the advance payment will be refunded in the event that the supplier fails to refunded in the event that the supplier fails to perform under the contract.perform under the contract.

Invoice Support StandbyInvoice Support Standby

Standby letters of credit can be issued in Standby letters of credit can be issued in conjunction with open account payment conjunction with open account payment terms. A supplier may be willing to ship on terms. A supplier may be willing to ship on open account terms, but only if it has open account terms, but only if it has received a separate assurance, from a bank, received a separate assurance, from a bank, that the buyer will pay those invoices. The that the buyer will pay those invoices. The Invoice Support Standby serves that Invoice Support Standby serves that purpose, and provides the buyer with a purpose, and provides the buyer with a bank undertaking that the invoices will be bank undertaking that the invoices will be promptly paid.promptly paid.

GuaranteesGuarantees

Federal Reserve Regulations prevent Federal Reserve Regulations prevent nationally chartered banks in the United nationally chartered banks in the United States from issuing Guarantees. That is the States from issuing Guarantees. That is the reason why US banks generally issue reason why US banks generally issue Standby Letters of Credit in lieu of Standby Letters of Credit in lieu of Guarantees. Guarantees.

Counter Standby Counter Standby GuaranteesGuarantees

Some international contracts require that Some international contracts require that a Standby Letter of Credit or Guarantee be a Standby Letter of Credit or Guarantee be issued in a specific foreign country and issued in a specific foreign country and under the laws, or in the language of that under the laws, or in the language of that foreign country. When we cannot issue foreign country. When we cannot issue our own Standby or Guarantee under the our own Standby or Guarantee under the required terms, our bank will instead issue required terms, our bank will instead issue a Counter Standby to a correspondent a Counter Standby to a correspondent bank in the foreign country. The bank in the foreign country. The correspondent bank will then use M&T’s correspondent bank will then use M&T’s standby guarantee as security for its standby guarantee as security for its issuance of the local Guarantee in the issuance of the local Guarantee in the required format. required format.

Protection Offered byProtection Offered byLetters of CreditLetters of Credit

Substitutes credit-worthiness of bank for Substitutes credit-worthiness of bank for that of buyerthat of buyer

Provides third party to validate that Provides third party to validate that stipulated terms have been metstipulated terms have been met

Assures seller of payment when he Assures seller of payment when he satisfies terms of letter of creditsatisfies terms of letter of credit

Assures buyer payment will be made only Assures buyer payment will be made only if terms of letter of credit are met.if terms of letter of credit are met.

Limitations of Letters of Limitations of Letters of CreditCredit

Banks deal in documents Banks deal in documents onlyonly

Detailed merchandise description Detailed merchandise description does not prevent frauddoes not prevent fraud

Documents, Documents, Documents, Documents, Documents !!Documents !!

Letter of Credit DiscrepanciesLetter of Credit Discrepancies

A discrepancy occurs when documents A discrepancy occurs when documents presented do not conform with the terms and presented do not conform with the terms and conditions of the letter of credit.conditions of the letter of credit.

Common DiscrepanciesCommon Discrepancies- Late Shipment- Late Shipment- Incorrect Consignment of Goods- Incorrect Consignment of Goods- Late Presentation of Documents- Late Presentation of Documents- Incorrect Description of Goods- Incorrect Description of Goods

Discrepant Discrepant Documents!Documents! What’s an ExporterWhat’s an Exporter to do??to do??

Ask Negotiating Bank to return Ask Negotiating Bank to return documents for corrections and resubmit documents for corrections and resubmit them.them.

Ask Negotiating Bank to contact Issuing Ask Negotiating Bank to contact Issuing Bank for permission to pay or accept Bank for permission to pay or accept documents with discrepancies.documents with discrepancies.

Instruct the Negotiating Bank to forward Instruct the Negotiating Bank to forward the documents on approval.the documents on approval.

The Rules Governing Letters of The Rules Governing Letters of CreditCredit

U.C.P. - The International Chamber of U.C.P. - The International Chamber of Commerce (I.C.C.) Publication, “Uniform Commerce (I.C.C.) Publication, “Uniform Customs and Practice for Documentary Customs and Practice for Documentary Credits” Comprehensive record of customs Credits” Comprehensive record of customs and usage.and usage.

ISP 98 – The International Standby Practices ISP 98 – The International Standby Practices reflects generally accepted practice, custom, reflects generally accepted practice, custom, and usage of standby letters of credit and usage of standby letters of credit (including performance, financial, and direct (including performance, financial, and direct pay)pay)

The M&T AdvantageThe M&T Advantage

Correspondent banking relationship with Correspondent banking relationship with over 2000 banks in over 3000 locations over 2000 banks in over 3000 locations worldwide.worldwide.

Web-based letter of credit generation Web-based letter of credit generation and reporting system for our customers – and reporting system for our customers – free of charge.free of charge.

M&T Banks acts as the international for M&T Banks acts as the international for over 80 domestic banks.over 80 domestic banks.

Provides discounting and financing of Provides discounting and financing of Chinese letters of credit.Chinese letters of credit.

QUESTIONS ?QUESTIONS ?

Contact Information:Contact Information:John VilardoJohn VilardoVice PresidentVice President

International Trade FinanceInternational Trade FinanceOne Fountain Plaza – 12One Fountain Plaza – 12thth Floor FloorBuffalo, New York 14203-1495Buffalo, New York 14203-1495

(716) 848-7344(716) 848-7344jvilardo@mandtbank.com