Forfaiting:
THE FACTS
WHAT S NEWS Issue 2 May 1995
Although by no means a new product, forfaiting is new to
the Rabobank. While more and more financial centres in
Europe are now offering the product, London remains the
world's premier forfaiting centre. At the beginning of the
year, London branch introduced the product and is cur-
rently the only Rabobank office to provide it. Specialist
David Roche explains what it is, what its advantages are
and why this product is becoming increasingly important
in the structuring of export credits worldwide.
David Roche
Can you teil us briefly what forfaiting is?
'In its simplest form it is the discounting
of bank-guaranteed overseas debt obli-
gations. In other words, a forfaiter pur-
chases a guaranteed debt owed to an ex
porten The concept was originally developed
after the Second World War to help fi-
nance West German exports to the Eastern
bloc countries. Later, with the dramatic
expansion of capital goods exports to the
developing world, exporters found that
many of their buyers required credit which
could not easily be financed from govern-
ment-backed or more traditional forms of
trade financing. It has since developed into
an increasingly attractive alternate method
of trade finance which companies cannot
ignore when considering a credit package
for a potential buyer.'
FORFAITING TERMS
Aval The purest form of guaran-
tee.and is both unconditional and
irrevocable and by virtue of the
fact that it is written directly onto
the face of the Bill or Note, is-
inseperable from it.
Forfait The surrender of rights and
the surrender of right of recourse.
Forfaiting Purchasing without
recourse to any previous holder of
debt instruments due to mature
in the future and arising from the
provision of goods or services.
Without recourse The endorse-
ment of the debt instrument with
this phrase means all risks and re-
sponsibilities of collecting the
debt are transferred to the for
faiter.
Is that why the forfaiting business
has grown
'I think it's probably due to increases in
risks to which exporters are exposed and
the lack of adequate alternative sources of
finance dealing with those risks. I'd say
forfaiting scores in this regard as the for
faiter accepts the risks attached to any
debt he purchases.'
How does the debt purchase work?
'Forfaiting is actually a very flexible tooi
and essentially the transaction is straight-
forward. Normally, the following pre-
requisites would apply: an exporter will
have agreed to extend credit to his cus-
tomer for a period between six months
and ten years (the latter is the longest
period usually seen in a forfait market).
He will also have agreed to stage pay-
ments of his receivables so that the Bills of
Exchange or Promissory Notes or other
instruments evidencing the debt will
typically be a series.
In addition, unless the importer is a
government agency or major multina
tional, repayment of the debts will be
avalised or guaranteed unconditionally
and irrevocably by a bank or state insti-
tution acceptable to the forfaiter. There
are numerous advantages for the exporter,
ranging from the fact that he receives pay-
ment immediately on delivery of the
goods, to the removal of currency and
interest-rate risks.'
Does this not increase the risk profile of
these transactions for the forfaiter?
'There are certainly risks involved. The
forfaiter bears all the funding and interest-
rate risks but they exist during the com-
mitment period only - the period from
confirmation of purchase up to the date of
delivery of valid documentation, ie. the
Bill of Exchange or Promissory Note. This
risk can be removed by quoting a margin
over LIBOR at the time of drawing, thus
placing the interest-rate exposure back
with the exporter. And you can minimize
other risks by using treasury products and
derivatives. There are also other factors to
be taken into account. You must know
national laws and regulations governing
the validity of instruments. You are
responsible for checking the guarantor's
credit worthiness. You cannot accelerate
payment of Bills or Notes which have
yet to mature following a default and
you have no recourse in the event of
default.'
So why is forfaiting so attractive?
'Higher margins, for one. Plus, as the title
to assets purchased are easily transferable
with simple documentation, trading them
in the secondary market is possible. Thus,
active forfaiters with established links to
the investor base can service the trade
finance requirements of their customers,
including the down-payment elements of
credit insured transactions, without filling
up country lines.'
David Roche has written a detailed paper on
forfaiting. Anyone who would like a copy
should call or fax him at London Branch,
telephone: +44 171 280 300;
telefax: +44 171 283 4446.
