International Trade FinanceMGMT 3008

Export Development CanadaFinancing & Insurance

OECD The Organization for Economic Co-operation and Development.It is an international organization for 30 member countries.These countries include only developed countries where these members usually have high-income economies.Originally formed in 1948 as the Organization for European Economic Co-operation to help the reconstruction of Europe after WW1.Its head office is in Paris, France.It shares a consensus that no single country will top another country by offering more EDC services.

EDCFormed from the Export Development Act of 1969.It deals with bonds, guarantees and performance bonds.A bond is an instrument by which a guarantor will guarantee the obligations of the Exporter in favour of the Importer.In this instance, the guarantee is an agreement that the exporter will pay a sum of money in case the exporter defaults on its promises.

EDCPerformance bonds on the other hand, have a 5% 10% of the contract value posted (for performances),In guarantee, this amount is set for the possibility of a default.The following is required to benefit from EDC Financing:A local content requirement: where the Canadian business must have 50% CDN content.Benefits Report: Exporter must complete a CDN benefits report; giving the ratios of CDN content to foreign content.

EDCImport finance & Export credit insurance:Iff the Exporter qualifies for EDC coverage, then the Importer is given a credit by the Exporter after 90 120 days.This credit is then used to purchase CDN goods.This is an example of reverse financing, whereby the Exporter is financing the Importer on behalf of EDC.

EDCAN INSIDE LOOKEDC example.Importer gives a cheque for $50,00010,000 of this is held back (CND legislation)So, 40,000 is given(5000) in 30 days + (5000) in 60 days25,000 X 0.01 X (30/10) = 75025,000 X 0.01 X (60/10) = 1500So EDC takes 2,250 and the Exporter is left with 47,750.EDC insures and now finances.

EDCInsuranceEDC covers up to 90% of invoice value.The insurer provides a list of risks covered.Every country has its own premium payable for insurance.

There are two specific areas looked at:Commercial riskPolitical risk

EDCInsuranceCommercial risk covers:Buyer insolvency (bankrupt)Default by buyerRefusal to accept or take delivery of goodsBuyer terminates contract on his or her own without notice to the exporter.Political risk covers:Blocked fundsBreakout of warCancellation of import permits by foreign governmentsExpropriationRevolutionsCivil commotion

EDCInsurance14 insurance categories (the buffet of insurance)Short term insurance 180 days or less.Medium insurance up to 5 years.Long term insurance over 5 years.Foreign investment insurance protects CDN investments in foreign countries from Political risks.Global comprehensive insurance usually done on a shipment by shipment basis.Global Political insurance covers all countries on the list.Selective Political insurance covers sales to specific markets.

EDCInsuranceDocumentary credit insurance covers defaults on LCs or Stand Bys. Coverage is not to be more than 365 days and was originally designed to cover agricultural products.Specific transaction insurance covers risks for individual transactions for goods and services from the time the goods are shipped until the time payment is received.Loan pre-disbursements coverage for production risk.Sub-supplier insurance covers CDN companies acting as sub-contractors to the CDN exporter.

EDCInsuranceEquipment insurance coverage for equipment used in foreign projects.Bid security insurance to provide insurance to exporter in case the importer walks out of a bid after acceptance.Surety bond insurance provides insurance to a surety company that, in turn, provides a performance bond to a foreign buyer.

EDCFinancing ServicesGlobal comprehensive insurance financing A CDN company will take its account receivables to its commercial bank and will receive cash up front for their receivables.EDC provides export financing for up to 85% of contract value; either on a floating rate or fixed rate.Lines of credit for either short term, medium term, or long term. Credit is not directly provided to the exporter. this is so the importer can purchase. EDC finances the importer indirectly; reverse financing.

EDCFinancing

EDC finances the following:ImporterExporterServiceGovernment projectsPrivate projectsConstruction buildingsEquipmentTransportation materialsTools and equipment for specific industries (ex.. oil, gas equipment)Mining projectsTelecommunications equipmentManufacturing productionAnything else they deem fit by approval

EDC3 types of financing programs

Direct loans negotiated with the foreign buyer to support the purchase of CDN goods.Mixed Credit such as forfeiting and factoring for short term long term.Note purchase program EDC purchases promissory motes that have maturities of 1 5 years.Lines of credit negotiated with foreign banks, specifically to purchase CDN capital goods or products related to the oil industry.

EX.. MOSCOW May 30, 2007 Export Development Canada (EDC) and JSC VTB Bank (VTB) of Russia signed an agreement increasing an existing US 50 million line of credit established in December, 2004 to USD 150 million. The increase is a result of high usage of the original facility and ongoing demand. This line of credit will continue to finance Canadian exports of goods and services to Russia