In trade finance, there are a few major payment used of which one is called Open account.

Basically, when settlement takes place on open account, it means that the exporter will ship his products to the importer before any payment has been received. The exporter then presents the required documentation to the [...]]]>

Trade Finance Payment Tool-OPEN Account

In trade finance, there are a few major payment used of which one is called Open account.

Basically, when settlement takes place on open account, it means that the exporter will ship his products to the importer before any payment has been received. The exporter then presents the required documentation to the importer, rather than involving a commercial bank in the process. The importer pays the exporter when the documentation has been received. In US, Europe and even China, Open account is a widely used trade finance technique. However, due to the recent financial crisis many have now opt for traditional methods of trade finance like the letter of credit. By doing so, there will be less risk of counterparty defaults.

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Basel II aims to produce greater consistency in the way banks and their regulars approach cross-border risk management. One of its main goals [...]]]> Basel II is a revised version of the 1988 Capital Accord, written by the Basel Committee on Banking Supervision(BCBS). Its formal title is the International Convergence of Capital Measurement and Capital Standards:A Revised Framework.

Basel II aims to produce greater consistency in the way banks and their regulars approach cross-border risk management. One of its main goals is to align regulatory capital with risk management, which was deemed one of the failings of the original Accord.

Basel II is based upon three “pillars”

• Pillar I:Minimum Capital Requirements. Improvement and standardization of the calculation of three major risks which banks face:credit risk, operational risk and market risk
• Pillar II:Supervisiory Review Process. Provision of a framework for regulators when dealing with all other forms of risk, which the Accord refers to as “residual risk”
• Pillar III:Market Discipline. Increase in disclosure requirements for banks to allow better market visibility and more informed pricing from counterparties.

This articles look at what’s are cash pooling- its advantages and it basic mechanism.

Cash pooling is simply a banking structure where balances on a [...]]]> As group treasurer, you need to enable your cash in all your various banks to generate interest. Very often, you are being approach by banker(s) to do cash pooling or concentration of balances.

This articles look at what’s are cash pooling- its advantages and it basic mechanism.

Cash pooling is simply a banking structure where balances on a number of separate bank accounts are treated COLLECTIVELY for interest purposes. By pooling these accounts together or this concentration of bank balances, it optimizes the amount of interest companies both pay and receive as the bank who ask you to pool will consider the total “pooled” balance when computing the interest.

So, the main benefit of cash pooling is to improve liqudity management as total cash balances can then be managed centrally rather than locally.

Next, there are two ways of handling/conducting cash pooling:

- by the “physical” basis whereby funds are actually transferred from participant accounts into a master(or header) account at the end of each day or each week or each month.

-by the “notional” basis  where no physical movement of funds takes place. Here, the bank offsets the debit and credit balances of participating accounts to compute the pool’s net interest position. Certain countries like China do not permit the notional pooling basis .

However, in the event of an UNSECURED commercial loan, we will often then see a Negative Pledge Covenant letter being issued. So what is this negative pledge clause letter and what are its purposes?

Firstly, a negative pledge is a provision in a contract which prohibits a party [...]]]> Bankers when offering banking facilities would prefer that the company provide certain security/collaterized  assets

However, in the event of an UNSECURED commercial loan, we will often then see a Negative Pledge Covenant letter being issued. So what is this negative pledge clause letter and what are its purposes?

Firstly, a negative pledge is a provision in a contract which prohibits a party to the contract from creating any security interests over certain property specified in the provision.

As for the purpose, it is to ensure that a borrower, having taken out an unsecured loan, cannot subsequently take out another loan with a different lender, securing the subsequent loan on the specified assets. If the borrower could do this, the original lender would be disadvantaged because the subsequent lender would have first call on the assets in an event of default. As it is an attempt to ensure no unequal/unfair treatments to bankers, it is also referred to as a “covenant of equal coverage”.

Take for example in the case of a bond, a negative pledge clause is just another way for bondholders to protect their investment. By including a negative pledge clause in a bond indenture, the bondholders of the current bond issue prevent the company from issuing any debt in the future which would jeopardize their current priority claim on the company’s assets. Including a negative pledge clause in a bond indenture increases the safety of the bond issue from the investors’ perspective, and therefore often allows the bond issuer to borrow funds at a slightly lower interest rate.

Appended below is a typical Letter Of Negative Pledge:

To: ABC Bank
Date:
Dear Sirs
Re: Banking Facilities

In consideration of your agreeing to grant, continue and/or further extend credit facilities and other financial accommodation to us or at our request upon and subject to such terms and conditions as you shall from time to time think fit, we hereby irrevocably and unconditionally covenant and undertake with you as follows:

(1.0) Without prejudice to any other undertakings on our part, we shall not, and shall procure that none of our subsidiaries shall, without your prior written consent:
(a) create or attempt to create or permit to subsist any mortgage, debenture, charge, pledge, lien or other incumbrance upon, or permit any lien or other encumbrance( save a lien arising by operation of law in the ordinary course of trading) to arise on or affect, the whole or any part of our or their respective undertaking, property, assets and rights other than pledges created over goods and/or services acquired pursuant to documentary credits opened in the ordinary course of trading for the purpose of financing the acquisition or provision of goods and services; or
(b) part with, transfer, sell, or dispose of or attempt or agree to part with, transfer, sell or dispose of the whole or any part of our or their respective undertaking, property, assets and rights except by way of sale at full value in the usual and ordinary course of trading as now conducted and for the purpose of carrying on the relevant business;

(c) grant, issue or extend any guarantee or indemnity or enter into any other form of contractual undertaking or arrangement of similar effect in respect of any indebtedness or obligations, actual or contingent, of any other person whatsoever except in the usual and ordinary course of trading as now conducted by us and our subsidiaries and for the purpose of the carrying on by us or the relevant subsidiary of our or its business.

(2.0) The undertakings set out above shall not be deemed breached by reason only of the existence of any mortgage, debenture, charge, pledge, lien or other encumbrances or guarantee or indemnity which has been created or which subsists or has arisen prior to the date hereof, provided that any further or additional encumbrance over or affecting the relevant asset, or increase in the amount secured by or other variation of the relevant encumbrance or guarantee or indemnity of similar effect, shall constitute such breach.

(3.0) We further authorize you, in your absolute discretion at any time and from time to time to notify any other creditors of our company and/or any of its subsidiaries of the terms of the undertakings set out above in the event that you receive notice of proposals which if implemented would or might be in breach of such undertakings.

Yours faithfully,
Company ZUY

…………………
(Directors)

Extracted from www.bankinginfo.com.my are interesting salient points noted on this topic on guarantor:

(a) What really is a guarantee:

Hypothecation simply refers to the pledging of assets as security for the funds borrowed.

A typical example is the bank lending working capital which involves a hypothecation of INVENTORIES and BOOK DEBTS.  In this case, the current assets still remain with the borrower but in case of [...]]]> In debt financing, we often hear the term “hypothecation of xx”.

Hypothecation simply refers to the pledging of assets as security for the funds borrowed.

A typical example is the bank lending working capital which involves a hypothecation of INVENTORIES and BOOK DEBTS.  In this case, the current assets still remain with the borrower but in case of default, the bank may seek recovery of the loan by instituting a lawsuit to seize the hypothecated assets which can later be sold.

When [...]]]> We often hear terms like the assets of the company being charged to the lender, this article on glossary of debt shall briefly describe some of the distinguished features of charges and its ranking. Also, we see how a high or low debt to equity ratio is so important in the event of liquidation.

When a company asks a bank for a loan, the banker will seek certain collaterals or security from the company like land, building, plants and machinery, current assets, etc. The assets become collateral or security to the loan made by the bank.

Charges therefore represent security that a bank has in making a loan.

Charges can be:

• A fixed charge where it refers to a specific asset e.g. building or plant. In the event of default, the lender can take control of the asset and sell it to cover the value of the loan.

and

• a floating charge refers to all the assets of a business over which there is no fixed charge.

In the event that the company who took the loan is unable to pay the bank, than the ‘RANKING” which refers to the orders in which the holders(lenders) of a company’s securities are paid out in the event of liquidation.

The order is as follows:

1. preferred creditors ( Inland Revenue, Statutory Boards , wages and salaries up a certain limit )
2. holders of fixed charges over the assets ( ie mortgagees)
3. holders of floating charges over the assets ( ie debenture holders)
4. senior creditors like the trade creditors and unsecured debt
5. subordinated creditors such as holders of unsecured loan stock
6. holders of preference shares
7. ordinary shareholders.

To the lender the debt to equity ratio plays an equally important part besides the earlier mentioned asset and interest cover.

The debt to equity ratio is a good indicator to see how much more equity/ordinary shareholders can absorb the debt.

A low debt to equity ratio means that there are plenty of equity participants at the bank of the above quece to absorb any risks and therefore gives banks comfort whilst

A high debt to equity ratio means that the bank’s loan will be more exposed in the event of liquidation