LOG323: Machinery Export (‘seller’) is to Manufacture and sell 3 Machines to an Overseas Buyer: Trade Finance Assignment, SUSS, Singapore

Assignment: Machinery Export And Machinery Important

Machinery Export (‘seller’) is to manufacture and sell 3 machines to an overseas buyer, Machinery Importa (‘buyer’) in an emerging market country, totaling USD1.563m. Neither has traded with each other before and limited information is available on the credit status of the buyer and their country, or the reliability of the seller The values and schedule delivery (from date of contract) are as follows:

Machine 1 USD 258,000 Delivery 3 months Machine 2 USD 552,000 Delivery 5 months Machine 3 USD 753,000 Delivery 9 months The contract of carriage and insurance will be arranged by the seller. Machines will be deemed delivered once they are loaded onboard the sea vessel in the country of the shipment Transit time of the goods from the seller to the buyer is 20 days.

The delivery of the machines is time-critical for the buyer Whilst the machines are based on a standard design, they are to be specifically adapted to the requirements of the buyer. To assist in the funding of manufacture, the seller requires the buyer to pay a deposit of USD390,750 on contract signature, representing 25% of the full contract value It has been agreed that an advance payment guarantee will be issued by the bank of the seller in favor of the buyer.

A draft of the guarantee wording required by the buyer is provided in this assignment Credit terms of 270 days after the date of shipment (of each machine) are to be provided to the buyer by the seller. However, the seller needs to receive the sales proceeds as soon as possible after the shipment of each machine, or obtain appropriate funding, otherwise, they will face liquidity pressure Whilst a number of the commercial terms have been agreed upon, the method of payment is still to be determined The bank of the seller has limited appetite to provide credit facilities; any request to the bank must demonstrate that credit risk exposure is minimized

Draft Terms; Advance Payment Guarantee Issuer: Guarantor Bank To Machinery Importa Advance Payment Guarantee

In furtherance of contract number 321 between the applicant, Machinery Exporta (seller), and the beneficiary, Machinery Importa (buyer), we Guarantor Bank hereby irrevocably undertake to pay the Beneficiary any amount up to the Guarantee value of USD 390,750 upon presentation of the Beneficiary’s written demand This guarantee is assignable, transferable and shall be governed by the laws of the beneficiary’s country and subject to the exclusive jurisdiction of their courts This guarantee shall remain open for the receipt of claims until returned to Guarantor Bank by the Beneficiary for the express purpose of cancellation

Requirements

1. List and describe the risks of this transaction to the seller and to the buyer

2. Describe the risks to the seller and to their bank of issuing a demand guarantee and using the draft advance payment guarantee wording required by the buyer

3. Propose changes to the draft terms of the guarantee, describing why these changes are required and what risks they will mitigate for the seller and their bank

4. Propose a method of payment that will mitigate the risks identified in question 1 for the seller and the buyer and facilitate the acceleration of proceeds or post-shipment funding for the seller in respect of the credit period allowed to the buyer. Provide a description of the key terms and conditions and operational structure of the proposed solution. Explain the reasons for selecting the solution and why this is likely to be acceptable to both commercial parties. What possible alternatives were considered and why were these not chosen as the preferred solution?

5. Propose how the buyer can mitigate risk, or claim compensation, should any of the machines not function correctly during the first 12 months. Describe the key terms which are likely to be acceptable to both commercial parties and explain the operation of the proposed solution

6. Based upon your proposal in questions 3, 4, and 5 calculate the required credit facility amount that will need to be recorded, if any, by the bank of the seller and the bank of the buyer. Please show your calculations for each (6 marks) 7. Construct the trade cycle timeline of the proposed solution incorporating the proposals made in questions 3, 4, and 5

Assumptions

•  One contract is to be signed covering all 3 machines
•  The proposed solution in Q4 should incorporate the 25% deposit requirement of the seller
• Deposit monies for all 3 machines are paid 10 days after the contract signature
• The date of loading goods on board the vessel can be taken as the date of shipment
• Subject to receipt of the full deposit of USD390,750 prior to manufacturing, and receipt of proceeds shortly after shipment of each machine, the seller will have sufficient resources to fulfill the contract

The timeline commences on contract signature (Day 0). Each month contains 30 days. A separate timeline for each machine will be acceptable

When constructing your timeline solution assumptions may be made on the time flow of documents, goods, and money which are not explicitly referred to in the assignment. These must be assessed as reasonable and practical

Assignment Guidance Notes

It is very important when answering the assignment questions that you address all of the points. The maximum number of marks available for each question is indicated in brackets on the assignment paper.

To assist you in the planning and construction of your answers, the key areas of assessment and their weighting to the total distribution of marks are shown below:

Assessment of the needs of all parties 10% Identification of risks 20% Effective mitigation of risks 20% The effective use and structure of payment mechanisms 20% Formulation of the structured financing solution 20% Presentation (clear, well-structured, use of diagrams and trade cycle timelines) 10% 100% Assessment of the needs of all parties The needs of each of the parties should be considered and the implications, benefits, and disadvantages to each party expressed in respect of the solution.

There is no useful purpose in formulating a solution that is likely to be rejected by the importer, exporter, or financier. Identification of risks The risks need to be identified and clearly described.

If any of the identified risks are considered acceptable, an explanation should be provided of why. Effective mitigation of risks Where an identified risk needs to be mitigated, the reasoning behind the chosen risk mitigant solution and how this will reduce or remove the identified risk must be clearly described. Where the proposed risk mitigant has an impact on other parties this must be considered, and an explanation provided on the reasons why this is likely to be acceptable to all parties.

The effective use and structure of payment mechanisms The assignment answer must demonstrate a deep acquired knowledge of any trade product or payment instrument featured in the assignment and incorporated within the solution. This will be demonstrated by the identification of specific areas of risk in the presented trade product or payment mechanism to the exporter, importer, and financier and the reasoning used to recommend a change in its terms and conditions and/or the use of an alternative product. Formulation of the structured financing solution The chosen solution must be workable and address the issues and risks previously identified and accommodate any funding needs.

Whilst there may be more than one possible solution, the reasoning behind the selected solution must be explained. The alternate solutions should be summarised together with the reasons why each was not chosen i.e. why was the chosen solution better than the alternatives? The operational requirements of the solution should be described, ideally in table form showing the sequence of required actions and their risk-mitigating effects and the creation of funding appetite/availability.

Presentation The assignment should be well-structured, concise, clearly articulated with a mix of narrative and bullet points to emphasize key points, with the use of diagrams, tables, and trade cycle timelines to present the chosen solution. Your assignment should be around five thousand words in length, and you may also additionally include diagrams, trade cycle timelines, and tables.

You should not exceed the maximum upper word limit of 5,500 words (any remaining part of your assignment in excess of this will not be marked). If you wish to add additional information, this should be provided by way of an appendix.

Candidates will be assessed on the basis of the knowledge gained from The Mechanics of International Trade Finance distance learning course, the considered and correct application of their learnings to the assignment, and the lucidity, and conciseness of their answers.

Of particular importance is the explanation of the reasoning behind the restructuring of any trade product/payment mechanism and the formulation of the proposed solution, demonstrating the critical factors and dependencies that have been evaluated.

This should include a description of the benefits and implications of the solution, and the alternatives that were considered in reaching the decision, and why these were discarded. These explanations must be clearly articulated to demonstrate the breadth and depth of comprehensive understanding of the topic, practical application of the acquired knowledge, and the applied reasoning.

Where relevant, examples should be provided to reaffirm or demonstrate the argument and decision reached. It is not acceptable to lift and use the actual wording of the course material and marks will be deducted should this be evident. The candidate is required to demonstrate their acquisition and application of the knowledge by expressing this in their own words and in relation to the set assignment provided.