THE ART OF FORFAITING
FORFAITING
THE LAST TEN YEARS
RICHARD WILLSHER looks back at the events and challenges of the past decade in forfaiting.
T
he International Forfaiting Association’s (IFA’s)
Rome conference from 2nd to 4th September
coincides with the Association’s 10th anniversary.
It also coincides with the current financial crisis. But the
history of forfaiting over the past decade has been
one of encountering and overcoming one predicament
after another.
“Every crisis has had an impact on the market,” says
Waltraud Raderschall of Commerzbank AG. “For example,
major events or reschedulings led to definite changes in
documentary requirements for deals originated in the
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area concerned. They may also be the reason why market
participants sometimes would look twice at documentation
evidencing the claims they intend to purchase on a discount
without recourse basis.”
These are just two examples Raderschall refers to
from a forfaiting career that spans more than 20 years.
As she prepares to step down from the IFA’s Board at
this year’s conference after a six-year stint, she notes that
the result of dealing with each period of turbulence in
the market has been one of learning and adapting to
new aspects of the business.
The insidious influence of injunctions preventing payment being made under LCs
has had the effect of weakening the strength and integrity of the credit instrument,
as a number of forfaiters are currently finding to their cost.
It became clear, however, with the arrival of new market
participants who did not necessarily appreciate the way
business had traditionally been carried out, that the forfaiting
community had to decide whether it would become externally
regulated or whether it would do the job itself. This led to the
secondary market IFA Guidelines being drawn up. And though,
adds Ms Raderschall, they are not used as they were originally
intended, they have become a valuable point of reference.
IFA’s influence
The IFA itself has achieved much of what it was established
to do ten years ago. Among other things, Article 2 of its
4th August 1999 Statute lists the aims of the Association as
being to, “promote good relations amongst its members and
to provide a basis for joint examination and discussion of
questions relating to the forfaiting business; to issue rules
and make recommendations regarding the conduct of such
business; to provide services and assistance to participants in
the forfaiting business”. All of these things it continues to do.
Market participants note that over the years the forfaiting
market has seen a variety of instruments become popular and
then lose their appeal. A number of standard instruments,
including supplier credit structures, discounted letters of
credit and promissory notes, book receivables, promissory
note facilities and bundling transactions have came into vogue
– and subsequently waned in popularity. But in the current
crisis, there has been a definite withdrawal from more creative
structuring and a return to letters of credit (LCs), once again.
Some see this as a negative development.
Sal Chiappinelli, CEO of SFC Swiss Forfaiting, based in
Zurich, laments this change in the market place. As he also
prepares to bring to an end his six-year IFA Board term,
he says that the move has enabled large banks to dominate
because they can act as issuers or confirmers or advisors
of credits. Their fees are assured and there is less scope for
smaller, more agile and, perhaps, more creative players to
perform a role in the market.
Meanwhile, he adds that the insidious influence of
injunctions preventing payment being made under LCs
has had the effect of weakening the strength and integrity
of the credit instrument, as a number of forfaiters are
currently finding to their cost. In this regard, he supports the
recent co-operation between the IFA and the International
Chamber of Commerce, which may lead to the establishment
of rules for conducting forfaiting including, hopefully,
receivables arising from deferred payment LCs.
Global reach
Geographically, forfaiting has continued to spread and
embrace new areas of the world. There has been a
continuous stream of new risk countries, additional sources
of transactions and budding local forfaiting marketplaces.
It has, for example, been ten years since Charles Brough,
who heads forfaiting and trade finance in Asia/Pacific for
UniCredit Markets and Investment Banking, moved to
Singapore to start a forfaiting desk. Since then, Singapore
has steadily grown into an active marketplace in its own
right, spanning the Asian theatre.
Brough notes that in his early days in South-East Asia,
half of the business he saw derived from financing Japanese
exports to neighbouring countries. South Korea became an
active market but then waned, as did Japan. But Chinese
exports then became the principle driver for the market
from about 2002 onwards.
He confirms that, for the time being, new business in
the region, as in other parts of the world, almost exclusively
takes the form of deferred-payment LCs. And he and others
watch the current developments in both Kazakhstan and the
Middle East with some concern as the consequences of the
most recent crisis buffet the market.
But some things have remained constant throughout
the past ten years. According to Waltraud Raderschall, the
market remains small, but by no means exclusive. And it is
still the case, in her view, that market participants are willing
to help each other with education, in sharing information
and getting through difficult times.
The IFA’s education seminars and annual conferences
have extended this trend by enabling networking and new
contacts to be made. This bodes well for the future and, as
happened over the past ten years, the market will continue to
adapt to events on the world stage and learn to do business
in the changing environments they bring about. ‰
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