Feature

posted 1 Oct 2000 in Volume 4 Issue 2

FORFAITING MARKETS: Sobering up in Tyrol

The forfaiting flock landed in the Austrian Alps last month to attend that annual event known as the Annual Forfaiting Conference. As ever, worrying issues such as the dire state of the secondary market were not officially on the programme, although delegates certainly voiced their concerns to one another between the coffees and the schnapps. Rupert Sayer was there to witness what was however a successful conference and a watershed as far as legitimising the International Forfaiting Association.

When I heard that the 27th annual international forfaiting conference was being held in Austria’s Tyrol region, I had images of flying down the slopes, a drunken haze of après ski, leisurely pottering around the town in my moon boots throwing snowballs at passing dogs and infants. Then of course I realised that the first snows would be a good two months away. And when I got to the Interalpen Hotel Tyrol in Telfs-Buchen near Seefeld – the venue for the event – I realised that the town was a good day’s walk away (or maybe about an hour) down a winding and picturesque mountain road.

And all for good reason, I was led to believe by some of the delegates who attended. This year of all years, delegates were to be made to work harder for the privilege of an invitation. There was to be no sneaking off to the Weinstuben while others were working. But more of this later.

The mountainside setting for this year’s event was stunning. The organisation, by RZB and AWT/Bank Austria Creditanstalt, was excellent. But the mood among forfaiters was pretty low – the market being as it is at the moment. What the conference did do however was to lift those who wanted to be lifted and instil a bit of confidence and hope that has been somewhat lacking recently.

Come to Croatia!

The conference opened with the traditional greeting to those delegates who had got there on time. At this point I was still at Munich Airport with a few of those who hadn’t got there on time. Then, the former deputy prime minister of Croatia, Mladen Vedris, addressed the gathered on ‘Visions on the economic development of Croatia’. Here apparently, Mr Vedris told everyone what a great place Croatia is – and I can agree with him as I flew down there later on myself and spent four days on business in Zagreb. It was indeed great.

The next section of the conference concerned an area that is at once the most exciting and also frightening trend in the market – that of the influence and potential of electronic commerce on trade finance transactions. Jack Killick from Cyclop International Ltd, Hernan Narea from LoanQuorum LLC and Richard Tull from LTP Trade Finance Ltd set out respectively their visions for the direction of this trend and how their products can help the forfaiting market.

Tull asked what people really wanted from the internet. Ultimately, for trade financiers, this boils down to more profit for themselves, their shareholders and customers – through better information flow, quicker and cheaper deal settlement, greater liquidity in the market, and the like. For forfaiting, there is no dedicated medium or resource for trade financiers to make the most out of the market, Tull argued. LTPTrade provides this resource, he claimed, with about 180 banks already signed up to the online trade paper dealing system and the first few transactions completed.

With State Street Bank as trustee, LTPTrade allows potential online buyers to view all documentation before they buy. Furthermore, there is a section with issuer information, country data, news, research and so on. “All the information you need to make a trading decision is here,” says Tull. The system can accommodate any medium such as auction, participation, commitment, fixed rate, etc, although Tull believed that the auction system made more sense and would more likely get the best price.

“The best thing is that it is free,” added Tull. LTPTrade charges a fixed commission to the seller – but even this is being waived at the moment. “This is the free lunch that everyone told you doesn’t exist,” he says.

Cyclop International offers WorldBankNet – a system linking banks worldwide for selling assets and syndicated loans. The service costs £4,000 (US$5,600) a year, although this is being reduced for a year to £3,000. Banks can restrict details on screen to a chosen few counterparties as it wishes. This is the system’s beauty claimed Killick: “its flexibility and transparency”. He added: “It is a perfect salesman, eliminating drudgery and introductions and introducing efficiency into selling assets, making prices really competitive.” WorldBankNet also has access to World Bank reports.

Membership to LoanQuorum.com is free. The fee for sellers is one basis point however. It is a website for the trading of secondary loans that include trade finance, but also such areas as term loans, real estate, distressed debt, currencies, and so on. Narea pointed to the fact that the loans and securities markets are increasingly converging and that there is more of a cross-fertilisation of investors between asset classes and geographies. So, taking a broader market spread means a “greater competitive edge for us,” believed Narea.

LoanQuorum is an exchange site rather than a posting site or auction site like the other two systems – the latter to which Narea refered as “dead space”. An exchange requires minimal data entry for sellers, for instance, said Narea. It shows both sides of the market in each asset, allows for real-time adjustments of pricing, enables traders to filter counterparties, provides anonymity until a LoanMatch ® is achieved. The site also provides ratings data, news and analysis.

With all three of these systems, despite differing and sometimes conflicting approaches, there is a unified acceptance that the internet is the best and most inevitable way forward for buying and selling debt. Whether the traditional forfaiter, with his coal-fired abacus, would agree is doubtful.

Balkan progress

Proceedings on the next day opened with an interesting speech by Wolfgang Petritsch, High Representative of the International Community for Bosnia and Herzegovina. Petritsch gave an account of a neutral player heavily involved in piecing together the various disjointed and bruised parts of a fledgling country and economy. He said: “The Balkan region is often seen as bad news that few bother with…. Mine is a frustrating job sometimes, with old guard politicians on all sides stuck in a 19th century timewarp.”

Although there have been difficulties moving Bosnia from war into peace, the country is changing, as are neighbours such as Croatia, and it does have a future in the new Europe, says Petritsch. “Phrases such as ‘European integration’ and ‘rule of law’ have started to have real meaning in Bosnia,” he says. For the first time, refugees are returning en masse – and to areas that witnessed atrocities – and Serbs are actually forcing Serbs out of some areas to let Bosnian Muslims resettle. “This would have been unthinkable last year,” says Petritsch.

But Bosnia needs to stand on its own feet soon, he says. Multilateral funds are decreasing by 25% each year and NATO is aiming to downsize too. One huge boost would be the overthrow on Milosevic in Serbia.

Market practice

One of the central themes of the event was market practice. Jaana Sulin was introduced by Skandifinanz’s Ragnar Granelli, who is the International Forfaiting Association’s head of the market practice committee. Sulin is a member of the market practice committee of ACI-Association Cambiste Internationale in Finland. She spoke about her own organisation’s experiences in setting up model codes.

Then it was up to the forfaiters themselves to group up and talk among themselves about the following areas and come to uniform market practice conclusions:

Satisfactory documentation if the debt instrument is a fully negotiable bill of exchange or promissory note.
Satisfactory documentation if using a letter of credit.
Satisfactory documentation covered by a letter of guarantee.
Availability dates and time limits for inspection of documentation.
Signature confirmations, bona fide holders.
Reserves and payment under reserve.
Due diligence.
Cancellation.
Deal closure.
Additional documentation.

I was unfortunately not allowed to be included in these discussions, despite my efforts to convince the organisers of my passion for and deep knowledge of bona fide holders. The results of the workshops were announced the next day and a full report of the findings will be published in the November issue of TFR.

The first meeting

The afternoon saw the first general meeting of the International Forfaiting Association (IFA) since its inception last year. President of the IFA’s board, Hans Egli, opened the meeting, thanked everyone for their hard work and went through the history of the association and why it was set up. “From 14 founding members one year ago,” he said, “we now have 81 members from 12 countries, which was the target set last year. We need to expand membership especially in the Far East, Southern Europe and Eastern Europe.”

The accounts were shown by the IFA’s treasurer Annemaria Brunnhuber and subsequently approved.

Margrith Lutschg-Emmenegger from WestLB, and vice-president on the IFA board, then spoke about the need to educate the market and those around the market about forfaiting. Forfaiting has changed so much in recent years, she argued, and everyone should develop new markets and regions for the forfaiting product. “No growth equals death,” she warned, and added: “Without education there is no market practice.” Then she introduced a forfaiting course idea that would cost £30,000 per course at City University in London. The part-time, internet-based course would be validated by the IFA and City University and would address both senior and junior staff. Members were called upon to join the course and really develop a worthwhile educational backbone for forfaiting.

Ragnar Granelli then asked for support and suggestions for the market practice committee, which has not seen much action to date. He stressed the importance of defining forfaiting wording and terms for market participants – something the various workshops set that day would no doubt help with.

The membership committee chairman, Ian Guild, reported on a good first year for membership growth. “We set a target of 80 members for the end of 2000,” he said. “Already we have 81 members and still four months to go until the end of the year.” New member countries include Slovenia, Cyprus, Denmark, India, Japan and Turkey. In the UK there are 25 paid-up members. Eight UK forfaiting institutions that are not members of the IFA but had attended the conference were implored to join. Likewise, Germany has 10 IFA members, but 12 other non-members at the conference. The Netherlands has four members, but three non-members attending, and so on. The IFA, said Guild, was certainly looking to co-operate far more on membership with the Association of Forfaiters in the Americas (AFIA), as it had done with the Swiss forfaiting body, VEFI. For 2001, subscription for members will remain at E2,000 (US$1,740).

Giovanni Rosa from Banca Nazionale del Lavoro then reported on the regions and outlined the work of the seven regional committees attached to the IFA. John Kibble, regional chairman for ISMA in the UK and Ireland the spoke about the parallels between his organisation – the International Securities Market Association – and the IFA in structuring the committees and administration. He stressed the importance of regional committees to hear of local problems on the ground and to resolve disputes among members before they spread.

The IFA’s communications co-ordinator, Crédit Lyonnais’ Daniel Vignial was the last of the board members to address the room. He spoke of the regular newsletter, a planned website, planned marketing and so on. The possibility of taking the planned website into more interactive fields was mentioned – as a trading portal perhaps.

At this stage, the proceedings really hotted up with the resignation of three members of the board and the opportunity for them to be re-elected, plus a replacement for Dresdner Bank’s Dieter Geue, who has retired. All three were duly re-elected – Hans Egli, Margrith Lutschg-Emmenegger and Anne-Maria Brunnhuber – while Landesbank Baden-Wurttemberg’s Tim Everitt was elected as Geue’s replacement. The board now numbers eight, one short of the maximum possible. The hope is to perhaps fill the remaining seat with an Asian or American representative.

Take the risk

The third day began with a look at the benefits or otherwise of insurance to forfaiting business. Miles Connell from captive Bermuda-based insurer Exporters Insurance described how his firm operated, calling it “the nearest thing to an ECA, but working in the private market”. Exporters has recently increased its reinsurance cap to US$75 million per deal. Connell added, regarding individual transactions: “We’re not basically interested in Russia. But each deal is taken on its merit.”

Next up was Nick Hedley from JLT Risk Solutions Ltd who claimed that the private insurance market had more benefits over ECAs – being quicker, more flexible, able to deal with individual insurance contracts and so on. This market is constantly changing however, with new players expected to enter the fray.

Dennis Parker from Aon spoke of how to avoid problems by analysing the risks beforehand and using comprehensive cover if you want to be covered for both country and commercial risks. “Claims are paid by the insurers – a signal that these policies work,” he added.

Texel Finance’s Andrew Lennard completed the quartet, explaining his firm’s role in the market – finding lenders and finding insurers for lenders – and working through a typical transaction. He reminded the audience of a key basis of insurance – that it is natural for an insurer to take risk; it takes risk to earn premiums; and it earns premiums to make a profit.

Following the presentation of the workshop conclusions (see November issue next month) the conference was closed, with the usual thanks to the hosts. St Moritz 1998, Heidelberg 1999, Telfs-Buchen 2000 – forfaiting’s Germanic love affair won’t be continued next year. The yearly gathering of the forfaiting tribe is moving away from the heart of Europe and favourites in the running for next year’s annual international forfaiting conference are Prague, Budapest and Istanbul. Also, the IFA will be organiser of the event from now on.

Overheard at the conference:

“He’s a dotcom executive now – he can do what he likes. I mean, he’s just shaved his head!”

“What is that DG Bank guy trying to prove, setting fire to his leg like that?”

“How far to Munich?”

“Who’s that freak pouring the wine?”

“How much is a car?”

“I’m just popping into town – I may be some time.”

“Why don’t they make it Mauritius next year?”

“Let’s talk about market practice…”

Barnum meets Barbarella

Crystal Worlds in Wattens is apparently Austria’s second biggest tourist attraction and we all had the pleasure to go there for dinner on our second evening. It is the home of the world famous Swarovski crystal, which is fashioned into trendy jewellery, strange ornaments and annoying little animals.

The visit included a tour of the crystal ‘museum’ which included some very clever and original use of the stone. All this was set inside an earth mound, fronted by a huge stone face, lit up and spouting water from its mouth – a cross between Easter Island and Fantasy Island.

The evening certainly was an experience. We were entertained and served in turn by a mime artist (who, for the first time in my life, I didn’t want to shoot), performers, jugglers, and a fine jazz band contributed the sounds.

A fine time was had by all, speeches were made, little crystal animal souvenirs were bought and some people even went home singing on the coach.