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Ports of call for FDs looking to finance international growth

As the economic indicators start to inch from red to green, more and more businesses begin to look at growth as a reasonable aim for 2010. And for those FDs engaged in looking overseas, making sure their businesses are correctly set up to cash in on export opportunities can make all the difference.

For some, the bank is the first port of call. Most corporate lenders are trumpeting their willingness to open up lines of lending to their customers. Whether that is true, there is no doubt that for some, the search for growth finance will need to start elsewhere.

In the view of Luke Reeve at Ernst & Young’s capital markets advisory, the credit crunch combined with the opportunities abroad has led many FDs to look beyond their own borders for finance.

“Two things have changed since bank lending became more expensive,” he says. “One is that companies have been far more disciplined in generating cash and therefore reducing borrowing needs.

“So that might be anything from reducing working capital, shrinking inventory and so on. Indeed, some businesses have decided to turn the finance function into a profit centre and charge subsidiaries for taking loans from the ‘mothership’. But the second element is people are exploring non-bank capital markets, trying to be creative in sourcing funding in order to finance exports.”

Companies are looking beyond the traditional sources of finance. In some cases, according to Reeve, that might involve looking abroad for growth capital to finance investment in exports.

“They are increasing their direct exploration of what’s available in China,” says Reeve. “There are banks in the Far East that are awash with cash that look like offering some interesting finance opportunities.”

Bond issuance
Indeed, a cursory glance at the markets reveals a significant uptick in bond issuance over the past six months, at least in the US. But it’s a different story in the Eurozone, where issuance has been sluggish. Private placements have become more popular for mid-market firms that have found bank debt either too expensive or just plain unavailable. And many UK banks are offering alternative financing packages to exporters, ranging from asset finance to fund capex to syndicated loan facilities in conjunction with trade finance providers.

But clearly, even for those businesses that have managed to access finance, managing export risk is a full-time job. “It is twofold,” says Garry Clarke, FD at motorcycle manufacturer Triumph. “You’re receiving currency – that receivable needs to be hedged, so it’s critical to manage that. There are a number of ways to do it. You can work through other funders and make sure you’ve got standby facilities and letters of credit in place.”

But for Clarke, there is no substitute for knowing the market and who you’re dealing with. “Initially, it is essential to undertake some financial due diligence on your customer base,” he says. “Being confident that you will be able to recover the proceeds of sales invoicing is paramount in the risk consideration. At Triumph we use a number of instruments and routes to protect the position. Standby letters of credit, bank guarantees and working with key financial institutions and funding partners are critical to the success here. Alongside that, we will occasionally insure with trade credit insurers.”

Those last two options have come of age too, with many banks having expanded their teams to cope with increased demand.

“Go back 12 or 18 months and there was a significant retrenchment of the trade credit insurance market, so previously where suppliers were able to give credit to UK companies, they found it much harder to do that,” says Simon Enticknap, head of trade sales for large corporates at Lloyds Banking Group. “To put it in context, 70 or 80 percent of global trade has been done on an open account basis. We are seeing a switchback on that, with more and more customers asking us for a trade letter of credit that might cover the whole of the next 12 months for a selected supplier.”

Lloyds, along with other banks, is now finding demand for its trade finance products is growing in line with the increased numbers of UK businesses pursuing export growth. Keeping up with that will form another crucial test during the recovery.

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