An exporter accepting a documentary credit chooses its buyer, and has a debtor imposed on it. The issuing bank is designated by the buyer, is most often its usual bank, and the exporter has over that choice only a right of refusal it rarely dares exercise in the middle of a commercial negotiation. A peculiar situation follows: the solvency that matters is no longer the one studied. All the commercial analysis bore on the importer, its financial statements, its payment history, and the risk actually carried is that of a banking institution about which nothing is known, in a country about which the rest is.
Assessing that risk means knowing what a local bank can and cannot do. A leading bank in an emerging country is often sound in local currency and fragile in foreign currency, because its foreign currency resources depend on lines granted by foreign correspondents and on access to its own country's exchange market. A documentary undertaking payable in euros or dollars therefore mobilizes a resource it does not manufacture. Two banks with the same balance sheet can thus present very different risks depending on the depth of their correspondent lines, information the market knows and the exporter can obtain simply by asking which confirmer accepts that name, and on what terms.
That is the most accessible and most neglected intelligence. The confirmation market is a permanent rating system, free to whoever can read it: if three banks refuse to confirm a credit issued by a given institution, or accept only on unusual terms, the question of that institution's quality is settled, without any financial analysis having been run. An exporter obtaining easy confirmation on a bank has positive information; one told the line is closed has other information, more important still, and obtains it in half a day.
Then comes what happens when the bank fails, and three moments must be distinguished which do not open the same rights. Before acceptance of documents, there is only a conditional undertaking: the bank must pay if a conforming presentation is made to it, and its failure leaves the exporter with its goods and its commercial receivable. After acceptance and before maturity, the bank owes a certain sum due at term, and that is an ordinary bank receivable which can be discounted, assigned or insured. After an unpaid maturity, one is in default. The second moment is the most favourable and the least used: it is when the receivable sells best, because it has become abstract and documented.
Placing a bank under administration, which is this module's worked case, is handled differently from a liquidation. An administrator appointed by a supervisory authority ordinarily keeps operations running, honours certain undertakings and freezes others, on priorities that are not a foreign creditor's. Accepted documentary undertakings are often treated there as preferred commercial debts, but nothing guarantees it, and the timetable is the administration's and not the contract's. The exporter then moves from being the beneficiary of a bank undertaking to being a creditor in a foreign procedure, which is a complete change of nature.
The insurance question then arises on a precise point: does the policy cover a bank's default, and on what basis. Credit insurance cover ordinarily names a designated buyer, and the issuing bank is not the buyer; bank risk must therefore be expressly covered, which is asked for at underwriting and not at the loss. Political risk cover can respond where the failure results from a public measure, a moratorium or an administration ordered by the state, but not where the bank simply managed itself badly. The boundary is the same as that of this certification's first module, and it arises here on a debtor one did not choose.
The method comes down to three steps, all before shipment. Ask who agrees to confirm the name proposed and on what terms, which gives in half a day an assessment no analysis will replace. Check that the policy covers the issuing bank's risk and not only the buyer's, because the first is the one actually carried. And know that between acceptance of documents and maturity, one holds an abstract bank receivable that sells well, a short window most exporters let pass while patiently awaiting a maturity that will not arrive.
An exporter holds an unconfirmed documentary credit of 2.4 million euros, issued by a local bank in a West African country, payable at one hundred and eighty days from shipment. Documents are presented and accepted without reservation on March 8, so maturity falls on September 4. On May 12, the supervisory authority places the issuing bank under administration; the administrator announces it will honour accepted commercial undertakings, with no timetable. The exporter's credit insurance policy covers the buyer, named specifically, up to a 3 million limit. A financier had offered in April to discount the accepted receivable at a discount, an offer declined because maturity was approaching. What should be drawn from this?
The exporter let pass the one window in which its position was good, and the reason for its refusal was exactly the wrong one. Between the March 8 acceptance and the September 4 maturity, it no longer held a conditional promise but a certain bank receivable, abstract from the commercial contract and documented: that is the state in which a receivable sells best, and the discount offered in April was the price of an exit the May 12 administration made impossible. Waiting out a near maturity is a treasury reflex, not a risk analysis. On the cover, the question is harder than it looks: the policy names the buyer, and the buyer is not the debtor. Once documents are accepted, it is the bank that owes, and if the issuing bank's risk was not expressly underwritten, the 3 million limit granted on the importer answers for nothing. That is asked for at underwriting and cannot be made good later. That leaves characterization, which will decide whether another policy can respond: an administration ordered by a supervisory authority may amount to a public measure, which opens the political risk ground, or to plain mismanagement, which closes it. The distinction is documented now, with the appointment order and its legal basis, while the papers are public and dated.
- 01The buyer chooses the issuing bank: the solvency studied is not that of the debtor actually carried.
- 02A local bank can be sound in local currency and fragile in foreign currency, its resources depending on foreign correspondent lines.
- 03The confirmation market is a free rating: who accepts that name, and on what terms, is learned in half a day.
- 04Between acceptance of documents and maturity, one holds an abstract bank receivable that sells well, and that window closes.
- 05The issuing bank's risk must be expressly covered: a limit granted on the buyer answers for nothing on a debtor that is not the buyer.