Global Trade Receivables Finance Efficient cost effective risk

Global Trade & Receivables Finance Efficient, cost effective risk mitigation and working capital optimization strategies Prepared by: Barbara Shaw Date: June 12, 2013 PUBLIC

Background · Businesses want to have a thorough understanding of the buyer credit risk mitigation tools and strategies are available, and: – how the choice of risk mitigation tool can also be used to improve working capital cash flow, – how the various tools might have different effects on the a client’ balance sheet reporting. · Businesses have relationships and payment obligations to a wide number of suppliers. · HSBC has a unique proposition that can assist our clients to strengthen their supplier relationships, and help to potentially negotiate more favourable terms. 2 PUBLIC

The Risk Ladder in International Trade Two Perspectives Importer / Buyer Perspective Exporter / Seller Perspective Open Account Documents against Acceptance Documents against Payment Confirmed DC Advance Payment 3 PUBLIC Security Documentary Credit

Standby Letters or Credit / Guarantees A Guarantee (GTE) / Standby LC (SDC) is an unconditional undertaking in writing, issued by a bank (the Issuing Bank or Guarantor) on behalf of a client (the Applicant) in favor of another party (the Beneficiary), to pay on demand in the event of non-performance, non-delivery or otherwise, in compliance with the terms and conditions as outlined in the Guarantee / SDC. Offer / Invitation Tender / Bid Contract Advance Performance of Deliveries / Installation Commercial Events Retention Time Bid Bond Advance Payment Bond BIDDER / CONTRACTOR SUB-SUBCONTRACTOR 4 PUBLIC Performance Bond Retention Types of GTE/SDC Bond

Trade Finance Specialist Helps Filter the noise How we work Will they pay? Terms Bankruptcy Reliable? Look at component parts War Sanctions Quality HSBC established in 1865 to finance trade F/X Access to the HSBC global network Dispute Channel Trade Relationship PUBLIC

Identify the parties and outside resources § Understand how each can add value § § Risk mitigation Financial strength Knowledge Relationships Banks Freight Forwarder Distributor Payment for Performance Insurance Company Seller ECA 6 PUBLIC Buyer

Transaction Cycle Each stage has different risks and financing requirements Commercial Agreement executed Buyer issues PO and Supplier accepts PO Shipment made by Supplier Buyer accepts Invoice Pre-shipment finance for supplier Buyer converts into a product or service Post-acceptance (Receivable) finance for supplier Supplier has now converted his inventory into a debt owed him by the buyer 7 PUBLIC Buyer in turn Ships and invoices for finished goods.

Trade Finance “Tools” • Loan against imports (with or without an Import LC or term LC) Secured by the goods. Loan is repaid through the onward sale of the goods. • Export Loan: Bank finances supplier after shipment enabling the supplier to offer longer payment terms to the buyer. (TINRFF) • Packing Credit / Manufacturers Advance: On receipt of a DLC or a confirmed purchase order, the bank loans the supplier money to complete the order and is repaid directly from the proceeds of the LC or the financed receivable once documents are presented. • Documentary Letters of credit: Using terms, to find most favourable structure for the transaction. - Discounting / Transferable LCs / Avalisation / Forfaiting • Documentary Collections, against payment, against acceptance • Supply Chain Finance • Standby LCs / Guarantees 8 PUBLIC

Trade Cycle Illustration Post-Shipment Financing Pre-Shipment Financing 0 5 20 Payables Financing PO received by Supplier 45 Manufacturers Advance or Packing Credit 105 Invoice Non-Recourse Financing Facility – A/R Purchase Our client ships goods to their Buyer; Invoices; Account Receivable Created. Invoice due date; Cash required Goods received from supplier; Invoiced; Payable created. Payables Facility retired with the proceeds from the of sale of the Account Receivable For each stage: Who are the parties? What risks is each party exposed to? What are the funding requirements? 9 PUBLIC On Invoice due date, Cash is received.

Payables Financing - Process Flow 1. Goods are shipped, and invoiced to Our Client by suppliers participating in the program Foreign Suppliers Domestic Suppliers Canada USA 2. P Our Client ay on ment rec ins eip tru t of cti inv ons oic e France 4. H on SBC inv deb oic its e d cli ue ent dat e China 3. Payments made 10 PUBLIC early on receipt of payment file, early payment fee deducted from payment

Trade Invoice Non-Recourse Invoice Discounting – Client Benefits as Supplier needs How we meet them Optimize Working Capital · Unlock cash from receivables on a “without recourse” basis · Increased working capital without leveraging existing or additional bank lines · Reduce Days Sales Outstanding and provide an improved liquidity position Reduce Supply Chain Costs · Competitive financing costs based on the Buyer Credit relationship with HSBC · LIBOR-based funding · Gain access to competitive non-recourse funding at buyer’s pricing Enhance Supplier Relationship and Loyalty · Buyer Servicing · Strengthen relationships with buyers trading on open account terms · Negotiated pricing with early payment may enhance relationship Gain better Visibility and Control · Enhanced risk management and balance sheet de-risking · Reduce potential collection related work and cash management costs Easy Adoption · Liquidity with no bank documentation · Low program entrance barriers for buyer nominated suppliers · No on-boarding 11 PUBLIC

Client Needs Objective: To provide trade finance tools and solutions for both our international and domestic clients that will both mitigate their counter-party risk and provide working capital solutions for optimal company growth. Progression from exclusively risk mitigation to complete working capital solutions Full Supply Chain Financing Use of trade finance products for financing of complete cash cycle Occasional Use of Working Capital Solutions Single order solutions, or use of a product for a single buyer or supplier Traditional Trade Import/Export Letters of Credit, Documentary Collections, SDBY LCs, Guarantees Improve Risk Control Deploy Cash for Growth Increase working capital through specific tradecycle financing Mitigate payment risk from buyers PUBLIC Better relationships with both suppliers and buyers Growth and increased profitability Strengthen internal controls and visibility into deployment of cash

HSBC’s Role as a Leading Global Bank A leader in international trade and corporate-to-bank connectivity, HSBC offers: · Strong financial stability and performance · Unmatched global presence and footprint · Local knowledge, support and execution · Broad product diversity · Significant capital and US$ 2. 7 trillion in assets (at March 2013) · Ongoing investment in systems, technologies and human capital necessary to provide world-class products and services · Thought leadership in practice · Consultative advisory approach · Solid growth: Increased contributions from emerging markets and global trade 13 PUBLIC

HSBC Global Trade and Receivables Finance HSBC has been helping to facilitate trade since 1865 Global Trade Network and Experience: • Over 3, 500 Trade Specialists • 131 Trade Processing Locations across 82 Countries and has >70, 000 trade customers worldwide • HSBC is able to provide local guarantee issuance capability in over 60 countries Ongoing Client Support • In-depth knowledge of foreign markets and country-specific regulations • Innovative Import/Export Products and Services 14 14 PUBLIC

Other ways we can support your business… Thought Leadership / Networking Opportunities Online Web Portal Trade Forecasts Daily Reports Country Guides 15 PUBLIC

HSBC Contacts HSBC welcomes the opportunity to work with clients to provide an understanding of the structures and risks associated with trade finance and to develop solutions which meet your requirements. Makhzuma Alieva Assistant Vice President Business Development Ananth Krishnan Head of Business Development Western Canada Global Trade & Receivables Finance 9 th Fl. 407 - 8 th Ave. SW, Calgary, AB T 2 P 1 E 5 Tel: +1 (403) 693 -8545 Cell: +1 (403) 850 -9746 E-mail: makhzuma. alieva@hsbc. ca Global Trade & Receivables Finance 885 West Georgia Street, Vancouver BC V 6 C 3 E 8 Tel: +1(604) 631 5002 Cell: +1 (604) 802 5004 E-mail: krishnanananth 1@hsbc. ca Barbara Shaw Assistant Vice President Business Development Calvin Tong Premium Trade Advisor Global Trade & Receivables Finance 9 th Fl. 407 - 8 th Ave. SW, Calgary, AB T 2 P 1 E 5 Tel: +1 (403) 693 -8523 Cell: +1 (403) 804 -7506 E-mail: barbara. c. shaw@hsbc. ca Global Trade and Receivables Finance 9 th Floor, 10250 - 101 Street NW, Edmonton Tel: (780) 641 -1363 Fax: (780) 426 -2660 E-mail: calvin_tong@hsbc. ca 16 PUBLIC

IMPORTANT This document is issued by HSBC Bank Canada ("HSBC"). This document is confidential and shall not be copied, reproduced, transmitted or further distributed by any recipient. The information contained in this document is of a general nature only and is for informational purposes only. It is not meant to be comprehensive and does not constitute financial, legal, tax or other professional advice. You should not act upon the information contained in this document without first obtaining specific professional advice. While reasonable care has been taken in preparing this document, HSBC does not make any guarantee, representation or warranty (express or implied) as to its accuracy or completeness, and under no circumstances will HSBC be liable for any loss caused by reliance on any opinion or statement made in this document. The information presented in this document is subject to change without notice. Certain of the products and services offered by HSBC and its subsidiaries and affiliates, as well as by third parties mentioned in this document, are subject to credit adjudication and approval. 17 PUBLIC

Credit Management = Risk Mitigation CREDIT INSTITUTE OF CANADA NATIONAL CONFERENCE Jasper, Alberta - June 2013

Talking Points n Overview of The North American Economy (Canada & USA) n Credit Management = Risk Mitigation (Internal / External)

The North American Economy Stable Disequilibrium… …is the New Normal

The North American Economy…Canadian Focus Current Issues in Canada n housing bubble and rising household debt n distressed manufacturing sector n currency at par with the US

The North American Economy…the Canadian challenge The Canadian Economy continues to limp along n IMF no longer views Canada as a growth engine of the G 7 economies n Forecasts for the Canadian Economy are negative due to the impact of weakness in the U. S. and Europe, compounded by the impact of a decline in commodity prices n GDP growth has once again been revised downward to an annualized growth rate of 1. 5% for 2013 as the Canadian economy will continue to be held back by high household debt levels and a cooling housing market n Few improvements for Canada’s economy over the next two years are expected, with unemployment remaining near the current 7. 2% level throughout n Canada’s current account balance with the rest of the world is expected to remain in a significant deficit n Should Canada’s economy further weaken, this could lead to the Government allowing budget deficits to widen, resulting in the Bank of Canada’s policy interest rate to remain at 1% for longer than originally planned

The North American Economy…US Focus Current Issues in the US n an improving housing market n a stablized / improving financial system n improving industry productivity / output

The North American Economy…the US positive trend Improving outlook and performance south of the border n the recovery is beginning to show some bright spots as credit growth has picked up, and bank lending conditions have eased slowly from tight levels n Growth in the United States was tepid during 2012 only achieving 2. 2%. In Q 1 2013 the GDP performance did decline versus 2012; however, the outlook for the remainder of 2013 is for GDP growth to be in the 2% range n Construction activity continued to rebound during 2012, albeit from low levels, and house prices have begun to rise n The pace of job creation accelerated in the second half of 2012, bringing the unemployment rate below 8% for the first time since early 2009. Wage growth has remained subdued, helping to keep inflation pressures well in check n The US economic performance could be dampened during the remainder of 2013 by Government budget cuts – the full impact is not currently known as it is not clear if these cuts will be sustained

The North American Economy…View from the North

The North American Economy…Insolvency Trends n The total number of insolvencies (bankruptcies and proposals) in Canada decreased by 24. 7% in December 2012 from the previous month. Bankruptcies decreased by 23. 5%, whereas proposals decreased by 26. 4% n The total number of insolvencies in December 2012 was 16. 2% lower than the total number of insolvencies in December 2011. Consumer insolvencies have decreased by 16. 3%, while business insolvencies have decreased by 14. 4%. n For the 12 -month period ending December 31, 2012, the total number of insolvencies decreased by 3. 9% compared with the 12 -month period ending December 31, 2011

The North American Economy…Insolvency Trends n Bankruptcy filings in the federal courts fell 13% in calendar year 2012, according to data released today by the Administrative Office of the U. S. Courts. The number of bankruptcies filed in the 12 -month period ending December 31, 2012, totaled 1, 221, 091, down from the 1, 410, 653 bankruptcies filed in Calendar Year 2011 n For the last three months of Calendar Year 2012 the number of bankruptcies filed (October 1 -December 31, 2012) were 273, 878, down 13% from the 313, 775 filings in the same period in 2011

CREDIT MANAGEMENT = RISK MITIGATION

CREDIT MANAGEMENT THE MAYANS WERE WRONG… NOW WHAT?

Credit Management = Risk Mitigation (Risk Management) n Risk Management is activity directed towards the assessing, mitigating (to an acceptable level) and monitoring of risks. In some cases acceptable risk may be zero n. In Businesses, Risk Management entails organized activity to manage uncertainty and threats and involves people following procedures and using tools in order to ensure conformance with risk-management policies n The Mitigation Strategies include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk n Some traditional Risk Management Programs focus on risks stemming from physical or legal causes; while, Financial Risk Management, focuses on payment risks that can be managed using traded financial instruments

Credit Management = Risk Mitigation – Internal Activities Credit Management’s crucial role in Risk Mitigation n Credit Policy n Credit File (buyer file) Review n Early Warning Signs (of Default)

Credit Management = Risk Mitigation - Credit Policy Credit Management’s crucial role in Risk Mitigation n Credit Policy n n.

Credit Management = Risk Mitigation - Credit Policy It is essential that your Credit Policy is documented and up to date n A Credit Policy could / should address: n The Company’s Mission n The Company’s Goals n Who has specific credit responsibilities n How is credit evaluated n How are collections handled n What are the terms of sale n Credit Policy is a living document n Credit Policy should be benchmarked against your peers

Credit Management = Risk Mitigation - Credit File Review Credit Management’s crucial role in Risk Mitigation n n Credit File (buyer file) Review n.

Credit Management = Risk Mitigation - Credit File Review Credit file review keeps a Creditor/Supplier ahead of the default curve n It is not enough to just monitor your buyer’s payment performance n Periodic review of credit information is essential for portfolio monitoring n It is recommended to obtain an updated credit application from time to time n Review the Trade Sector your customer belongs to – peer comparison

Credit Management = Risk Mitigation - Early Warning Signs Credit Management’s crucial role in Risk Mitigation n Early Warning Signs (of Default)

Credit Management = Risk Mitigation - Early warning Signs Many business relationships are based on one person. If that person leaves or worse dies, the relationship is often severed unless it is just a commodity-based transactional – “we use you when we need you” n n Not having a sound accounting function. Most businesses know where their inventory is, where each computer is located, but their accounts receivable processes are based on hope n Poor training or no training. Canada is near the bottom of the list in productivity and training hours per employee n Poor customer service, including relationships with customer’s accounting. Who knows the influencers that companies have that can destroy a relationship? n Poor management – perhaps the greatest business killer. There are few tests to become a manager/supervisor. No one weighs their brains n Lack of innovation – as an example, it has been 25 years since EDI (Electronic Data Interchange) first came on the scene. Yet, many companies are still paper-based, invoicing is still done by mail, envelopes still stuffed by hand n Competing only on price

Credit Management = Risk Mitigation – External Activities Risk Mitigation strategies may also include transferring risk to another party n Credit Insurance n Letter of Credit – L/C n Payment Bond n Credit Default Swap - CDS n Accounts Receivable Put Contract n Factoring/Discounting

Questions?

Atradius…Facts & Figures The Atradius Group provides trade credit insurance, surety and collections services worldwide 160 offices in 45 countries and 3, 300 staff Total income of more than € 1. 6 billion Insurer Financial Strength Rating: A. M. Best ‘A’ excellent Moody’s ‘A 3’ Access to information on 100 million companies worldwide Over 20, 000 credit decisions daily Headquarters: Amsterdam (the Netherlands) More than 85 years of experience in the credit insurance business

Managing Risk. Propelling Growth June 2013

MITIGATING RISK & FRUSTRATIONS 1) FINDING CAPACITY 2) OVERDUES/CLAIMS 3) REFINING POLICY

Can I Get Cover Feds threaten trade war over U. S. meat rules The Canadian Press Finally, signs of progress at Sears Canada Globe & Mail – May 23 rd, 2013

Credit Insurance Today • Dynamic Financing / Risk Management Tool • Key Buyer Cover (ie. Yahoo - $10 million) • Wholeturnover ($100 million) • …. And everything in between. • Yes! Even Sears!

Credit Insurance Market PUT Markets:

BIG Question – Can I Get Cover Needs Are: ü Who is offering? ü How much is available? ü How can the deal be structured? ü And of course. . . How much? . . . $ ¥ € £

Coverage > Cost > Decision Purchase INSURANCE – CAN take order – advance to GO and COLLECT $180 (10% co-insurance). Opt not to purchase/product not available – DECIDE on order. May or may not pass go – GAMBLE on collecting $200 OPTIONS ARE AVAILABLE!!

Managing Overdues/Claims- Preferential Payments • All have different reporting requirements/time frames

US Bankruptcy Code – Preferential Transfers What is a Preference? • Certain creditors were given preferential treatment and allegedly paid by a company prior to its bankruptcy filing. • Often made by the trustee against creditors allegedly given preferential treatment in an attempt to recall the funds so they can be appropriately distributed.

Preference Period • Generally subject to recall if received 90 days or less prior to the bankruptcy. • Payments made to insiders/business partners made one year prior to the bankruptcy also subject to being recalled.

Criteria for Preference Claims Payments received by a creditor 90 -days prior to a debtor’s bankruptcy petition is subject to return under preference law if it involves any one of the following: • A charge from standard terms of payment • A payment out of the sequence of due dates • A change of security • A change of normal payment history

Creditor Defenses Against Preference • Contemporaneous Exchange • Ordinary Course of Business • New Value (aka Subsequent Extension of New Value) • Product or services that are critical to the survival of the bankrupt company • District Courts can vary in interpretations of all defenses

Canadian Preference – Simpler • • • Generally under the BIA Trustee must prove there is an “intent to prefer” 3 month time frame for non related parties 1 year for related parties Date initial proposal is made (look back date)

Consequences of Preference for Insureds • • • Coverage must be approved Credit limits may be insufficient Claim filing deadlines need to be extended Reporting requirements throughout bankruptcy process Potential delay in receiving preference claims Definition of Loss Date of Loss Exclusions No-Claims bonus and release of liability Cost-sharing to defend preference claims Insurer must approve settlement of preference claims

Refining Policy – SPECIAL WORDING • Definition of Products Covered • Products Covered - risk on product/type of cover • • • – Type of coverage – Shipments/Contracts/Services separate from Contract – Separate wording. Terms of Payment ILC – Opening Bank Cash Against Documents – Repudiation Open Account – Net 30 – Construed Terms – Net 60

Buyer Credit Approvals / Discretionary Credit Limit Approvals • Purchase order from Buyer • Invoice this same entity • Credit approval from insurance carrier may differ – onus is on YOU

About Millennium • Operating since 1994. Licensed/operating across Canada; • Team of 12: Ottawa, Toronto, Montreal, and Calgary; • Credit insurance experience and focus; • Acknowledged as the leader in Canada; • International capabilities (ICBA); • Work with all credit and political risk insurance companies in Canada; • Access to Lloyd’s of London. • Member of the Credit Insurance Advisory Group that reports to DFAIT.

Managing Risk. Propelling Growth Thank You Carolyn Sloan 800 -763 -3499 (Ext 306) mcm. ca