Bank of America Merrill Lynch designed a structured trade finance solution to provide limits to a group of Korean banks using the US Ex-Im’s newly-approved Korean liquidity facility for use with the export letter of credit (ELC) insurance policy, with the product introduced by the bank in late January 2009.

The Korean facility – developed by the US Ex-Im at the end of 2008 – provided a solution to counter the tightening of credit and lack of liquidity in the export marketplace for US exporters.

Kuresh Sarjan, senior vice-president at Bank of America Merrill Lynch, explains that the facility presented a very unique opportunity in the months following the financial crisis when – particularly in the Korean market – there was an acute shortage of US dollar liquidity.
“Many of our import clients were used to importing a variety of goods from the US, ranging from soft commodities to hard commodities, and were desirous for a solution which would allow them to have continuous access to US dollar liquidity at a competitive, consistent price in the market,” Sarjan says.

To meet the increased demand to insure US lenders’ confirmation of Korean bank issued letters of credit, the US Ex-Im created a facility to approve up to US$2.9bn in insurance cover involving letters of credit issued by 11 Korean financial institutions. The policy provides a 95-98% guarantee of the LC amount and allows for up to 360 day exposure.

Following this development, Bank of America Merrill Lynch devised its own trade finance solution to support the US Ex-Im programme and provide US$270mn in structured financing to Korean import clients.

With the programme in place, Bank of America Merrill Lynch is able to confirm and accept or discount letters of credit issued by the participating Korean Banks, namely Korea Development Bank, Industrial Bank of Korea, Kookmin Bank, Woori Bank, Shinhan Bank, Hana Bank, Korea Exchange Bank and National Agriculture Cooperative Federation.

Bank of America Merrill Lynch’s trade finance solution is tailored to finance working capital at rates more favourable than those offered by local banks; provide sufficient issuing bank limits to support their short-term financing needs; enhance the clients’ liquidity structure and better manage and forecast their cashflow; reduce FX risk and leverage client relationships; and improve working capital by extending Days Payable Outstanding (DPO).

More specifically, the programme allows Bank of America to finance (BA financing) up to 100% of US export-related foreign payables while taking only 5% uncovered risk with terms of up to 180 days, and to consider longer financing terms for agricultural commodities, fertiliser and capital equipment.

According to Marcia Davis, senior vice-president at Bank of America Merrill Lynch, the trade finance solution has had a tremendous impact on the bank’s ability to continue processing letter of credit activity in challenging times.

Commenting on the merits of the programme, Davis explains that as US Ex-Im granted limits ahead of time for each of the participating Korean banks, Bank of America Merrill Lynch, was able to go ahead and transact letter of credit business as they normally would.

“The significance is that we didn’t have to go back to US Ex-Im on each transaction and seek their approval, which would hold up the trade flow of the deal. It really expedited the transactions and made it an extremely smooth process, so that it was almost an invisible layer of support that US Ex-Im added.”
Deal information

Amount: US$270mn
Trade finance solution provider: Bank of America Merrill Lynch
Participating banks: Korea Development Bank, Industrial Bank of Korea, Kookmin Bank, Woori Bank, Shinhan Bank, Hana Bank, Korea Exchange Bank, National Agriculture Cooperative Federation
Date signed: January 2009