Leveraging its alliance with HSBC Holdings, Wells Fargo & Co. is expanding its use of a little-known but successful technique to help companies get rid of export-related credit risks.
The technique, known as "forfaiting" or nonrecourse financing, permits an exporter to sell a promissory note or bill of exchange to a bank at a rate calculated at half a percentage point to eight or nine percentage points over the London interbank offered rate.
The bank, in turn, either holds the paper for its own account until the payment comes due or sells it to private investors. The word forfaiting, derived from the French word for forfeiting, is used because the buyer of the paper gives up his claim in the event the debt is not repaid.
Transactions can range from $500,000 into the millions of dollars for debts of over one year.
"Given all the ongoing concerns about the unsettled nature of international markets, the potential for growth is huge," said Kenneth J. Petrilla, senior vice president at Wells Fargo HSBC Trade Bank.
He noted that forfaiting, along with export credit insurance, has become increasingly important for companies seeking to do business in Southeast Asia and other financially troubled parts of the world.
Though European exporters began extensively using forfaiting about 50 years ago to reduce risks and get early payment on sales in financially riskier countries, it has remained poorly understood and slow to take off in the United States.
Only a handful of foreign banks have been involved in forfaiting, including Germany's Westdeutsche Landesbank, Standard Bank of South Africa, Holland's ABN Amro, and Canadian Imperial Bank of Commerce.
Only one U.S. bank, Security Pacific Corp., made a serious effort to get into the business, in the late 1980s, but the business tapered off after Security Pacific was bought by BankAmerica several years ago.
For Wells, the move is particularly unusual since it almost completely withdrew from international activities, including trade finance, in the late 1980s.
But in a move to redevelop international business without having to build up a large global network of offices, Wells set up a San Francisco- based joint venture in 1996 known as the Trade Bank.
This, in turn, gave Wells the connection it needed to develop forfaiting through HSBC, which buys and sells trade-related credits through a London- based unit.
To be sure, the business line originated by Wells is still in its early stage, with some $20 million worth of transactions completed and another $50 to $75 million in the pipeline. But executives believe that forfaiting can only increase, given persistent uncertainty about foreign markets combined with growth in U.S. exports.
"The U.S. market really hasn't had a need to structure export-related deals," observed Melinda A. Barnes, vice president and structured trade finance officer at the joint venture unit. "But since the Asian crisis, U.S. companies are increasingly looking for ways they can stay competitive in overseas markets while reducing their risk."
