Structured commodity finance : techniques and applications for successful financing arrangements

335 Pages·2014·3.67 MB·English

by  Moors

Structured Commodity Finance
Techniques and Applications for Successful
Financing Arrangements
Second edition

Structured Commodity Finance
Techniques and Applications for Successful
Financing Arrangements
Second edition
Emmanuelle Moors and Lamon Rutten
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Contents
Foreword xv
Preface xvii
List of abbreviations xix
Acknowledgements xxi
About the authors xxiii
Introduction xxv
Evolution of commodity financing xxvi
The 1980s: financing trading companies on a corporate basis xxvi
The 1990s: financing commodity producers and importers on a
structured basis xxvii
The 2000s: shock and awe xxviii
What are the 2010s bringing? xxix
What is structured commodity finance? xxx
Scope xxxi
Part 1 Traditional commodity trade finance
Introduction to Part 1 3
1 Building blocks of trade finance: payment methods 5
Open account 5
Advance payment 6
Documentary collection 7
Documentary letters of credit 9
Bank payment obligations 13
2 Basic trade financing instruments 15
Post-shipment financing based on letters of credit 15
Trade paper 15
Bills of exchange and promissory notes 16
Banker’s acceptances 17
Pre-shipment financing for importers 17
Pre-shipment financing for exporters 18
Evaluation of basic trade financing instruments 18
3 More advanced instruments and techniques 19
Tailored letters of credit 19
Revolving letters of credit 19
Back to back letters of credit 20
Transferable letters of credit 22
Red-clause letters of credit 23
v
Contents
Green-clause letters of credit 25
Evaluation of more complex letters of credits 26
Factoring and forfaiting, the fraternal twins 26
Forfaiting 26
Principles and characteristics 26
Raising financing with forfaiting 27
Evolution of the forfaiting markets and participants 27
Factoring 28
Principles and characteristics of cross-border factoring 28
Raising financing with factoring 29
Evolution of the factoring markets and participants 30
4 Evolution of traditional trade finance 32
Part 2 Structured commodity finance techniques
Introduction to Part 2 35
5 Inventory financing 37
Principles and background 37
Basic transaction flows 39
Term sheet 39
Amount 39
Borrower 39
Commodities 40
Disbursement 41
Financing ratio 41
Tenor 41
Cost 42
Repayment 42
Security 42
Benefits of inventory financing 44
Exporters can raise attractive financing earlier in the marketing cycle 44
Lenders have more control over the commodities 45
Variations: financing the flow 45
Variations: ownership-based financing 47
Limits of inventory financing 49
Required logistics is costly 49
Additional exposure to volatile commodity markets 49
Banks remain exposed to third-party fraud and performance risk 49
6 Structured pre-export financing 54
Principles and background 54
Pre-export receivables financing 54
Prepayment financing 57
vi
Contents
Basic transaction flows 58
Pre-export receivables financing 58
Prepayment financing 58
Term sheet 59
Pre-export receivables financing 59
Amount 59
Borrower 59
Commodities 59
Disbursement 60
Financing ratio 60
Tenor 61
Cost 61
Repayment 61
Security 61
Prepayment financing 64
Amount 64
Borrower 64
Commodities 64
Disbursement 64
Financing ratio 65
Tenor 65
Cost 65
Repayment 65
Security 66
Benefits of structured pre-export financing 75
Exporters can leverage their buyer relationships 75
Borrowers can benefit from lower payment risks of OECD and
other creditworthy buyers 76
Pre-export structures can support longer-term financing 76
Additional benefits of prepayment structures 76
Limits of structured pre-export financing 77
Exporters are tied to existing buyers 77
Previously approved buyers can become off-limits 77
All-in cost can be high 77
Banks remain exposed to performance risk 78
7 Building on structured commodity financing techniques 80
Revolving funding for the full production cycle 80
Value chain finance 83
Financing indirect exporters 87
Adapting a principal financing approach to trade finance 88
Using structured commodity finance techniques for imports into non-
OECD countries 89
Inventory-based import financing 90
vii
Contents
Receivables finance for import transactions 91
Additional security features 91
Alternative assets for financing the commodity sector 94
Transport and transit fees 94
Royalties 95
Tax receivables 95
Balance sheet and income statement enhancing structures 95
Leases 96
8 Countertrade 99
Existing forms of countertrade 99
Tolling 99
Barter 101
Counter-purchase 102
Compensation trade 103
Buy-back 104
Offset 105
Switch trade 105
Evaluation of countertrade 106
9 Securitisation 109
Principles 109
Basic transactions flows 109
Variations 110
Overview of commodity sector securitisation 110
Beneficiaries and use of funds 110
Investors in commodity-linked securitisations 111
Trends in securitisation 114
Born in the USA 114
Securitisations for large commodity producers and consumers 116
Securitisation for tax optimisation and balance-sheet effect purposes 119
Securitisation of commodity traders’ receivables 122
Securitisations of banks’ commodity trade finance portfolios 123
Evaluation of commodity-linked securitisations 126
More flexibility and better terms for commodity owners 126
A stronger security package can attract a wider range of investors 127
Dependence on ‘established’ emerging markets 127
10 Due diligence 130
Components of the marketing cycle 131
Availability of the commodities 135
Market risks 136
Commodity buyers 137
Price risk management 138
viii
Contents
Contractual aspects 139
Direct and indirect parties to the transaction 140
Commodity owner 140
Warehouse operators 142
Inspection companies and collateral managers 143
Other commercial parties 145
Country risks 145
Impact on performance 145
Transfer and other payment risks 146
Legal and regulatory environment 147
Structural considerations 148
11 Legal aspects 150
Legal documentation 150
Financial documents 150
Facility agreement 150
Security agreements 151
Other financial documentation 151
Supporting commercial documents 151
Sales contracts 151
Insurance documents 152
Additional supporting documents 152
Legal advice and opinion 152
Legal opinions 153
Which law? 154
Inside versus outside legal advice 154
12 Evaluation of structured commodity finance techniques 156
Providing attractive financing in difficult situations 156
Supporting access to longer-term financing 157
Supporting international trade 158
Improving emerging markets economies 159
Part 3 Third party credit enhancement: insurance and guarantees
Introduction to Part 3 163
13 Insurance 165
Political risk insurance 165
History of political risk insurance 165
Users of political risk insurance 166
Events covered by political risk insurance 167
Credit risk insurance 168
History of credit risk insurance 168
Users of credit risk insurance 169
ix