Commodity Trade Finance CAIA Zurich. February 2013

Transcription

1 Commodity Trade Finance CAIA Zurich February 2013

2 Contents Some statistics about world trade 03 Financing the commodity trade flows 06 Commodity trade finance : the market 08 Why invest in commodity trade finance 12 Contacts 13 2

3 Some statistics about world trade I Source : WTO 3

4 Some statistics about world trade II (*) Source : WTO (*) Financial crisis in 2008 led to a general fall in commodity prices in

5 The ten biggest traders of world commodities Trading houses extensively use trade finance structures to finance their physical trading activities. These can have different forms and are generally provided by large international banks. These players are at the heart of international trade flows. Name 2010 Turnover 1 Activities Main Office Vitol 195 Physical oil trading and refining Geneva, Switzerland Glencore 108 Metals and minerals, energy and agricultural products Baar, Switzerland Cargill 108 Metals and minerals, energy and agricultural products Minneapolis, Minnesota Koch industries 100 Oil refining and transportation, petrochemicals, forestry and paper, and ranching. Wichita, Kansas Trafigura 79.2 Crude oil, products, non-ferrous, concentrates and refined metals trading and transportation Geneva, Switzerland Gunvor international 65 Oil trading with emphasis on Russia. Has expanded in power and coal trading Geneva, Switzerland Archer Daniels Midland (ADM) 62 Oilseeds, corn processing, agricultural services, storage and transportation, wheat milling, cocoa processing and food ingredients business. Decatur, Illinois NOBLE Group 56.7 Soybeans, oil seeds, grains, coffee, cocoa, sugar, cotton, coal, clean fuels e.g. ethanol, ferrous and non-ferrous metals and vessel chartering. Mercuria Energy Group 46 2 Physical crude oil and oil products including fuel oil, middle distillates, naphtha and gasoline. It also trades power, natural gas, coal and biodiesel. Bunge 45.7 Oilseeds and grains, produces sugar and ethanol, mills wheat and corn to make ingredients used by food companies and sells fertilizer in North and South America Hong Kong, China Geneva, Switzerland White Plains, New York Total Source: The Telegraph, April 2011, 1 in USD Billions Turnover 5

6 Commodity trade finance : the value chain (simplified) The different players have different financing needs adapted to their respective production cycles Producers Traders Processors Traders End users Origination DOWNSTREAMING Destination Financing Post trade financing (short term) Transactional financing (short term) Pre-payments / Pre-export finance (medium term) Borrowing base financing (revolving) 6

7 Lenders Commodity trade flows need financing Commodities generate trade flows that in turn generate financing needs at all stages of the supply chain: > Producers / exporters > Trading companies > Processors > Importers > End users / distribution FINANCING NEEDS: Pre-payments / Pre-export finance Transactional financing Post trade financing Borrowing base financing Commodities trade flows intervene at an early stage of industrial processes and economic life in developed and emerging countries. They are therefore highly strategic for most countries, industrial companies and end users which makes the financings attached to them strategic too As a result, financings linked to commodity trade flows have demonstrated a high level of resilience and robustness, particularly during economic down cycles 7

8 Commodity trade finance : the market > Commodity finance is predominantly a bank market dominated by large commercial banks. European banks are among the top players with global reach (geographies, commodities, borrowers) > Commodity Trade Finance has grown faster than other syndicated financings: Development of free trade policies Growing investment and consumption needs in emerging countries Significant increase in volumes traded and in prices fuel for growth effect Growing demand for secured assets due to change in risk appetite by banks, new regulatory framework and constraints on liquidity > Despite the credit crisis and tougher regulations several top commodity finance banks have stated that commodity trade finance remains within their core lending activity. As a comparison these very same banks have closed or dramatically reduced other lending activities. This demonstrates further the resilience of the asset class through the cycle > Regulatory capital treatment remains favorable when compared to other lending businesses although at a level higher than historical performance 8

9 Commodity trade finance : challenges REGULATIONS > Growing capital and liquidity requirements > Restrictions on banking business model and activities > More constraints on accounting rules > Greater scrutiny of regulators and governments ENVIRONMENT > Pressure on European banks to reinforce their capital base and stable funding > Greater defiance of USD lenders vis-à-vis European banks > Banks seeking solutions to meet their funding requirements of their USD assets base 9

10 Trade finance example - Crude oil from Angola to the US Pre Export Financing example of Angolan crude oil exports to US refineries Angola OPEC member Local Exporter Refiner USA Largest consumer of liquid fuels with 23 mbbls/day 7 th largest producer with 1.8 mbbls/day Crude oil accounts for 90% of export revenues and 80% of GDP 2 1 Pool of Lenders 3 Imports account for approx. 50% of consumption Largest importer of Angolan crude oil with more than bbls/day Offshore Account Based on solid track record of Angolan crude oil exports to US refiners, a pool of Lenders will pre-finance future exports of Angolan crude oil by a local exporter (the Borrower ) to US refiners. The financing is secured as the Borrower assigns the proceeds of the exports contracts payable in an offshore collection account pledged to the Lenders. The actual and future value of the export proceeds (based on prevailing market prices) shall at all times represent more than 100+% of the outstanding amounts under the financing. Additional security package can include security interest in onshore current and fixed assets. On receipt of the cargo the Refiner pays into an Offshore Account pledged to the Lenders. The financing is then repeated.! During the whole transaction price risk is mitigated. 10

11 Commodity (Collateral) Understanding the commodity Understanding and mitigating the risks behind a commodity transaction is at the heart of the expertise Performance The risk that an exporter does not deliver the goods in the context of a commercial contract backing a credit facility Mitigants Track Record, contractual terms, capacity and cost analysis Commodity Price The risk that commodities price volatility negatively impact the cash flows of a specific transaction or the value of assets Overcollateralization, marked-to-market adjustments or hedging Country The risks inherent to the situation of a particular country that may directly or indirectly negatively affect a transaction Analysis of commodity s strategic importance, offshore repayments, political risk insurance. Corporate The risk related to the financial health of a counterparty based in most cases on an assessment of the business model, balance sheet and income statements and cash flow analysis Financial analysis of the company, ownership and strategy. In-depth liquidity analysis. Payment The risk that an importer does not comply with its payment obligation in the context of a commercial contract backing a credit facility Track record, letter of credit or payment guarantee Damage or loss of goods Self Explanatory Track record, insurance Quality & Quantity FX Legal Goods delivered do not comply with contractual specifications in terms of quantity and quality Self Explanatory Self Explanatory Track record, Client/Supplier relationship, overcollateralization, first class inspection companies Trade is back to back in USD, offshore repayments Legal opinions (local and international) 11

12 Why invest in commodity trade finance Today more than ever Commodity Trade Finance represents a stable and de-correlated yield enhancer > Global commodity trade of strategic commodities will continue to grow fuelled by new emerging demand > The default rate is minimal compared to other debt investments as credit line is secured or backed by underlying commodity flows. Risk profile is also improved by the strategic nature of commodities that provide a strong incentive to the parties involved to perform their obligation even in times of stress: commodities need to flow on a continuous basis > Enables to participate in global commodity trade without being exposed to underlying commodity volatility > Tightening regulations are forcing banks to limit the size of their balance sheets and pushing them to increasingly syndicate their very good quality assets > Current risk free levels highly improve the strategy s risk return attractiveness. 12

13 Contacts United Kingdom Galena Asset Management Limited Portman House 2 Portman Street London W1H 6DU Singapore Galena Asset Management Asia Pte. Ltd. 10 Collyer Quay Ocean Financial Centre #29-00 Singapore Singapore Tel: +44 (0) Fax: +44 (0) Tel: +(65) Fax: +(65) For additional information please contact: information@galena-invest.com Switzerland Galena Asset Management B.V. Geneva Branch Rue de Jargonnant Geneva Switzerland Tel: +41 (22) Fax: +41 (22) This Document has been prepared by Galena Asset Management Ltd, authorized and regulated by Financial Services Authority, for circulation to persons reasonably believed by it to be of a kind described in Article 238(6) of the Financial Services & Markets Act 2000 (Promotion of Collective Investment Schemes)(Exemptions) Order 2001 or to whom this document may otherwise lawfully be issued or passed on to give preliminary information about the investment proposition described herein. It is confidential communication to, and solely for the use of the recipient. It is not addressed to and may not be used by any other person. It expresses no views as to suitability for the individual circumstances of any recipient. This Document may only be delivered to a U.S. person who is an Accredited Investor as such term is defined in the U.S. Securities Act 1933, as amended (The 1933 Act ), a Qualified Purchaser as defined for purposes of Section 3(c)(7) of the U.S. Investment Company Act of 1940, as amended (The 1940 Act ), and Qualified Eligible Participants as such term is defined under the U.S. Commodity Futures Trading Commission Rule 4.7. It is not anticipated that these securities will be registered under the 1933 Act or qualified under any applicable state securities statutes. Nor is it anticipated that the Fund will be registered as an investment company under the 1940 Act in accordance with Section 3(c)(7) of that Act. This Document is based on, or derived, from information generally available to the public which we believe to be reliable. No representation is made that it is accurate or complete. The Trafigura group of companies and those associated with it may have positions in, and may effect transactions in, securities and instruments of issuers mentioned herein. The presentation has been solely prepared for informational purposes and is not a solicitation or an offer to buy or sell any security or instrument or to participate in any trading strategy. The Private Placement Memorandum relating to the Funds mentioned in this document includes information as to certain risks, supersedes the information contained herein and should be requested and carefully reviewed by persons interested in investing in any of the Funds. Past results are not necessarily indicative of future results. Price and availability are subject to change without notice. Examples of transactions contained herein may not represent actual trades and similar results may be obtained only if the parameters described can be duplicated, of which there can be no certainty. Each recipient must satisfy himself as to the observance of relevant laws and regulations, including obtaining any consent which may be required. Company registration number: Country of registration: England. Authorised and regulated by the Financial Services Authority. 13