Structured Trade Finance- The Right Panacea. ICA Dubai 2011

Transcription

1 Structured Trade Finance- The Right Panacea ICA Dubai 2011

2 SYNOPSIS What is Structured Trade Finance? Products Risks & Risk Mitigation Techniques Benefits

3 Importance of Cotton Life can be hard but cotton makes our lives easier, after all it is often the first fiber we touch when we are born and remains with us throughout our entire lives National Cotton Council of America

4 What is Structured Trade Finance It is a tailor-made cross-border trade finance where such credit facility is repaid by the liquidation of a flow of commodities.

5 Salient features of STF Structured techniques to mitigate risks involved Raising of cash from the transaction to secure the credit Based on future identified and somehow assured receivables Predictable cash flow

6 Importance of STF Lifeblood of every open economy Trade will never stop World Trade volume is outpacing the growth rate of the World economy Dynamism of international trade Growth of emerging markets Tested during the midst of the credit crunch

7 Wide array of STF s products Pre-export Financing Freight Financing Warehouse/Stock/Inventory Financing Tolling/Processing Financing Receivables Financing Invoice Discounting

8 Benefits of Structured Trade Finance Focus on the commodity itself and/or trade receivables rather than on the strength of the balance sheet and tangible assets Utilizing future trade flows to raise selfliquidating export-based financing and improve the cash flow

9 Benefits of Structured Trade Finance Some consider it as Off borrower s balance sheet financing since it is an asset-backed financing Execute new and perhaps larger transactions Stronger bargaining powers

10 Benefits of STF Short term revolving asset Secured and much more controlled Immediate liquidity Complete elimination of payment risks Better pricing cause it is more controlled and secured Risk may be shifted to a strong off-taker All risks identified and mitigated Self liquidated

11 Major Risks Political Price Credit Warehousing Performance

12 Political Risks Currency inconvertibility or exchange control restrictions War, civil war, terrorism, political unrest, other acts of political violence Dishonouring of contractual payments by Soverign/ sub-soverign/ Government entities

13 Unpredictable Political Risks Can surface overnight Beyond our control Considering what happened in the neighbouring countries, then one can realize that cross border investment can switch from low to high risk within couple of hours

14 Risk Mitigation-Political Risk Insure adequately and at the outset Be proactive rather than reactive Ask your local Bank to avalize the drafts or bills of exchange Accept local guarantees subject to local law Request your local Bank to add confirmation (if not applicable then Silent ) to letters of credit

15 Benefits of Insuring and/or Confirming lc Managing the levels of credit/country risks Opening up new markets Lending becomes easier Owners/boards of companies and investors have a peace of mind and can sleep better

16 Price Volatility Risk Due to recession global retail inventories were greatly reduced Due to economy recovery demand from retailers exceeded the supply as inventories fail to respond Short supply in the spot market due to flooding in Pakistan, harsh weathers in China, Australia and Brazil Lower expected crop yields

17 Price Volatility Risk Higher consumption in China & India Last year floods in Pakistan ( produces 8% of the World s cotton ) killed 30% of its cotton crop China has had a very bad crop India imposed a cotton export ban According to IBISWorld analysts, prices are not expected to start coming down until 2012 Unpredictable- Sometimes no time to recover

18 Risk Mitigation-Price Volatility Price-Hedging Back-to-Back price fixation In case of currency exchange risk Take a forward contract Borrow in the same currency of future inflows

19 Credit Risk Buyer may default Buyer may pull out from the commercial contract especially when prices plummet Buyer may take up the goods and does not honour the payment obligations especially on open account or DAA collection basis Buyer s bank unable to pay

20 Risk Mitigation-Credit Make sure the commercial contract is legally binding and all your rights protected The right Incoterms are stipulated ( Incoterms 2010 are now applicable 11 instead of 13, DAT & DAP replaces DAF,DEQ,DES and DDU ) Ask for payment in advance, if not 100%, then a % which you deem suitable at least to cover a possible price nose-dive and/or freight involved Request the Bank to avalize the draft in DAA

21 Risk Mitigation-Credit Risk Ask for a letter of credit and request your Bank to add confirmation to it Check credit reports on the buyer Get adequate insurance cover against all risks, including contractual defaults, bankruptcy, war, terrorism, theft,.etc..and also hijacking/piracy (64 incidents already reported to IMB Piracy Reporting Centre for this year )

22 Estimates of Insurance claims & paid 2008/9 TOTAL : $ 2.42bio Ukraine -$600mio ( Banks & Steel ) Kazakhstan - $500mio ( Banks ) Brazil - $300mio ( Agriculture mostly sugar ) Russia - $200mio ( Metals ) Bahrain - $150mio ( Banks ) Mexico - $150mio ( Various ) South Korea $100mio ( Ship building ) Thailand - $100mio ( Metals ) China/Indonesia/Ghana/Venezuela - $80mio each Source : Gallagher London

23 Risk linked with Warehousing Is the warehouse safe and secure? Is the collateral manager a reputable one? Are the commodities kept at the right conditions? Is the commodity perishable? Has the shelflife expired? Is it easily accessible by the transport operators?

24 Risk linked with Warehousing Is there any lien on the warehouse itself or the warehouse keeper/owner or even worse on the collaterals stored against debts unknown to you? Does the warehouse receipt provide you with a clear and undisputed legal ownership of the goods stored at the warehouse? Is the warehouse receipt recognized as document of title and a negotiable instrument? Is a proper CMA in place?

25 Risk Mitigation-Warehousing Appoint a collateral management company that carries a high reputation in the market Insure against all risks and make sure all the premiums are paid up to date Location ideally to be near the ports, borders, railways, fields, mills, mines, yards, etc Appoint a lawyer to conduct a research about any pending litigation/s involving the warehouse keeper/owner and the warehouse itself

26 Risk Mitigation-Warehousing In case finance is required, get an approval from your Banker before signing any contract Ensure that there is a valid law to protect the holder of the WR and that it complies with the law of the Country in which it is issued Ensure that the goods can be easily imported/ exported even if some constraints exist such as exchange controls, quotas, duties, etc Ideally country should be trouble - free

27 World Cotton Consumption COUNTRIES NAME 2010/11 ( Mio of metric tons ) CHINA INDIA 4.54 PAKISTAN 2.22 TURKEY 1.27 BRAZIL 0.97 BANGLADESH 0.86 UNITED STATES 0.78 INDONESIA 0.41 MEXICO 0.39 THAILAND 0.35

28 World Cotton Consumption COUNTRIES NAME 2010/11 ( Mio of metric tons ) VIETNAM 0.35 UZBEKISTAN 0.24 SOUTH KOREA 0.22 TAIWAN 0.22 ARGENTINA 0.17 REST OF THE WORLD 1.97 WORLD TOTAL 25.10

29 Performance Risk Supplier pulls out from the sales contract especially when prices are on the upward trend Supplier does not produce the cotton on time for shipment- might be liable to demurrage fees Does not ship the right quality/quantity of cotton Fictitious or Phantom supplier

30 Risk Mitigation-Performance Conduct a research on the supplier if not known in the cotton market/cotton associations Ask for past bills of lading that show the supplier s name as the shipper under previous shipments of cotton and verify these transport documents with some agencies such as IMB Double check with inspection companies and other cotton players Ask for Performance Bank guarantee

31 Risk Mitigation-Performance Pay a surprise visit to the supplier s premises If applicable ask for an advance bank payment guarantee Include a hefty penalty for not honouring the contractual obligations Appoint a reputable inspection company to inspect the cotton before/on loading

32 Methods of payment Open account Documents for collection letters of credit/standby lc/bank guarantee Advance payment In this region the most popular method is still the letter of credit and is worthwhile highlighting some clauses stipulated in some letters of credit

33 Planting and Selling COUNTRIES NAME PLANTING SELLING WEST AFRICA MAY JUL OCT DEC ANGOLA MAR APR AUG SEPT ARGENTINA OCT NOV FEB MAY AUSTRALIA AUG SEPT MAR - MAY BRAZIL CENTRE SEPT OCT MAR - JUNE BRAZIL NORTH EAST DEC JAN JUNE - OCT CENTRAL AFRICAN REP. JUN JUL SEPT- NOV. CHINA JAN- FEB AUG - OCT CONGO NORTH JUL AUG JAN - MAR CONGO SOUTH DEC JAN. JUN - SEPT

34 Planting and Selling COUNTRIES NAME PLANTING SELLING EGYPT FEB APR AUG OCT GREECE APR MAY AUG NOV INDIA MAR SEPT OCT FEB IRAN MAR APR SEPT OCT LAOS JUN JULY NOV DEC MADAGASCAR NORTH WEST MARCH SEPT MADAGASCAR SOUTH WEST OCT NOV APR MAY MOZAMBIQUE NOV JAN JUN AUG MYANMAR APR SEPT DEC PAKISTAN APR JUNE SEPT DEC

35 Planting and Selling COUNTRIES NAME PLANTING SELLING PARAGUAY AUG OCT FEB MAY SOUTH AFRICA NOV DEC MAY JUL TANZANIA OCT NOV MAY AUG TURKEY MAR APR SEPT NOV UNITED STATES MAR MAY AUG DEC UZBEKISTAN MAR MAY SEPT DEC ZIMBABWE OCT NOV APR AUG

36 Letters of Credits Restrictive/Stop Clauses If an l/c contains such restrictive/stop clause then that renders that l/c as worthless..losing the scope of the l/c due to the fact that the beneficiary will be at the mercy of the applicant and not the issuing/confirming Bank to get paid. This is against the spirit of the UCP600 rules which clearly emphasize that a letter of credit should be an instrument of payment and not an excuse for non payment.

37 Letters of Credits Few examples of Restrictive/Stop Clauses: Final price will be fixed via means of an amendment Inspection certificate to be issued by the applicant or his representative Delivery note/receipt to be countersigned by the applicant Nomination of vessel via an amendment

38 Issues related to l/cs Examples of docs asked for under l/cs that might tantamount to Non-Compliant presentation Insurance document ( Libyan l/cs insist that this has to be issued by a Libyan Insurance Company ) Warehouse-to-Warehouse cover is not always provided by insurance companies Phytosanitary/Fumigation certificates issued by Govt approved authority

39 Issues related to l/cs Examples of docs asked for, under l/cs that might tantamount to Non-Compliant presentation Phytosanitary/Fumigation/Inspection/Health certificates issued in English Language ( example :is it possible in CIS countries? ) Certificate of Origin to be legalized by certain Embassies ( is it possible within limited period of time ) Form 9 (Indian lcs), Form C 16 (Nigerian lcs)

40 Issues related to l/cs Check whether any port or country mentioned in the docs is sanctioned It is risky when the transport document is straight consigned to the applicant in case of discrepant docs ideally to the order of Unit price should be mentioned especially where partial shipments are allowed Retention money is not guaranteed under lcs Consider checking bill of lading with IMB

41 Issues related to l/cs Be careful when being asked to send one bill of lading out of three directly to the applicant, especially when documents are not fully compliant with lc terms and conditions It is risky presenting discrepant documents especially when the transport document is not a document of title such as an airway bill and it is consigned in favour of the applicant. Make sure that a clean set of documents is presented especially when prices take a nosedive

42 One of the Main Challenges Large Increase of working capital requirements caused by the record all time high prices ( Cotton prices have exploded, they have nearly doubled over the past 12 months, fetching 212.7c/lb May 2011 Delivery rendering it as one of the hottest commodities so far this year ) Considering that Banks are adopting a stricter lending policy then STRUCTURED TRADE FINANCE IS THE RIGHT PANACEA

43 Thanks for your kind attention FIMBank p.l.c Dubai Branch DIFC