Understanding Basic Trade Finance Structuring Techniques and Lessons from Failed Deals

The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa1

Understanding Basic Trade Understanding Basic Trade Finance Structuring Finance Structuring

Techniques and Lessons Techniques and Lessons from Failed Dealsfrom Failed Deals

By Dr. B. O. Oramah*By Dr. B. O. Oramah*

*Dr. B.O. Oramah is Executive Vice President at AfreximbankOpinions expressed herein do not necessarily reflect the views of Afreximbank

The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa (2)

Preamble:Preamble:Major objective of this presentation is to refresh participants’ memories about the basics of Structured Trade FinanceTo achieve the above objective, the paper is organized as follows:

Section One explains Risk,

Section Two defines Structured Trade Finance and the steps involved in Structuring,

Section Three discusses Deal Breakers,

Section Four touches on Pricing issues,

Section Five discusses why some structured trade deals fail, while

Section Six concludes


1. RISK IDENTIFICATION AND MITIGATION

1.1 What is Risk?Two Definitions:

1. Context in which an Event Occurs with some Probability or where the size of the Event has a Probability Distribution.

2. A Class of Uncertain Events which Affects the well-being of a decision maker or a class of Decision – Makers.


Definition No. 2 is more APPROPRIATE for what is Risk if there is no cost to it?


1.2 Operative WordsThe Operative Words Are:

UNCERTAINTYWELL-BEINGDECISION-MAKER

In this case; DECISION-MAKER = Bank WELL-BEING = Bank’s Financial Health UNCERTAINTY = Events Outside Bank’s

Control


1.3 Uncertain Events In Credit Transactions Arise Because

Banks are unable to determine client’s ability to

meet obligation with any degree of certainty due

to a variety of reasons,

Such as:

Changes in Borrower’s Financial Standing

Changes in Borrower’s Business Environment

Changes in Country Conditions

Changes in the Financial Conditions of the

Borrower’s Direct and Indirect Counter-

parties


The above are usually aggregated into;

Credit Risk

Business Risk

Performance Risk

Counter Party Risk, and

Country Risk


1.4 Key Characteristics of the identified Risks are that they are;

Separable Transferable Essentially Exhaustive And Therefore Can Be Mitigated

The above characteristics form theFoundation of Structuring


2. ROLE OF STRUCTURED FINANCE IN RISK MITIGATION

2.1 Structured Finance is the;

Art of transferring Risk in Financing

Transactions from Parties less able to Bear

those Risks to those more equipped to

bear them in a manner that ensures

Automatic Reimbursement of Advances

from the Underlying transaction Assets


It encompasses: “Any structure whereby certain assets (inventory,

contract, export receivables etc) with more or less

Predictable cash-flows can be isolated from the

originator, Pledged (Sold, leased etc) and used to

support the Financing being raised (as collateral

and/or source of reimbursement or repayment) or

to substitute it”

(Emmanuelle Moors de Georgio)


Accordingly, Structured Finance Converts

Uncertainty to some “Certainty”

(Predictable Cash-flow) and thereby

Mitigates Risks.

Unbankable deals therefore become bankable.


2.2 THE COLLATERALIZATION OF CREDITS: A SCHEMATIC OVERVIEW OF STRUCTURED FINANCE

Collateralized LendingCollateralized LendingCommodities as

collateralAssets other than commodities as:

•Unconditional collateral (cash, treasury bonds, stock):•Collateral conditional on the performance of the party offering the collateral (irrevocable L/Cs)•Collateral conditional on the performance of a third party debtor (loan or contract/ Accounts receivables, Assignments of contracts):•Assets backing Special Purpose Vehicles (credit card receivables, road tolls).

Indirect Use:Special PurposeVehicles, issuingBonds which areCollateralized byCommodityassets

Direct Use

Commoditiesnot yet produced;

CommoditiesIn the ground

or being grownare assignedas collateral

CommoditiesHave beenproducedalready

Warehousereceipts

Trust receipt:Used for

Commodityprocessing

Negotiable:can be traded

on a secondarymarket

Non-Negotiable:Used within

a deal

Secured Finance:Secured Finance: collateral is assigned collateral is assigned

Structured FinanceStructured Finance: Collateral is assigned and an automatic reimbursement : Collateral is assigned and an automatic reimbursement procedure is devisedprocedure is devised

Courtesy: L. Rutten, UNCTAD, Geneva


8. Legal Documentation

7. Developing the Term Sheet

6. Identifying Mitigants

5. Assessing the Risks

4. identifying key parties and entities involved, including countries of Domicile of the parties

3. Understanding the envisaged Funds flow arising from the physical (Sketch)

2. Understanding the Flow of Documents (Sketched if Possible)

1. Understanding the envisaged physical transaction 2.3 Essential Steps in

Building a Structure:


Understanding the Physical Transaction:Understanding the Physical Transaction:- What good is being shipped?What good is being shipped?- What are the contract specifications?What are the contract specifications?- When is the good to be shipped?When is the good to be shipped?- Where will it be shipped to?Where will it be shipped to?- How is the good to be transported, any intermediate How is the good to be transported, any intermediate

warehousing? Who is the w/house?warehousing? Who is the w/house?- What is the cycle of shipment?What is the cycle of shipment?

11

Understanding the Nature and Flow of Documents:Understanding the Nature and Flow of Documents:- The Sale contract (the parties involved)The Sale contract (the parties involved)- Industry rules under which the contract was drawn Industry rules under which the contract was drawn

(CAL, AFCC, FOSFA, etc)(CAL, AFCC, FOSFA, etc)- The shipping documentsThe shipping documents- Quality certificates (who issues?)Quality certificates (who issues?)- Insurances (what do they cover?)Insurances (what do they cover?)- How are documents to be remitted and received?How are documents to be remitted and received?- The Export License and other official docs. required for The Export License and other official docs. required for

shipment?shipment?

22

2.4 THE BUILDING BLOCKS:2.4 THE BUILDING BLOCKS:


Understanding the Envisaged Funds Understanding the Envisaged Funds Flow:Flow:

• What are the sums involved?What are the sums involved?• How and when are they to be paid?How and when are they to be paid?• Where are they to be paid and received?Where are they to be paid and received?• What currencies are involved?What currencies are involved?• Are any deductions to be made?Are any deductions to be made?• Are there provisions for Are there provisions for

Reimbursements?Reimbursements?• What duties and taxes are payable?What duties and taxes are payable?

33

Identifying Key Parties and Entities Involved:Identifying Key Parties and Entities Involved:• Who is the shipper (Exporter)? Based in which Who is the shipper (Exporter)? Based in which

Country?Country?• Who is the buyer (Importer)? Based in which Who is the buyer (Importer)? Based in which

Country?Country?• Who are the forwarding Agents?Who are the forwarding Agents?• Who are the insurers?Who are the insurers?• Who are the warehouse men (if any?)Who are the warehouse men (if any?)• Who are the document remitting bank?Who are the document remitting bank?• The L/C bank?The L/C bank?• The Inspection Agents?The Inspection Agents?

44


Assessing the RisksAssessing the RisksEvaluating the building Evaluating the building blocks in steps 1 to 4 blocks in steps 1 to 4 using certain Risk using certain Risk Acceptance CriteriaAcceptance Criteria

5

Identifying MitigantsIdentifying MitigantsIdentifying securities, Identifying securities, contractual obligations, etc… contractual obligations, etc… to deal with unacceptable to deal with unacceptable risks as may be identified in risks as may be identified in step 5step 5

66


The Term The Term SheetSheet

7

Legal DocumentationLegal Documentation• Generating the Legal documents to Generating the Legal documents to

support (6-7)support (6-7)• Dealing with Legal RisksDealing with Legal Risks• Legal OpinionsLegal Opinions• Governing LawGoverning Law• Local Law/RegulationLocal Law/Regulation• Documentary Taxes in Security Documentary Taxes in Security

PerfectionPerfection

88


2.5 Arriving at the Structure:2.5 Arriving at the Structure:Risk assessment and Mitigation

Credit RiskCredit Risk

Character / Management / FinancialCharacter / Management / Financial

Assessment CriteriaAssessment Criteria

Risk FactorRisk Factor

Is borrower rated, with investment grade rating? Is borrower rated, with investment grade rating?

Or Are key individuals behind the Borrower of Or Are key individuals behind the Borrower of

high integrity and:high integrity and:

have no record of corruption or fraudhave no record of corruption or fraud

no conviction for criminal offenceno conviction for criminal offence

well respected in the trade for honesty and well respected in the trade for honesty and

reliabilityreliability


have risk appetite assessed to be moderate. In have risk appetite assessed to be moderate. In this regard, shareholding must be well spread, if this regard, shareholding must be well spread, if not wholly owned by government.not wholly owned by government.

Key officers must have the ability to withstand Key officers must have the ability to withstand political and other pressurespolitical and other pressures

Do internal controls evidence separation of Do internal controls evidence separation of powers and devolution of authority?powers and devolution of authority?

Are there no Board room squabble of significance?Are there no Board room squabble of significance?

Do key officers have relevant formal and/or Do key officers have relevant formal and/or informal training in the trade?informal training in the trade?


Do key officers have sufficient knowledge about Do key officers have sufficient knowledge about the business?the business?

Can key officers show evidence of satisfactory Can key officers show evidence of satisfactory performance in past positions?performance in past positions?

Does organization have a sound and documented Does organization have a sound and documented corporate strategy outlining the vision of corporate strategy outlining the vision of management?management?

Does the institution have a very good relationship Does the institution have a very good relationship with the regulatory authorities?with the regulatory authorities?

Is management turn-over high?Is management turn-over high?


Does the organization maintain consistent Does the organization maintain consistent profitability (over 3 years) (any decline to be profitability (over 3 years) (any decline to be explained by factors outside the organization’s explained by factors outside the organization’s control)control)

Is debt/equity ratio at least equal to the industry Is debt/equity ratio at least equal to the industry average or those of competitors in the country average or those of competitors in the country concerned. Where a monopoly is being assessed, the concerned. Where a monopoly is being assessed, the analyst should use his judgment to ascertain a analyst should use his judgment to ascertain a prudential ratio to acceptprudential ratio to accept

Are the company’s assets mostly current?Are the company’s assets mostly current?

Does it maintain a strong position among its Does it maintain a strong position among its competitors in market share and financial standing.competitors in market share and financial standing.

Is debt service coverage ratio greater than 2Is debt service coverage ratio greater than 2


Structure loan to make self liquidating by Structure loan to make self liquidating by

transferring repayment risk to other credit worthy transferring repayment risk to other credit worthy

entities with the Bank having title over the entities with the Bank having title over the

receivables, if ability to perform contract is receivables, if ability to perform contract is

adjudged “good”.adjudged “good”.

Possible Mitigants that may be used to Possible Mitigants that may be used to improve riskimprove risk

In the case of a trading company, having a credit In the case of a trading company, having a credit worthy and reliable local bank to on-lend funds.worthy and reliable local bank to on-lend funds.

If Answers are NO, Risk may be transferred to other more credit worthy counterparties by:

Taking acceptable guarantees (corporate, local Taking acceptable guarantees (corporate, local bank or reliable affiliates or holding companies).bank or reliable affiliates or holding companies).


Does the company:

have good track record i.e. has it exported have good track record i.e. has it exported successfully for at least 3 years?successfully for at least 3 years?

Have necessary facilities vehicles, personnel, local Have necessary facilities vehicles, personnel, local supply network, warehouses, processing plants, to supply network, warehouses, processing plants, to support transactions implied by the Facility support transactions implied by the Facility amount being requested?amount being requested?

Performance RiskPerformance Risk




Is the company’s export market share in the Is the company’s export market share in the business sizeable such that the company is business sizeable such that the company is perceived as being in general in the top 15% perceived as being in general in the top 15% of its trade by peers?of its trade by peers?

Has the company good working relationship Has the company good working relationship with the regulatory authorities of the trade?with the regulatory authorities of the trade?

Are there minimal social unrests, work Are there minimal social unrests, work stoppages, incidents of arson and theft of stoppages, incidents of arson and theft of goods in warehouse or in-transit?goods in warehouse or in-transit?

Is port infrastructure sound and adequate to Is port infrastructure sound and adequate to support the trade?support the trade?

No major adverse changes in the sector or No major adverse changes in the sector or company (by the government) is being company (by the government) is being expected?expected?


If answers are no; limit the lender’s role to refinance of stock in third limit the lender’s role to refinance of stock in third

party warehouse or provide post-shipment credit party warehouse or provide post-shipment credit onlyonly

poor performance risk can be transferred to a good poor performance risk can be transferred to a good credit risk of a bank, government or other entities. credit risk of a bank, government or other entities. (if such risk is found acceptable)(if such risk is found acceptable)

explicit charge on marketable assets of the explicit charge on marketable assets of the company located in acceptable jurisdiction.company located in acceptable jurisdiction.

Cash collateral to be takenCash collateral to be taken

Possible MitigantsPossible Mitigants


Borrower to take insurance coverage on stocks, if Borrower to take insurance coverage on stocks, if arson and theft are rife. Insurance to be assigned arson and theft are rife. Insurance to be assigned to the Lender.to the Lender.

Have acceptable Management Have acceptable Management Consultants/Collateral Agents monitor facility. Now Consultants/Collateral Agents monitor facility. Now Collateral Management companies abound and can Collateral Management companies abound and can assist.assist.


Are there existing or potential political and social Are there existing or potential political and social problems e.g. arbitrary government restriction or problems e.g. arbitrary government restriction or actions, or socio-political unrest?actions, or socio-political unrest?

Are there existing or potential economic/financial Are there existing or potential economic/financial difficulties?difficulties?

Country RiskCountry Risk




Transfer repayment risk to a jurisdiction with Transfer repayment risk to a jurisdiction with better risk rating if other risk factors are found better risk rating if other risk factors are found acceptable.acceptable.

Take appropriate securities domiciled outside the Take appropriate securities domiciled outside the countrycountry



Must be seen to improve profitability of the businessMust be seen to improve profitability of the businessMust be seen to have economic benefit to the countryMust be seen to have economic benefit to the country

Loan PurposeLoan Purpose



None. The Loans to be supported must have a None. The Loans to be supported must have a valid purpose.valid purpose.



Is price of the commodity volatile and uncovered?Is price of the commodity volatile and uncovered?

PricePrice



Margin the financing sufficientlyMargin the financing sufficiently Only accept firm fixed price contractsOnly accept firm fixed price contracts Take a price Hedge (options, futures, forwards or Take a price Hedge (options, futures, forwards or

swaps)swaps)



Is the currency of receivable different from currency Is the currency of receivable different from currency of loan?of loan?

Exchange RateExchange Rate



Enter a currency forward, swap, futures or optionEnter a currency forward, swap, futures or option

Margin the financing sufficientlyMargin the financing sufficiently



Is demand volatile?Is demand volatile?

Is buyer likely to renege on contract to buy ?Is buyer likely to renege on contract to buy ?

MarketMarket



Enter only firm fixed price contracts with Enter only firm fixed price contracts with acceptable buyersacceptable buyers

Use only Irrevocable L/Cs issued by acceptable Use only Irrevocable L/Cs issued by acceptable banksbanks



Is buyer a reputable trading house ?Is buyer a reputable trading house ?

Does buyer have acceptable credit rating?Does buyer have acceptable credit rating?

BuyerBuyer



Use Irrevocable L/Cs’ issued by prime investment Use Irrevocable L/Cs’ issued by prime investment grade-rated banksgrade-rated banks

Use Credit InsuranceUse Credit InsuranceBank GuaranteesBank Guarantees



2. Buyer Acknowledges Receipt of Assignments

notice

Figure 1: Commodity Pre-financing securitized by export flow

2. Exporter Assigns Export Contracts to Lending Bank

(with notification to Buyer)

BuyerLending

Bank(Int’l Bank)

Exporter

4.

Export

er

ship

s goods

4.

Export

er

ship

s goods

1.

Export

1.

Export

co

ntr

act

wit

h

contr

act

wit

h

Buyer

Buyer

5. Buyer pays for exports as per assignment

3.

Lendin

g B

an

k d

isb

urs

es

3.

Lendin

g B

an

k d

isb

urs

es

funds

to E

xport

er

funds

to E

xport

er

2.6 Typical Structure - Commodity Pre-Financing2.6 Typical Structure - Commodity Pre-Financing


Key Features of Deal are

Performance Risk is Retained on ExporterPerformance Risk is Retained on Exporter

Payment Risk is Isolated and Transferred to an Payment Risk is Isolated and Transferred to an

OECD BuyerOECD Buyer

Price Risk is mitigated by pre-financing firm fixed Price Risk is mitigated by pre-financing firm fixed

price contracts or through a price hedgeprice contracts or through a price hedge

Security and Repayment are Achieved through;Security and Repayment are Achieved through;

• Assignments and acknowledgements

• Charges

• Pledges, etc


2.7 Such Deals are Possible where: Commodity involved is Exchange - TradedCommodity involved is Exchange - Traded

Exporter has Good Track RecordExporter has Good Track Record

Foreign buyers are diversified and are good Foreign buyers are diversified and are good

namesnames

Exporter’s country is reasonably stable Exporter’s country is reasonably stable

(Politically and economically)(Politically and economically)

Underlying Contract is sufficiently Long, Underlying Contract is sufficiently Long,

Binding and EnforceableBinding and Enforceable

The Borrower is able to assign and/or The Borrower is able to assign and/or

transfer its Assets.transfer its Assets.


2.8 Deals with Deviations from Typical2.8.1 PROBLEM ONE

IF EXPORTER CANNOT ASSIGN OR PLEDGE ASSETS DUE TO NEGATIVE PLEDGE CLAUSES

SOLUTIONS

Use a Pre-Payment Structure (Figure 2) e.g.

Cotton deals in Tanzania, Oil deals in Angola;

Use Irrevocable Payment Instructions and take

all funds coming into collection account as

repayment (because other creditors can attach

the receivables and the Collection Account), e.g.

Copper deals in Zambia in the 1990s.


5. Repayment, then Documents endorsed to Buyer

Figure 2: Dealing with Problem 1:A Prepayment Financing Structure

Buyer LendingBank

Exporter

3. G

oods

ship

ped

3. G

oods

ship

ped

to B

uyer

to B

uyer

1.E

xp

ort

Contr

act

,1.E

xp

ort

Contr

act

,Fo

reig

n C

urr

ency

Fore

ign

Cu

rrency

Pre

paym

ent

Ag

reem

ent

Pre

paym

ent

Ag

reem

ent

2. Disbursement against assignment of Prepayment Benefits

4. Title Documents to Lending Bank


2.8.2 PROBLEM TWO

IF EXPORTER PERFORMANCE CAPABILITY IS IN DOUBT

SOLUTIONS

a) Finance Against Stock in Warehouse under

Third Party Supervision

b) Take Performance Guarantee from a Local Bank

or Insurance Company (Figure 3)

c) Finance on Credit of Buyer Under a Red or

green Clause Letter of Credit (Figure 4)


Figure 3: Dealing with Problem 2 (b) Lending With Payment Guarantee

LendingBank

GuarantorBank b)

4.

Dis

bu

rsem

en

t4

. D

isb

urs

em

en

t

2.

Con

tract

2.

Con

tract

Assig

nm

en

tA

ssig

nm

en

t

3. Guarantee (which may or may not be collateralized) a)

a) Securities taken include depositing of treasury bills, partial cash collateral etc.b) Guarantor may be local or international bank, government, central bank or a

multinational corporation which may be a major shareholder of the exporting company.

a) Securities taken include depositing of treasury bills, partial cash collateral etc.b) Guarantor may be local or international bank, government, central bank or a

multinational corporation which may be a major shareholder of the exporting company.

6. Repayment of principal and

interest as per Assignment

1. Commercial Contract

5. Goods

Exporter Importer


2. Limited Recourse Loan

Figure 4 Dealing with Problem 2

(c) Financing the Buyer Under Limited Recourse Structure

Buyer Lender

Exporter

4. G

oods

ship

ped

4. G

oods

ship

ped

to B

uyer

to B

uyer

1.E

xp

ort

Con

tract,

1.E

xp

ort

Con

tract,

Fore

ign

Cu

rren

cy

Fore

ign

Cu

rren

cy

Pre

paym

en

tP

rep

aym

en

t

5. Repayment contingent on successful export of goods

CrudeSupplier

3. Pays for and receives Crude


2.8.3 PROBLEM THREE

IF THE COMMODITY IS NOT EXCHANGE TRADED, e.g.

Manufactured Goods

SOLUTION Obtain A Local Bank Guarantee Or Performance

Bond From A Credit-Worthy Insurance Company

Finance only against L/Cs with Required

Documents Clearly Specified

Use Twinning to reduce Performance Risk, e.g. as

in Afreximbank Export Development Finance

Programme.


2.8.4 PROBLEM FOUR

IF TRANSACTION INVOLVES PROCESSING RISK

SOLUTION Refinance Raw material stock in W/House under

Third Party Supervision and sell stock forward

through an option

Mitigate Processing and Payment Risks by

allowing stock to be drawn under a “Buy-Back”

Arrangement. (e.g. cocoa processing in Nigeria),

i.e. stock under collateral management can only

be drawn for processing upon receipt of sums of

at least 125% of value of stock to be drawn.


2.8.5 PROBLEM FIVE

If Traded Good/Service Is Not Conventional,

e.g. Trading Done On; Consignment Basis (Flowers)

Through Agents (Diamonds)

Aircraft Purchase

Raw fish Export

Telecommunication

Power

Oil Services

Hotels


SOLUTION

Net Call receivables in USD Roaming charges (GSM) Air time revenues.

Ghana, Nigeria, Zimbabwe,

Sudan

4. Telecom

Book receivables from Flower Auction

Zimbabwe/Kenya3. Horticulture

Fishing Royalties Namibia, Seychelles

2. Fish

Sales proceeds due exporter from sales agent

Guinea1. Diamonds

What have been/can be Assigned

Country Transaction

was Done

Product


Over-Flight-FeesGhana8. Airport

Ticket Sales Proceeds, Airline Royalties

Ghana, Nigeria7. Aircraft

Sales proceeds collected by Sales Agent and covered by Credit Insurance

Zimbabwe, Zambia

6. Beef

Proceeds of Power Purchase Contract with mining companies

Zimbabwe5. Power


Country Transaction

was Done

Product


Term room rentals with reputable corporates and tour companies

Financial Future Flow Structures (e.g. credit card payment rights)

Eastern & Southern Africa, Nigeria, Ghana

10. Hotels

Proceeds of Service Contracts entered into with Major Companies

Nigeria, AngolaZambia, Ghana

9. Mining Services


Country Transaction

was Done

Product


2.8.6 PROBLEM SIX

WHAT OF INTRA-AFRICAN TRADE?

SOLUTION

Cover Country Risk using Afreximbank Country

Risk Guarantee Facility (See Figure 5)

The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa

Figure 5 AFREXIMBANK COUNTRY RISK GUARANTEE FACILITY FLOW OF TRANSACTIONS

(49)

Exposure Extinguished

AFREXIMBANK interventionas risk mitigant

Cause of Non‑reimbursement is determined and risk is shared

Afreximbank is dischargedAfreximbank is discharged

AFREXIMBANK reimburses covered portion (80%) to Lender and pursues reimbursement with country concerned in

accordance with Bank Membership Agreement

On recovery of repayment. Lending bank is On recovery of repayment. Lending bank is reimbursed the remaining 20%, less reasonable reimbursed the remaining 20%, less reasonable

costs incurred by Afreximbank in pursing recoverycosts incurred by Afreximbank in pursing recovery

Risk Period for lending bank

No

Yes

No

Yes

At maturity, International bank isAt maturity, International bank isreimbursed by obligorreimbursed by obligor

At maturity, International bankAt maturity, International bankis reimbursed by obligor ?is reimbursed by obligor ?

Non‑reimbursement caused by commercial risk (credit, documentary/administration risks and fraud) events,

force majeure and/or certain country risk events

Yes

Lenders pursue security from BorrowerLenders pursue security from Borrower

Afreximbank providescover against certain country risk

events

International bank assumes payment risk of an African entity (through L/C issuance/ confirmation or other forms of financing

Yes

Yes

NoNon‑reimbursement caused by certain country risk events (exchange. Non‑reimbursement caused by certain country risk events (exchange.

control regulations, moratorium on debt payment, change in law or control regulations, moratorium on debt payment, change in law or policy affecting the timing currency or manner of debt paymentpolicy affecting the timing currency or manner of debt payment


Use your country’s ECA cover, if available

Finance against Buyer’s Assignment of Export

Receivable from a more secure country

Take out Country Risk insurance from ATI and

Lloyds if there is availability


2.8.7 Role Envisaged for Local Banks by International Banks under Structured

Finance

a)Confirmers of Local Producer/Exporter Performance

b)Funded participants or as collateral agents in

transactions

c) As disbursement Agents, L/C advising

Bank/Collection Agents

d)Monitoring Local Exporter Performance against set

Criteria and Delivery Projections

e)Source of Local knowledge ( A. Applegarth)


2.8.8 Banks as Performance Risk Guarantors or beneficiaries of export Lines of Credit

Local Bank Risks can be, and have been enhanced

through: Pledge of Treasury Bills or Government Bonds e.g.

banks in Zimbabwe, Zambia, Nigeria

Assignment of Financial Future Flows (Migrant Remittances) e.g. banks in Ghana, Nigeria and Ethiopia

Assignment of Credit Card Receivables

Assignment of Check Remittances, e.g. Turkey

Assignment of Trade Finance Payment Rights e.g. a 1999 Groundbreaking deal in Turkey


The Benefits are that :

The local bank is able to launch itself in

the market and may be able to obtain

better terms subsequently

It increases the amount of borrowing

the local bank may be able to raise at

better pricing


2.8.9 Some Innovative Structures Implemented with Local Banks

1) USD40 million Migrant Remittance Pre-financing for an African Agricultural Development Bank

The Trade Finance Bank for AfricaThe Trade Finance Bank for Africa

2) GUARANTEED AFREXIMBANK-BACKED

SECURITIZED OIL SERVICE NOTES (GASON)

(55)

Credit Enhancement*(Lloyds /AFREXIM)

LENDERS (INTERNATIONAL BANKS)

OIL SERVICE COs.

OIL MAJORS(SUBSIDIARIES)

ESCROW A/C

1.C

on

tra

ct

AFREXIMBANKLender of Record

QUALIFIED LOCAL BANKS(BORROWERS)

2. Secu

rity /

Assig

nment

2. Acknowledgement

Recou

rse

Gu

ara

nte

e

(Per

Aval)

2.

Ris

k

Part

icip

ati

on

A

gre

em

en

t

2. L.O.C**

3.

Fu

nd

ing

On

-Len

din

g

4. O

il Fie

ld

Serv

ices

5. C.W.D***

6.

Rep

aym

en

t

* May include Country Risk and Performance Risk * May include Country Risk and Performance Risk GuaranteesGuarantees

** Letter of Comfort** Letter of Comfort*** Certificate of Work Done or Accepted Invoices*** Certificate of Work Done or Accepted Invoices


2.8.10 The Success Factors in Structuring

Deals

THE THREE D’s; i.e.: UNDERSTAND

D EAL FLOW;

D OCUMENTS FLOW; AND CONDUCT PROPER

D UE DILIGENCE (Financial, Economic,

Transactional, Credit and Legal)


3. DEAL BREAKERS Untested and/or ambiguous

Commercial Law or Law relating to Security and Title to Goods, transfer of title and documents of title, and Bankruptcy

Registration issues and Stamp Duties Export Licenses and unclear Export

procedures Political Risk Unclear Insurance Regulations Unfamiliarity with Loan Agreements

and collateral verification and control KYC/AML Issues


4. PRICING ISSUES Structured Finance Makes It Possible To Achieve

Lower Pricing For A Given Transaction

Pricing Must, However, Take Account of the Following:

Effort expended in putting the structure in

place;

Risks involved;

Market practice; Desired return on Capital;

Need to attract other parties to deal, if

transaction is large; and

Weight to attach to fees and interest rates


5. Role of Central Banks

Creating enabling environment to facilitate inflow of international financing through: Ensuring currency convertibility and

transfers i.e. enabling exchange control regime

Appropriate monetary policies that are friendly to exports

Ensuring a sound banking system

A transparent and rule-based regulatory framework

To enable participation of local bank, clarifying how structured trade finance amy be treated under Basle II


6. Failed Deals and Lessons Structured Deals Are Not Fail Proof. Some

examples:6.1 A Cocoa Deal in West Africa – 1996

To support Borrower’s working and Investment Capital Requirements by way

of pre-finance of Term Cocoa Export Contracts Entered into with Major

International Cocoa Trading House

Purpose:

London Branch of an Asian bankSecurity Agent:

Major Indigenous Cocoa Trader Controlling more than 30% of the Market

at the time deal was done

Borrower:

From assigned Cocoa Export ProceedsSource of Repayment:

Syndicated Pre-Export Financing FacilityFacility Type:


Deal

Assignment of proceeds

of fixed-price cocoa sales contracts with leading commodity'

traders (Phibro Commodities, General

Cocoa, Mitsubishi Andre et cie and E D & F Man Cocoa Ltd.) for at least 125% of the

Facility Amount as well as a pledge over local

cocoa stocks on a tonnage basis

Additionally, there will be a charge over the

proceeds to be held in an Account to be

maintained in the name of the Borrower with the Lender/Security Agent

into which cocoa proceeds will be paid by

the cocoa buyers

Upon delivery of the cocoa lots into the warehouse.

the warehouse agents will issue warehouse receipts

in the name of the Lender/Security Agent. At

the time of shipment of the cocoa produce, the

Lender/Security Agent will receive the complete set of

shipping documents,

Security Agent Warehouse Agents

Deal Pillars

Support for the Pillars

Deal StructureDeal Structure

1

2 3


What Went Wrong? Security Agent did not know the

Difference between Good Fermented Cocoa (GFC) and Fair Average Quality

Cocoa (FAQ) so could not interprete the Stock Report Properly

Since Assigned Contract was for GFC and most of stock became FAQ, Pillar I

collapsed AND DEAL FAILED.

Loss was not 100% as FAQ cocoa was eventually sold at lower price.


6.2 A Cocoa Deal in West Africa – 1998

A Local BankFacility Agent:

To enable the Borrower purchase Cocoa in West Africa for export using its local office

Purpose:

A medium – sized U.K Cocoa Trader Active in West Africa

Borrower:

Pre-export financing Type of Facility:

Cocoa of LIFFE deliverable qualityGoods:


Deal

Assignment of firm fixed price cocoa

sales contracts

between the Borrower and

ultimate buyers, such

as Nestle, Mars and

Rowntrees (the

"Buyers")

Goods will be moved from

the warehouse to the ports and

loaded on-board vessels

by pre-approved

forwarding agents who

will bear responsibility for the goods while in their

custody

All Shipping documents to

be routed through Local Agent to the presenting banks with instructions

for payments to be made

directly to an account

nominated by the Lenders

Local Agent Warehouse Agents

Deal Pillars

Support for the Pillars

Deal StructureDeal Structure

Fixed charge over a Collection

Account (the “Collection

Account”) that will be opened

by the Borrower with the Off-

shore Agent or a bank nominated by the Off-Shore

Agent where proceeds of

assigned contracts will be

remitted

Advances will also be against

LIFFE deliverable quality cocoa received in warehouses

under third party supervision. The

warehouse keeper will also be expected to issue quality certificates

covering the stored cocoa. The warrants will be held by the Local Agent in trust for

the Lenders

1

2 3 4 5


What Went Wrong? Borrower pledged same cocoa stock to Multiple Lenders with Connivance

of Warehouse Agent

Local Agent was not doing proper Monitoring to identify the Multiple

pledges of which Lenders were alerted by manipulation of the

endorsement page on the Insurance certificates

Accordingly pillar 3 collapsed and with it the Deal

Loss was not 100% as cocoa was sold and proceeds distributed to multiple

Lenders.


6.3 LESSONS HUMAN BEINGS ARE CENTRAL TO

SUCCESS OF ANY STRUCTURED DEAL – Knowledge, Experience, Being

Hands On And Integrity Are Critical; Watch Agency Risk, Watch Fraud Risk

etc.

DON’T BE FOOLED by Supposed Big Size Of Borrower Or Their Location.

Do Your Normal Due Diligence.


7. CONCLUSIONS Structured Finance is a useful tool of

providing finance under difficult environment.

Essential Difference with Corporate Finance is that while Corporate Finance follows the Balance Sheet. Structured Trade Finance follows the deal (implication, you need to understand trade docs in Structured Finance)

It needs careful design for it to achieve its purpose

it is continuously evolving

It requires a lot of Effort and Imagination


African Export-Import African Export-Import BankBank

20092009

Thank Thank YouYou