Structured trade finance

Author: Partho Chakraborty

STRUCTURED TRADE FINANCE Definition Structured trade and commodity finance is defined as cross-border trade finance in emerging markets where the intention is to get repaid by the liquidation of a flow of commodities. It is an increasingly important area of emerging-markets lending, but its potential pitfalls have given it a poor image among parts of the financial community. However, compared to any other form of lending or investing in the emerging markets, structured trade and commodity deals have demonstrated an enviable track record of "survivability" under extreme testing. By John MacNamara in his book Structured trade and commodity finance: What can go wrong and how to avoid it Case Study

EXPORT & LOCAL BILL DISCOUNTING LINKED TO BACK-TO-BACK L/C Players Simrone Pharmaceuticals Industries Ltd., Mumbai, India Simrone’s Overseas Buyers (4 No – 3 in Africa & 1 in Europe) Simrone’s Local Suppliers (10 No) ICICI Bank, Mumbai, India Role Simrone: They are India based manufacturers and exporters of Pharmaceuticals Simrone’s Overseas Buyers: They are Africa and Europe based buyers Simrone’s Local Suppliers: They are India based manufacturers of goods on behalf of Simrone. Simrone out sources the production to them ICICI Bank: They are India based banker of Simrone, arranging the bills of Simrone to be negotiated and will open the Back-to-Back L/C in US$ for Simrone. Commodity: Pharmaceutical Products Total Amount: US$ 527,442 (Export L/Cs) Rs. 89,46,810 (Domestic Sales) This current order position is for 90 days and will be repeated each quarter.

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Details of Export L/C and Back-to-Back L/C

S. No.

Name of Overseas Buyer

Country L/C Opening Bank

L/C Confirming Bank

Value in US$

Value Per Shipment in US$

Tenor of First L/C in Days

Back to Back L/C Value (US$)

Tenor of Back to Back L/C in Days

1. Super Pharmaceuticals Ltd.

Uganda N.A. N.A. 202,600 67,533 + 67,533 + 67,534

N.A. 47,273 + 47,273 + 47,274

40

2. Noble Azania Ltd.

Tanzania Barclays Bank, Tanzania

Barclays Bank, UK

31,557 31,557 90 22,090 120

3. Karnag International (Z) Ltd.

Zambia First Alliance Bank, Zambia

Citibank, New York

73,285 36,643 + 36,642

Sight 25,650 + 25,650

50

4. Ayusa International

Yugoslavia Central European Bank, Yugoslavia

Natwest Bank, UK

220,000 180,000 + 40,000

Sight 126,000 + 28,000

50

TOTAL 527,442 527,442 369,210 Back-to-Back L/C Amount:

1. For Export L/Cs: US$ 369,210 (70% of US$ 527,442) in equivalent Rupees 2. For Domestic Sales: Rs. 62,62,767 (70% of Rs. 89,46,810=00)

Tenor:

1. The first L/C will be at Sight from Karnag, Zambia and Ayusa, Yugoslavia. The L/C from Noble, Tanzania will be for 90 days usance. There will be no L/C from Super, Uganda. Super will release the payment on faxing him the Bill of Lading.

2. The Corresponding Back-to-Back L/C will be for 50 days usance for Sight L/C’s and 120 Days usance for 90 Days L/C. For Super, Uganda the back-to-back L/C will be for 40 days usance.

3. The Rupees transaction will be without L/C. It would be a Purchase Order from German Remedies with a Credit Period of 30 days to make payment after receipt of goods

4. The Corresponding Back to Back L/C will be for 75 days Time Frame

1. 15 Days for Domestic Supplier to Manufacture & Supply the Goods 2. 21Days to Export the Goods

Security:

1. Promoter’s Personal Guarantee 2. PDC’s 3. Asset Collateral (Land, Building) 4. Cash Margin: 20%

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Requirement: Simrone has 4 overseas buyers located in Africa and Europe. They have 10 local suppliers of raw materials. Their overseas buyers on a continous basis place the orders against which Simrone sources the materials on a back-to-back basis.

Simrone needs a limit to be set in place as the Export L/C’s varies per transaction. Thus the back-to-back L/C’s cannot be accurately quantified. But by and large it will be as mentioned above. A Revolving Limit can be considered with a Cap. Transaction:

Export L/C’s

This transaction has 2 legs. The first leg is to open a Back-to-Back L/C and the second leg is to Discount the Bills backed by the Export L/C.

1. Simrone and Overseas Buyer enter into a contract where Simrone will sell the Pharmaceutical goods and Overseas Buyer will buy the same.

2. Simrone and Domestic Suppliers enter into a contract where Simrone will outsource the production to the Domestic Manufacturers.

3. The Overseas Buyer sends a Purchase Order to Simrone 4. Against the first Purchase Order, Simrone sends a Purchase Order to

Domestic Suppliers

5. The Overseas Buyers open a L/C favouring Simrone. 6. Against this L/C ICICI Bank will open a Back-to-Back L/C on the Domestic

Suppliers. 7. The Domestic Suppliers send the goods to Simrone. 8. The Domestic Suppliers then present the documents to their bank for

payment. 9. The Domestic Suppliers bank pays the Domestic Supplier and sends

documents to ICICI Bank to be forwarded to Simrone for acceptance. 10. Simrone accepts the documents and takes delivery of the goods. 11. Simrone exports the goods and sends documents to ICICI Bank for payment

against the first L/C. 12. ICICI Bank discounts the L/C backed bills and pays Simrone. 13. ICICI Bank sends the documents to Overseas Buyer through their bankers for

acceptance. 14. The Overseas Buyer accepts the documents and takes delivery of the goods 15. On due date the Overseas Banks remits the funds to ICICI Bank 16. Transaction Ends

Note:

1. The tenors will vary as for Sight L/C’s it will be less and for Usance L/C’s it will be more.

2. The transaction for Super Pharmaceuticals Ltd., Uganda will be as follows

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Super Pharmaceuticals Ltd., Uganda

1. Simrone and Super enter into a contract where Simrone will sell the Pharmaceutical goods and Super will buy the same.


3. Super sends a Purchase Order to Simrone. 4. Against this Purchase Order ICICI Bank will open a Back-to-Back L/C on the

Domestic Suppliers. 5. The Domestic Suppliers send the goods to Simrone. 6. The Domestic Suppliers then present the documents to their bank for


documents to ICICI Bank to be forwarded to Simrone for acceptance. 8. Simrone accepts the documents and takes delivery of the goods. 9. Simrone exports the goods. 10. Simrone faxes the Bill of Lading to Super for Payment and sends documents

to ICICI Bank for onward dispatch to Super. 11. Super credits the account of Simrone with ICICI Bank. 12. ICICI Bank sends the documents to Super through their bankers for

acceptance. 13. The Overseas Buyer accepts the documents and takes delivery of the goods 14. Transaction Ends

Domestic Transaction German Remedies Ltd., Mumbai

1. Simrone and German enter into a contract where Simrone will sell the Pharmaceutical goods and German will buy the same.


3. German sends a Purchase Order to Simrone. 4. Against this Purchase Order ICICI Bank will open a Back-to-Back L/C on the

Domestic Suppliers. 5. The Domestic Suppliers send the goods to Simrone. 6. The Domestic Suppliers then present the documents to their bank for


documents to ICICI Bank to be forwarded to Simrone for acceptance. 8. Simrone accepts the documents and takes delivery of the goods. 9. Simrone sends the goods to German and sends documents to ICICI Bank for

payment against the Purchase Order. 10. ICICI Bank sends the documents to German through their bankers for

acceptance. 11. German accepts the documents and takes delivery of the goods 12. ICICI Bank pays Simrone a further 15% of Invoice Value. 13. On due date the German remits the funds to ICICI Bank

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14. ICICI Bank deducts its charges and credits the balance to the account of Simrone

17. Transaction Ends Indicative Cost: EXPORT TRANSACTION

There are various costs here as some L/Cs are Back-to-Back L/Cs against Sight L/Cs and some are Back-to-Back L/Cs against Usance L/Cs. Also there is a case of Back-to-Back L/C against Overseas Factoring. Receipts: ICICI Bank - 1st Leg against Sight L/Cs S.No. Particulars Amount (Rs) 1. Export L/C Advisory Fees – 3 L/Cs (Flat Fee) 4,000=00 2. Back to Back L/C opening Charges for

a) Commitment Charges - 0.25% per quarter 24,122=75 b) Usance Charges - 0.10% usance per month 19,298=20 c) Commission – 0.15% (Flat Fee) 14,473=65

TOTAL 61,894=60

Receipts: ICICI Bank - 1st Leg against Usance L/Cs S.No. Particulars Amount (Rs) 1. Export L/C Advisory Fees – 1 L/Cs (Flat Fee) 1,000=00 2. Back to Back L/C opening Charges for a) Commitment Charges - 0.25% per quarter 5,191=15 b) Usance Charges - 0.10% usance per month 4,152=92 c) Commission – 0.15% (Flat Fee) 1,557=35 TOTAL 11,901=42 Receipts: ICICI Bank - 1st Leg, where there are no L/Cs S.No. Particulars Amount (Rs) 1. Back to Back L/C opening Charges for


TOTAL 39,993=24 Total Receipts: ICICI Bank – 1st Leg: Rs. 1,13,789=26

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Receipts: Simrone - 2nd Leg S.No. Particulars Amount (Rs) 1. Reimbursement of Export L/C Value

a) Sight L/Cs of Karnag (Less 9.5% Per Annum for 25 days) 34,43,911=52 b) Sight L/Cs of Ayusa (Less 9.5% Per Annum for 25 days) 1,02,71,784=72 c) Usance L/Cs of Noble (Less 9.5% Per Annum for 90 days) 14,47,953=50 d) Payments by Super 95,22,200=00

TOTAL 2,46,85,849=74 Payments: Simrone - 2nd Leg S.No. Particulars Amount (Rs) 1. Payments to ICICI – 1st Leg 1,13,789=26 2. Management Fee @ 0.5% Flat on US$ 369,210 86,764=35 3. Reimbursement of Back to Back L/C 1,73,52,870=00

TOTAL 1,75,53,423=61 Net Earnings to Simrone: Rs. 71,32,426=13

Receipts: ICICI Bank - 2nd Leg

S.No. Particulars Amount (Rs) 1. Spread on Sight L/Cs (1% for 25 days) 9,572=50 2. Spread on Usance L/C (1% for 90 days) 3,707=95 3. Management Fee @ 0.5% Flat on US$ 369,210 86,764=35

TOTAL 1,00,044=80 Total Receipts: ICICI Bank: Rs. 2,13,834=06 DOMESTIC TRANSACTION Receipts: ICICI Bank

S.No. Particulars Amount (Rs) 1. Back to Back L/C opening Charges for


TOTAL 33,839=37 Receipts: Simrone - 2nd Leg

S.No. Particulars Amount (Rs) 1. Reimbursement by German (Less 11% Per Annum for 75 days) 87,41,778=94 TOTAL 87,41,778=94

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Payments: Simrone - 2nd Leg

S.No. Particulars Amount (Rs) 1. Payments to ICICI – 1st Leg 33,839=37 2. Management Fee @ 0.5% Flat on Rs. 62,62,767 31,313=84 3. Reimbursement of Back to Back L/C 62,62,767=00

TOTAL 63,27,920=21 Net Earnings to Simrone: Rs. 24,13,858=73 Receipts: ICICI Bank - 2nd Leg

S.No. Particulars Amount (Rs) 1. Spread on PO of German (2% for 75 days) 37,278=38 2. Management Fee @ 0.5% Flat on Rs. 62,62,767 31,313=84

TOTAL 68,592=22 Total Receipts: ICICI Bank: Rs. 1,02,431=59

Flowchart: Export Transactions under Sight and Usance L/C’s 27 26 7 5 1 3 8 28 6 25 29

30 22 9 11 18 19 2 4 12 23 24 20 10 17 21 31

14 13 15 16

SIMRONE’S OVERSEAS BUYERS

OVERSEAS BUYER’S BANK

SIMRONE PHARMACUETICALS INDUSTRIES LTD., MUMBAI, INDIA

ICICI BANK, MUMBAI, INDIA

SIMRONE’S DOMESTIC SUPPLIERS

DOMESTIC SUPPLIER’S BANK

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Note:

1. The Goods from the Domestic Suppliers in India are sent by Road 2. The Goods exported to Overseas Buyer are sent by Air/Ship

Table.

STEP NO.

DAY NO.

EVENT

1. 1 Contract Between Simrone and Overseas Buyer 2. 2 Contract between Simrone and Domestic Supplier 3. 3 Overseas Buyer sends a Purchase order to Simrone 4. 4 Simrone sends a Purchase Order to Local Supplier 5. 6. 7. 8.

6 6 6 6

Overseas Buyer requests their bank to open a L/C favouring Simrone Buyer’s Bank opens L/C favouring Simrone and sends it to ICICI Bank Overseas Buyer’s Bank gives a copy of the L/C to Buyer Overseas Buyer faxes L/C copy to Simrone

9. 10.

11. 12.

7 7

7 7

ICICI Bank notifies Simrone of receipt of L/C ICICI Bank opens a Back to Back L/C favouring Domestic Supplier and sends it to their Banker ICICI Bank gives a copy of the L/C to Simrone Simrone Faxes the L/C copy to Domestic Supplier

13. 8 Domestic Supplier’s Banks notifies Domestic Supplier of the receipt of L/C 14. 23 Domestic Supplier sends the goods to Simrone by Road 15. 24 Domestic Supplier presents documents to his bank for payment 16. 17.

25 25

Domestic Supplier’s Bank pays Domestic Supplier Domestic Supplier’s Bank sends the documents to ICICI Bank for acceptance by Simrone

18. 19.

20. 21.

27 27

27 27

ICICI Bank receives documents and notifies Simrone for acceptance Simrone accepts Bill of Exchange at the counters of ICICI Bank and takes the other documents to clear his consignment Simrone takes custody of goods ICICI Bank notifies Domestic Supplier’s Bank on acceptance of Bill of Exchange by Simrone

22. 48 After Processing and Packaging, Simrone exports the exports to Overseas Buyer 23. 49 Simrone presents the documents to ICICI Bank for payment 24. 25.

50 50

ICICI Bank purchases/negotiates the documents and pays Simrone, less their charges and costs ICICI Bank sends the documents to Buyer’s Bank for acceptance by Overseas Buyer

26. 27.

28. 29.

53 53

53 53

Overseas Bank receives documents and notifies Buyer for acceptance Overseas Buyer accepts the Bill of Exchange at the counters of Overseas Bank and takes the other documents to clear his consignment Overseas Buyer takes delivery of goods Overseas Buyer’s Bank notifies ICICI Bank that documents have been accepted by Overseas Buyer

30. 73/128 On due date Overseas Buyer’s Bank remits funds to ICICI Bank 31. 75/145 ICICI Bank remits funds to Domestic Supplier’s Bank 32. 75/145 TRANSACTION ENDS

Note:

1. Under Step No. 30 and 31, the days mentioned are 73/128 and 75/145, where 73 and 75 are for Export Sight L/C’s and 128 and 145 are under Export Usance L/C

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2. The Computation of Payments under Step 30 and 31 are calculated from The B/L Date

Flowchart: Export Transactions where there are NO L/C’s 28 27 24 22 1 3 29 21 23

25 18 19 20 14 7 5 2 4 8 15 26 16 6 13 17 30

10 9 11 12 Note:

1. The Goods from the Domestic Suppliers in India are sent by Road 2. The Goods exported to Super Pharmaceuticals, Uganda are sent by Air/Ship

SUPER PHARMACUETICALS LTD., KAMPALA, UGANDA

STANDARD CHARTERED BANK, KAMPALA, UGANDA

SIMRONE PHARMACUETICALS INDUSTRIES LTD., MUMBAI, INDIA




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Table.

STEP NO.

DAY NO.

EVENT

1. 1 Contract Between Simrone and Super 2. 2 Contract between Simrone and Domestic Supplier 3. 3 Super sends a Purchase order to Simrone 4. 5. 6.

7. 8.

4 4 4

4 4

Simrone sends a Purchase Order to Local Supplier Simrone requests ICICI Bank to open a L/C favouring Domestic Supplier ICICI Bank opens a Back to Back L/C favouring Domestic Supplier and sends it to their Banker ICICI Bank gives a copy of the L/C to Simrone Simrone Faxes the L/C copy to Domestic Supplier


22 22


14. 15.

16. 17.

24 24

24 24


18. 19.

45 45

After Processing and Packaging, Simrone exports the exports to Super Simrone faxes the Bill of Lading to Super

20. 21. 22. 23. 24. 25.

46 46 46 46 46 46

Simrone presents the documents to ICICI Bank for forwarding it to Super ICICI Bank sends the documents to Super through their banker Super requests their banker to pay Simrone through ICICI Bank Super’s Banker remits the funds to ICICI Bank favouring Simrone Super’s Bankers gives a copy of remittance to Super Super Faxes the copy of Remittance to Simrone

26. 48 ICICI Bank receives the remittance sent by Super’s Banker and credits the account of Simrone less their charges and costs

27. 28. 29.

49 49 49

Super’s Bankers notifies Super of receipt of Documents Super takes the documents from their bankers Super takes delivery of goods

30. 60 ICICI Bank remits funds to Domestic Supplier’s Bank 31. 60 TRANSACTION ENDS

Note:

Super Pharmaceuticals Ltd. Bankers are Standard Chartered Bank, Kampala, Uganda

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Flowchart: Domestic Transactions where there are NO L/C’s 23 22 26 1 3 24 21 25 27

25 18 19 20 14 7 5 2 4 8 15 20 16 6 13 17 28

10 9 11 12 Note:

1. The Goods from the Domestic Suppliers in India are sent by Road 2. The Goods will be sent to German Remedies by Simrone by Road

GERMAN REMEDIES LTD., MUMBAI

GERMAN REMEDIES’ BANKERS

SIMRONE PHARMACUETICALS INDUSTRIES LTD., MUMBAI




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Table.

STEP NO.

DAY NO.

EVENT

1. 1 Contract Between Simrone and German 2. 2 Contract between Simrone and Domestic Supplier 3. 3 German sends a Purchase order to Simrone 4. 5. 6.

7. 8.

4 4 4

4 4

Simrone sends a Purchase Order to Local Supplier Simrone requests ICICI Bank to open a L/C favouring Domestic Supplier ICICI Bank opens a Back to Back L/C favouring Domestic Supplier and sends it to their Banker ICICI Bank gives a copy of the L/C to Simrone Simrone Faxes the L/C copy to Domestic Supplier


22 22


14. 15.

16. 17.

24 24

24 24


18. 45 After Processing and Packaging, Simrone sends the goods to German 19. 20. 21.

46 46 46

Simrone presents the documents to ICICI Bank for payment ICICI Bank negotiates the documents and pays Simron, less their charges and costs ICICI Bank sends the documents to German’s Bank for acceptance by German

22. 23.

24. 25.

47 47

47 47

German’s Bank receives documents and notifies German for acceptance German accepts the Bill of Exchange at the counters of their Bank and takes the other documents to clear his consignment German takes delivery of goods German’s Bank notifies ICICI Bank that documents have been accepted by German

26.

27.

75

75

On due date German requests their Bank to remit funds to ICICI Bank favouring Simrone German’s Bank remits funds to ICICI Bank

28. 95 ICICI Bank remits funds to Domestic Supplier’s Bank 29. 95 TRANSACTION ENDS

Note:

German Remedies has a lot of bankers. The banker through whom the documents to be routed would be informed subsequently

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Note: Names, if any are Suggestive and are strictly not to be taken on Face Value. It is only to give a feel and touch of how transactions can be structured and names are indicative

This article is meant for education purposes only and it is not be

reproduced for any commercial purpose by print or electronic medium whatsoever

This case study is written by: Partho H. Chakraborty A - 305, DSR Spring Beauty Apts., 124/1, ITPL Main Road, Brookefields, Kundalahalli, Bangalore - 560 037, India Tel: +91 80 420 50293, Cell: +91 99863 22504 email: [email protected]; [email protected] Skype: parthohc01

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Economy & Finance

Structured trade finance