F IN A NCE
Trade solutions:
Structured trade and commodity finance helps mitigate risk
T
he road of cross-border and -country trade does not always run smooth. That makes mitigation of financial risk a very welcome addition for those in commodity trading – and more especially for small to medium companies. That’s according to Bobby Madhav, head of FNB’s trade, structured trade and commodity finance, who says structured trade and commodity finance (STCF) provides this benefit. “The product lends itself to companies who are in a growth space and need to deliver on confirmed orders. Sectors range from electronics, fast-moving consumer goods, pharmaceuticals and machinery to soft and hard commodities. Benefits include cash flow for more output and repaying the loan once payment is received.” Dinos Demetriades, chief financial officer at Pelagic Resources, explains: “Structured trade finance is a type of non-conventional lending, predominantly used in commodity trading, which looks at Bobby the type and value of the Madhav product being financed as a collateral, rather than the balance sheet of the borrower. It’s used regularly in developing countries and in relation to cross-border transactions. The aim is to promote trade by using non-standard security in high value transactions in bilateral trading relationships.” Tried and tested trade finance risk mitigation techniques are used. “There are multiple risks involved in typical structured trade, but the risk usually falls
FAST FACT
The 2020 ICC Global Survey on Trade Finance highlights the potential of increased demand for trade finance over the next two years: 86 per cent and 75 per cent in Asia Pacific and Africa, respectively. Source: International Finance Corporation Why Trade Finance Matters – Especially Now, November 2020
with the last counterparty that has put money out the door,” explains Demetriades. “For example, if a trader purchases cargo to supply into a sales contract against a letter of credit and the bank fails to honour the payment, the risk lies with the trader. If you deliver successfully, get paid, but the vessel sinks on its way to the destination, the risk lies with the bank and the insurance companies.” STCF allows for mitigation of supply and demand and price risks. “We can look at fixed price off takes,” says Madhav. “A key factor is liquidity management for production and sale of goods and materials. We ring-fence transactions, and with fixed off takes we can manage client pricing and cash flows. The quantum
Financing cross-border and -country trade requires a high degree of certainty and expertise – with as little risk as possible, says SAMANTHA BARNES
of funding depends on clients’ contribution in business and relatively strong off takers who pay into a ring-fenced account, and allows facilities to liquidate and roll over. “STCF is about assessing the goods, having control of goods and ensuring the entire chain of delivery is under the guidance of the bank. In STCF you require a skilled team with a long track record in understanding trade instruments,” says Madhav. “The structures and partners form part of the offering.” Demetriades says the common costs associated with structured trade include letter of credit issuing costs, other bank fees, interest costs, insurance and multiple inspection costs regarding cargo, and documentation handling. STCF has an even bigger benefit in emerging countries due to perceived risks. “Economies where there are major challenging factors from instabilities of financial sector and lack of governance framework lean more towards STCF structures,” says Madhav. “In these markets we find gaps in financing, private sector and private financial institutions. STCF reviews deals and ensures they are transactions which can liquidate within a short period.” All the major banks in South Africa offer STCF while many trade houses and freight companies offer these services too. “For smaller traders,” Demetriades observes, “there is a shift towards alternative financiers such as Teybridge Capital or Challenger Trade Finance, which are rapidly growing their presence.”
“There are multiple risks involved in typical structured trade, but the risk usually falls with the last counterparty that has put money out the door.” – Dinos Demetriades
DID YOU KNOW?
• As of 2019, the trade finance gap in Africa was already estimated at $82-billion and is now growing post COVID-19. • While in 2014, 92 per cent of banks surveyed engaged in trade finance activities, in 2019 it dropped to 71 per cent of banks. Source: Trade Finance in Africa Report: Trends Over the Past Decade and Opportunities Ahead 2020
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F R E I G H T, L O G I S T I C S & W A R E H O U S I N G
2021/05/20 9:32 AM
