What is structured commodity finance?
Structured commodity finance (SCF) is a sophisticated commodity-based financing technique, specifically designed for commodity producers and trading companies doing business in the developing markets. Introduced in the early 1990s, SCF continues to play an important role, providing liquidity management and risk mitigation for the production, purchase and sale of raw, semi-refined or semi-processed materials. SCF funding solutions include a variety of pre-export finance, toll finance, counter-trade finance, and others. SCF can be applied across part or all of the commodity trade value chain: from producer to distributor to processor, and of course, the physical traders who buy and deliver commodities in the international and domestic markets. SCF financing is primarily based on performance risk and as such is particularly well suited for companies doing business in what are considered higher risk markets and industries.
Understanding performance risk
Unlike traditional financing which looks to the flow of funds and the sources of the money, SCF looks to the flow of the goods and their origins – with repayment realized from the export and sale of commodities in hard currency countries. In other words, the lender’s risk assessment is primarily related to the company’s ability to perform – to produce and deliver commodities, even under unstable or uncertain political and financial circumstances. Hence the term ‘performance risk’.
By focusing on the individual transaction structure and the company’s performance capability, as opposed to their balance sheet, SCF provides an alternative and cost effective financing tool to companies in the commodity arena, and to commodity producers and trading companies doing business in the developing markets. The value-added of SCF solutions is their built-in ability to provide maximum security to all the parties to a transaction – producer, trader and lender – essentially by converting payment and sovereign risk into performance risk.
Evaluating performance risk
By combining a pragmatic approach to performance risk with extensive country and industry knowledge, a good commodity finance bank should be able to design individual structures for each commodity financing opportunity. Due diligence should entail a series of onsite visits to the producer, often involving third party experts such as engineers and industry specialists in order to accurately assess the company’s ability in three critical areas:
- Technical ability to produce or distribute the commodity, in terms of physical conditions, capacity and management
- Financial ability, in terms of generating current assets in order to meet payroll, acquire necessary supplies and maintain plant and equipment
- Legal ability to enforce the contract, regarding the right of the lender to realize repayment in a hard currency country at the time of delivery
Who are the players?
A wide range of companies stands to benefit from SCF programs, including local producers, international and regional trading companies and financial institutions.
Local producers: The primary beneficiaries of SCF liquidity management are local producers of commodities in the developing markets, who are provided working capital for purchase of raw materials, specialized or additional equipment, or other essentials for producing and delivering on a given contract.
International and regional trading companies: There is a vast group of these companies doing business in the developing markets that would benefit from pre-export financing. With SCF risk mitigation, companies that source all their raw materials in a single country, for example, or from a single provider are able to lay off some of their risk on the lender. Here a trading company may want to accommodate a commodity producer with an advance payment in order to ensure a steady flow, but fears exposure to a certain company, industry or country. When mitigated with SCF, advance payment financing enhances the ability for the trading company to do business – without an unnecessary increase in market, commodity and political risk.
Financial institutions: For the lenders, SCF presents an opportunity to add desirable new customers and expand into markets that are simply not accessible through traditional channels. Furthermore, a comparison of SCF financing in developing markets, versus traditional methods, quickly reveals that repayment by an offshore off-taker, rather than by the borrower, has historically proven to be a more effective tool against payment risk. In fact, SCF stipulations for physical evidence of the ability to perform, confirmed by special expertise as well as country and commodity knowledge and full legal documentation, often add up to transaction credit ratings that are actually higher than individual corporate and country ratings.
Why SCF is important in Asia
Today in Asia, the need for financing is more critical than ever before. Although trade flows and commodity prices continue to increase, local financial institutions often are unable to take on the additional credit risks. As result, local commodity producers and even multinationals who are active in this region often find themselves unable to obtain financing. In China alone, there are many companies in the commodity producing business who do not have access to the capital markets. With structured commodity finance gaining in popularity, companies and traders in the commodity producing industry can have access to a whole range of alternative financing solutions, with a single, overriding goal – to provide assistance in markets where conventional methods fail.
What Capital Peak brings to the table
Capital Peak (CP) – Capital Peak Int’l Limited is providing tailor made Risk Management Services for transactional financing, specifically geared for end-to-end trade flows. Our objective is to create a secure financing conduit for the Banks and Trading houses by sequencing the transaction and offsetting underlying associated risks. To do so, CP had team up and works very closely with ACE – Audit Control & Expertise, an International Credit Support Company base in Geneva who apply - at any trade flow stages - both physical and legal mitigates. Please take a visit www.ace-group.net
Our integrated solution is composed of following modules:
1) Pre-Loan Survey (Due Diligence)
2) Collateral Management Services and Field Warehousing Services
3) Monitoring Services
4) Agricultural Credit Management Services
5) Credit Shield (Extensive Insurance Coverage)
6) Audit Services
7) Inspection Services
8) Training Services
Based in Geneva, ACE today has 32 offices worldwide with highly trained and qualified direct staff totaling 1,800 persons. A global network of Agents increasing coverage to 103 other countries supports this. We also enjoy strategic partnerships in specific fields to the like of Cotton quality inspection with Wakefield International Services.
From the above, CP perceive that our proven and innovative know how resulting from strong field experience could be of added value to the Banks and Trading Companies, and meet theirs need for more secured commodity transaction financing with Basel II in perspective:
Petroleum Products and Food Oil Imports and / or export:
Together with ACE specific services provide for unrivalled control and monitoring capacity concerning any liquid commodity at all transaction stages - be loading, discharge, tank storage, processing or shipment.
We combine latest technologies available to the like of DNA unique code tagging for tractability and ultrasonic volumetric measurement for permanent real time monitoring.
The integrated solution could be of use to both private and government entities; here are a few of the positive externalities:
A) Application is ideally suited to monitor/control materials subjected to taxation /subsidies
- Marking can be used to establish duty paid status (Import or export Tax fraud or product re-routed for internal consumption while supposed to be in transit).
- To demonstrate whether subsidies or intervention funds have been paid (preventing multiple payment fraud).
- To avoid product blending, fuel adulteration or simply theft.
B) Application is ideally suited to monitor/control materials during storage and logistic phases
- Storage conditions, movements, abnormalities are constantly and immediately recorded.
- Real Time permanent monitoring generates strategic statistics.
- Real Time permanent monitoring creates tank storage security, allowing for improved collateral management, which results in transactional financing opportunity
- Based on Tank Farm Receipt.
Commodities Exports and / or Import:
By using our know how in collateral management based on warehouse/silo receipt, or more complex scheme like contract farming based on field warehouse receipt financing, we could increase access to financing opportunity for producers and exporters in most of your customers countries.
We could intervene at whichever stage the needs require, be inland raw commodity (or farm gate FAQ), pre or post processing or at export stage.
Our experience and know how in soft commodities enables us to deal with products like grains, sugar, rice, cotton, sunflower seed, cocoa and coffee to name a few.
