Upload
calvin-booker
View
225
Download
3
Tags:
Embed Size (px)
Citation preview
November 30, 2010
Key Considerations in Analysing the Credit of Structured Trade Finance Transactions
Anne-Marie Woolley
AFREXIMBANK SEMINARFundamentals of Structured Trade Finance
2
Connecting Africa to the World and the World to Africa
3 Activity driver # 1: Africa inward FDI flows 2009
Data per www.fdiintelligence.comOverseas investment projects above $100m recorded by fDi Markets between January 2009 and March 2010
UAE
EU
$1.0bn
$3.1bn
$1.0
bn
$3.4bn
$30.4bn
$8.4bn
$13.5bn
$39.
7bn$1.1bn
4Activity driver # 2: Africa trade 2009
Increasing trend in Africa’s share of total world trade in last decade**
Consistent organic growth in Exports and Imports from BRIC, US and EU
Strong CAGR across all the regions
− Export to China: 40.2%
− Export to USA : 24.3%
− Import from China : 36.1%
− Import from India:26.6%
Aggregate Exports and Imports from BRIC, US and EU
* EU-Africa trade data from 2008** European Centre for International Political Economy Data per IMF
$21.8bn$110.4bn
$16.5bn
$8.6bn
$1
33.9
bn
$1
30.6
bn
$1.63bn
$5.06bn
$46.88bn
$47.99bn
$12.3bn$4.7bn
5Activity driver # 3: Large donor flow recipients
Total donor flow growth in Africa – 78.6% (2002-2007) Standard Bank presence countries represent 43% of total African donor flow
Data per Africa Economic Outlook
SB presence countries
Non-presence countries
Donor Flows (US$ billion)
2002 2003 2004 2005 2006 2007
Angola 0.41 0.49 1.14 0.42 0.17 0.24
Botswana 0.04 0.03 0.05 0.05 0.07 0.10
DRC 1.17 5.42 1.83 1.78 2.05 1.22
Ghana 0.66 0.97 1.40 1.15 1.18 1.15
Kenya 0.39 0.52 0.65 0.77 0.94 1.28
Lesotho 0.08 0.08 0.10 0.07 0.07 0.13
Malawi 0.38 0.52 0.50 0.58 0.68 0.73
Mauritius 0.02 -0.01 0.03 0.03 0.02 0.07
Mozambique 2.22 1.05 1.24 1.29 1.60 1.78
Namibia 0.13 0.15 0.17 0.11 0.15 0.21
Nigeria 0.29 0.31 0.58 6.40 11.43 2.04
South Africa 0.50 0.64 0.63 0.68 0.72 0.79
Swaziland 0.02 0.03 0.02 0.05 0.03 0.06
Tanzania 1.26 1.72 1.76 1.49 1.83 2.81
Uganda 0.73 1.00 1.22 1.19 1.55 1.73
Zambia 0.79 0.75 1.13 1.16 1.43 1.04
Zimbabwe 0.20 0.19 0.19 0.37 0.28 0.47
Total ODA into Africa (2007): $38.7bn
$1bn
$1.7bn
$2bn
$1.7bn
$1.9bn
$1.2bn
$1.08bn
$2.4bn
$1bn $1.27bn
$0.7bn
$1bn
$2.8bn
$0.9bn
$2.1bn
$1bn
$1.1bn
6Activity driver # 4: Favourable business environment
Africa’s recent sustained growth has been made possible largely by improved political and macroeconomic stability, a strengthened political commitment to private-sector growth, and increased investment in infrastructure and education
Many African countries have liberalised trade since the early 1980’s, and throughout the continent fiscal soundness and monetary discipline are increasing
World Bank Index: Ease of doing business
Ranked from 1 to 183; the closer to 1, the conducive the regulatory environment
Source: World Bank
Country Moody's S&P Fitch
Rating Outlook Rating Outlook Rating Outlook
Angola B1 +ve B+ Stable B+ +ve
Benin B +ve B Stable
Botswana A2 -ve A- Stable
Burkina Faso B Stable
Cameroon B Stable B Stable
Cape Verde B+ -ve B+ Stable
Egypt Ba1 Stable BB+ Stable BB+ Stable
Gabon BB- Stable BB- Stable
Ghana B+ -ve B+ -ve
Kenya B +ve B+ Stable
Lesotho BB- -ve
Mauritius Baa2 Stable
Morocco Stable BBB- Stable BBB- Stable
Mozambique B+ Stable B Stable
Namibia BBB- Stable
Nigeria B+ Stable BB- Stable
Rwanda B- +ve
Senegal B+ -ve
Seychelles B- +ve
South Africa A3 Stable BBB+ -ve BBB+ -ve
Tunisia Baa2 Stable BBB Stable BBB Stable
Uganda B+ Stable B +ve
Sovereign credit ratings enjoy mainly good outlooks
130 - 159
160 - 183
1 -99
100 - 129
N/A
7
Activity driver # 5: Growing Consumer Market
By 2015, 221 million additional basic-needs consumers will enter the market in Africa
Natural resources are driving the boom; Wholesale and retail generated 24% of Africa’s GDP growth from 2000-2007
Africa is nearly as urbanized as China and has as many cities of one million people as Europe does
Breakdown of Africa’s Population
5234
3955
7 9
12
0%
20%
40%
60%
80%
100%
2005 2015 (projected )
Destitute (<$1,000) Basic needs ($1,00-$5,000)
Middle income ($5,000-$25,000) Global (>$25,000)
By income bracket %100% = 792964
(1)
Note 1: Figures do not sum to 100%, because of rounding
Source: Global Insight: McKinsey analysis
Drivers of Africa’s growth Urbanisation of Africa
622
55
66
910
1213
24
0 5 10 15 20 25 30
Other servicesTourismUtilities
ConstructionReal estate, business serv.
Financial intermediationPublic administration
ManufacturingTransport, telecom.
AgricultureWholesale and retail
Resources
Sector share of change in real GDP, 2002-2007100% = $235 billion
Source: McKinsey Global Institute analysis
Share of population by region, 2010, %
100% (mil of people) 1,219 1,032 1,351 830 594 349
48 52 109 52 63 48
Number of cities with >1million people
3040 45
73 79 82
7060 55
27 21 18
India Africa China Europe LatinAmerica
NorthAmerica
Rural
Urban
Source: United Nations
8
Trade finance is considered less risky compared to general working capital facilities for the following reasons:
−Parties other than the borrower (Banks/DFI’s ) are also involved and the probability of all of them defaulting simultaneously is low.
−Trade finance is considered self securing and self liquidating
−Trade finance, tied as it is to identifiable cash flows, offers better recovery rates compared to general working capital finance products, such as overdrafts.
−Trade finance and trade cash flows are of critical strategic importance to the borrower. They are therefore less likely to default on these commitments as that could mean immediate stoppage of his business.
Trade finance is the finance of specific goods and services (generally, but
not exclusively) across borders
9
Structured Trade Finance Transactions
Self liquidating, receivables-backed transactions with identified repayment sources
−Generally know what you are financing and where in the cycle you are Imports and Exports Generally short tenors, but can be up to 5 years Historically, lower default rate but still require detailed credit analysis Can be “ring-fenced” from other business Counterparty:
−Transactions “With Recourse” to the borrower:
Usual credit analysis: management, financials, strategy, reputation, sector…
− “Without Recourse” transaction:
Analyse the buyer / market
Trade finance is not generally regarded by regulators as posing a systemic risk to banks and as trade levels are consistently growing
it offers a source of low volatility returns to the Bank.
Low Risk Profile with Service as Financial Intermediaries and Providers of Credit
10
Role of Banks
The economic importance of trade finance stems, not just from our role as providers of credit, but also from our status as a trusted third-party financial intermediary. By working with Importing and Exporting Clients the role of Banks is:
► Provider of liquidity
(especially in emerging markets where capital market liquidity is low)
► Credit enhancer
(using the rating of a Bank to enhance the credit worthiness of client)
► Risk mitigator
(through structure)
► Management of payments and documents associated with trade
(control of documents through the banking system)
11
Risks for Consideration
Industry (Agriculture vs Mining) Management Sovereign, SOE, local Corporate or multi-national Financial/Balance Sheet (gearing) Production / performance risk
− Processing risk ? eg cotton ginners, copper smelters Off-take risk / demand risk/Counterparty risk (who is the buyer?) Tenor short term vs longer Price Risk (can you hedge, should you build in margin calls?) Goods depreciation risk (price risk + quality risk) Transport/Logistics Warehouses (who owns, condition, control) Theft Monitoring / operational risk FX risk Facility structure / legal risk Insurance risk (goods, PRI or PII) Political / country risk Reputational risk (for International Banks)
12
Good practices
Thorough due diligence including site visits and meetings with all parties involved
Rely on independent quality and quantity assessments Spot checks on all players in the trade cycle ( borrower, collateral manager,
forwarding agent, shipping company, off-taker) Do not assume two transactions will work in the same manner Know what you finance at all times and where the financed goods are
− Follow the goods
− Follow the cash Seasonal or Annual clean-up Make internal and external processes and procedures clear “Damage control”: plan for if/when things go wrong MONITOR (don’t assume everything will perform as expected)
13
The Goods being Financed
There are a great variety of goods financed under trade structures:
“Soft” and “Hard” commodities e.g. coca, cotton, oil, sugar, copper
Raw material and finished goods e.g. capital equipment, palm oil
Services/Intangibles; receivables e.g. overflying revenues
Key questions: Have goods already been produced and pre-sold upon drawdown of the facility? Is the price of the goods volatile? Perishable goods with deteriorating quality? Are the goods ready to be marketed or do they need to be
processed/assembled? Can the goods financed by the bank be clearly identified or are they co-mingled
with other stock? Can they be tracked/traced? Are there substitute off-takers (liquid market) and at which cost can the goods
be sold (discount in case of forced sale)? Location: Are the facilities owned or rented? Approved by insurers? Secured
and clean? Is access restricted but authorised to the banks? Transport: who is taking care of the transport including loading , unloading,
customs clearance? Who has title on goods during transport? Is a license / export permit required to trade the goods?
14
The Security Package
Typical security package: Rights/Pledges on the financed goods, Assignment of receivables, Charge over a (offshore) collection account
(there should be no gap in the security package ; controls must be in place at all times including transfer points
Control over revenue collection:
−Domiciliation of receivables into collection accounts
−Approved buyer limits
−Off-takers: credit worthy off-takers with capacity to purchase the whole financed quantity
−Off-take payment terms (L/C or open account, deferred / immediate payment)
−Alternative market/buyers Collateral Management Agreement with a 3rd party Insurances: with a reputable company ; must cover all stages of the
transaction ; is PRI cover included? Hedging through tripartite agreement in case of volatile goods L/Cs: UCP liens Guarantees / Recourse to the borrower or a parent company?
15
The Legal & Regulatory frame
Enforceability of the security package
− to be confirmed by local legal opinions Securities can be expensive to put in place in certain countries
− (e.g. cost of stamps for registration of pledges …) Consider FX convertibility / transferability restrictions Required licences / trade permits must be identified and monitored Is Parliamentary approval required ?
16
The Importance of the Agent and of Monitoring
Independent quality inspection The lender/agent needs reliable operational capacity to :
−Control CPs and condition subsequents ;
−Monitor insurance documents ;
−Monitor receivables ;
−Do reconciliations between outstanding amounts and reports produced by the borrower, stock monitor, hedge provider
Coverage ratios:
Market value of goods / outsanding under loan
Sales contract value / outsanding under loan
Debt Service Coverage Ratio’s (DSCR)
Loan Life coverage Ratio’s (LLCR) Independent monitoring: CMA / SMA
−Who are they, experience, Professional Indemnity Insurance
CARE – NOT A PANACEA OR SUBSTITUTE TO STRUCTURE
17
Current Market Structures
Oil Deals
− BP Angola; classic oil PFX
− EGPC, Egypt and the PXF/PEL deals
− Sonangol, Angola; is it “structured” PXF today?
− PPMC, Nigeria
− OTC in Kenya
− Indeni Refinery, Zambia
Soft commodity
− Ghana Cocoa Board
− Cotco, Zimbabwe
Mining
− First Quantum, DRC
Telecoms
- Zain/Bharti
- ZTE/Huawei (suppliers to sector)
18
BP Angola
Financing Structure
19
NNPC USD97m Silent Payment Guarantee Facility
NNPCFuel
Supplier
BANK
Claim under gtee
Issues gtee
Copy of B/L & PU
Issues payment undertaking
Supplies Product
FACILITY
Bank issues silent payment guarantees in favour of international oil traders assuming NNPC/PPMC risk and Nigeria country risk – BUT NOT COMMERCIAL RISK.
Fuel Supplier (ie. Vitol) agrees contract, ships refined product to Nigeria and presents Invoice to NNPC; NNPC stamps Invoice and issues Payment undertaking in favour of Fuel Supplier; Fuel Supplier presents copies of PU, B/L and Invoice to Bank; Bank checks shipment is authentic; Bank issues silent payment guarantee in favour of Fuel Supplier for 85%/90% of shipment value; Funding may also be offered under a discounting arrangement In the event of non-payment by NNPC, Fuel Supplier claims from on Bank. Fuel Supplier assigns their claim on NNPC to Bank; Bank claims from NNPC direct.
20
Flows and Controls Chart – an Example
Lender(s) and
Agent
Borrower
Off-taker
Collateral Manager +
Quality Inspector
Stock
Collection Account
Insurance
Forwarding Agent +
Shipping Company
Guarantor
Loan
Sale and transport of goods
Repayment
Hedge Provider
21
22
Disclaimer
This presentation is provided on the express understanding that the information contained herein will be regarded and treated as strictly confidential. It is not to be delivered nor shall its contents be disclosed to anyone other than the entity to which it is being provided and its employees without the prior consent of the Standard Bank Plc (“SB Plc”). Moreover, it shall not be reproduced or used, in whole or in part, for any purpose other than for the consideration of the financing or transaction described herein, without the prior written consent of SB Plc. The information contained in this presentation does not purport to be complete and is subject to change. This document does not constitute an offer, or the solicitation of an offer, for the sale or purchase of any investment or security. The information contained in this document does not purport to be complete and it is subject to change. This is a commercial communication. If you are in any doubt about the contents of this document or the investment or security to which this document relates you should consult a person authorised under the Financial Services and Markets Act 2000 who specialises in advising on such investments or securities. This document relates to derivative products and you should not deal in such products unless you understand the nature and extent of your exposure to risk. No liability is accepted whatsoever for any direct or consequential loss arising from the use of this presentation. This presentation is not intended for the use of retail clients. This document must not be acted on or relied on by persons who are retail clients. Any investment or investment activity to which this document relates is only available to persons other than retail clients and will be engaged in only with such persons. SB Plc is authorised and regulated by the Financial Services Authority (“FSA”), entered in the FSA’s register (register number 124823) and has approved this document for distribution in the UK only to persons other retail clients. Persons into whose possession this document comes are required by the SB Plc to inform themselves about and to observe any such restrictions. You are to rely on your own independent appraisal of and investigations into all matters and things contemplated by this document. By accepting this document, you agree to be bound by the foregoing limitations. Kindly note that this presentation does not represent an offer of funding since any facility to be granted in terms of this presentation would be subject to Standard Bank Plc obtaining the requisite internal and external approvals.
Standard Bank Plc, 20 Gresham Street, London, EC2V 7JEValue Added Tax identification number 625861525