Overview of STF transactions
STF transactions are increasingly a feature of longer term supply and off-take contracts. Compared to traditional trade finance, STF transactions are typically longer-dated, more complex in structure and require more in-depth understanding of the underlying assets and counter-parties. In addition, banks and trade credit insurers are generally a few steps removed from the trader-producer relationship, and generally have to depend on traders to obtain credible track record information. It is therefore no surprise that the STF transactions undertaken by traders are well-supported by a plethora of banks, insurers and other non-bank financial institutions in the major trading centres around the world.
Benefits of STF transactions
To producers
- Provides additional working capital buffer to optimise cashflows
- Such structures usually attract greater lending appetite because risk profile predominantly shifts from being the credit risk of producer to production risk of producer
- Offers flexible and tailored financing terms
- Requires giving away less securities as compared regular bank financing
- Financing can also be done with full recourse to the stronger counter-party in the transaction chain, so as to achieve better pricing compared to unsecured/corporate loans
- Possible to achieve a positive balance sheet impact subject to internal accounting policy, notably on debt component of the producer
To traders
- Creates a more sticky relationship between producer and trader, resulting in higher barriers to entry for competitors to break into the relationship
- Mitigates credit risk through the ability to set-off proceeds from underlying payment obligation
- Provides an avenue to extract more value out of the trading relationship
- Possible to achieve a positive balance sheet impact subject to internal accounting policy, notably on debt component of the trader
Drawbacks of STF transactions
To producers
- Dependent on trader’s ability to lay off risk, which introduces an element of uncertainty
- Harder to switch trader once producer is dependent on funding from the STF transaction
- Transaction costs are typically higher versus a vanilla off-take/supply agreement, and are usually borne by the producer
To traders
- Working capital intensive, as banking lines designed for regular trading activities have to be stretched to fund STF transactions that are full-recourse to the trader
- Success of the STF transaction is dependent on the ability to syndicate credit risk to banks and trade credit insurers e.g. Lloyd’s market
- Labour-intensive, as it requires joint efforts from many functional areas outside of trading like legal, tax, compliance, accounting policy, trade finance and other specialised areas
Pre-export Financing (PXF)
- Buyer and Seller enter into a Commercial Contract and a Prepayment Agreement
- Bank provides a limited recourse financing facility to the Buyer, who assigns its rights under the Commercial Contract to the Bank as security
- Bank advances Seller a percentage of the total approximate contract value on day 1
- Advance is attached to periodic cargo deliveries under the Commercial Contract
- Repayment of advances done by the Buyer to the Bank after delivery of product by the Seller
- Buyer and Seller agrees a discount on the initially agreed commercial price of the cargos
Commercial Prepayment
- Buyer and Seller enter into a Commercial Contract and a Prepayment Agreement
- Bank provides a full recourse financing facility to the Buyer, which makes the loan to the Seller
- Buyer advances Seller a percentage of the total approximate contract value on day 1
- Advance is attached to periodic cargo deliveries under the Commercial Contract
- Repayment of advances done via set-off of Buyer’s payment obligations for each delivery of product
- Buyer and Seller agrees a discount on the initially agreed commercial price of the cargos
- Buyer may enter into a trade credit insurance policy without notifying the Seller, with Bank appointed as loss payee or co-insured under the insurance policy
Extended / Deferred Payment Terms
- Buyer and Seller enter into a Commercial Contract which includes extended /deferred payment terms (e.g. 90 days instead of 30 days) to alleviate Buyer’s working capital requirement
- Seller may require a corporate guarantee from the Buyer’s parent or ultimate beneficial shareholder as a credit mitigation measure
- Seller may also require a controlled bank account to be set up between Buyer and Seller to ensure the Buyer’s end customer pays into that specific controlled account
- In some cases, Buyer may offer a reverse discounting facility to the Seller to enable Seller to discount its long-dated receivables with Buyer’s relationship bank on a non-recourse basis
Sleeving
- Buyer and Seller into a Commercial Contract
- Seller enters into a back-to-back Commercial Contract with the Buyer’s end supplier
- Seller buys cargo from Buyer’s end supplier, holding title and financing shipment upon delivery to the Buyer, eliminating the need for the Buyer to bear working capital
- Title can be passed to specialised commodity financing firms and certain commodity traders
Stock Financing
- Bank funds working capital requirements against security over stock
- Bank funds working capital requirements against security over stock
- Title over goods are pledged to Bank
- Storage facility owner issues Holding Certificates in favour of Bank as evidence of possession
- In terms of control, goods cannot be moved without Bank’s approval
- Deal subject to legal, operational and financial DD but involves physical segregation of pledged/financed goods within a bonded area
- Holding certificates/warehouse receipts must also be countersigned by inspector and/or collateral manager
- Haircuts applied to financing value depending on price volatility of underlying goods and tenor
Repo Structures
- Initially involves a purchase contract between the Borrower and the Bank with title passing to the bank within an approved storage location
- Bank signs a storage agreement with the storage facility owner, or in some cases, a contractual assignment of an existing storage agreement with the Seller
- When Borrower needs to sell the goods, Bank sells back the goods to Borrower for the latter to on-sell to its counterparty under a sale contract
- Deal subject to legal, operational and financial DD as well
Synthetic Swap
- Netting off payment obligations due under sales of feedstock and purchase of finished products with a refinery or a smelter
Tolling Agreement
- Seller and processing plant (“Plant”), which may be an oil refinery or a metals smelter, enter into a tolling agreement
- Seller sells feedstock to Plant at an agreed market price
- Seller holds title and risk of the inventory work-in-progress and finished goods at Plant
- In return, the Seller pays a processing fee/tolling charge to the Plant
- Seller off-takes the product from Plant at an agreed market price