Structured Trade Finance

 

Commodity traders selectively provide financial inter-mediation services to their most important and long-standing counter-parties. These services often take the form of structured trade finance (“STF”) transactions that incorporate funding, trade credit, risk management with trading-related services like supply, off-take, storage, processing and shipping. STF transactions are a natural extension of the underlying physical trading relationship between buyer and seller which is self-liquidating in nature.

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