What Structures and Techniques Can Still Work in Trade and Commodity Finance?

Presentation by Geoffrey Wynne, Partner

Sullivan & Worcester UK LLP

On 26 January 2018

At New Broad Street House, 35 New Broad Street,

London, EC2M 1NH

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Overview Look at a typical transaction scenario

Look at structures that could be used

Consider how to find obligors

Due diligence to determine structure

Apply the above to structures

What experience of issues

How to deal with common problems

Why are there not more transactions?

The way ahead

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What is a typical transaction? Could be many variations BUT

Differentiate whether financing or credit support

If financing › Committed or uncommitted › Term or revolving › Secured or unsecured

If credit support › Issue of letter of credit › Confirmation of letter of credit › Guarantees

How about buying receivables? › Avoid the pitfalls

Participating with others

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We know all this – so what is difficult?

Nothing if done correctly

Everything if not and it goes wrong

Easy to blame structure (or lack of it)

Transaction can have problems › Need to address points at the outset › Create flexible and sensible structures

There are a growing number of issues to consider › Regulatory like financial crime, KYC › Legal like problems in local regimes

Nothing should make any structure undoable › How to find a way through

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The Structures and Techniques Some trade finance structures

Pre-export financing

Prepayments

Tolling

Warehouse financing

Borrowing base

Credit support arrangements

Receivables financing

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Pre-export financing

Producer (Borrower)

Onshore Offshore

3. Purchase price

4. Repayment

Collection account

Financer

Buyers

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Pre-export finance Lender assumes performance risk on borrower

Security usually taken over collection account(s) and sale contracts with buyers

Security may also be taken over the goods themselves

May have collection accounts onshore and offshore

LMA has a template form of PXF agreement

Common issues: › Currency exchange or export control regulations › Stamp duty and other perfection requirements › Risk mitigation

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Key points to avoid/deal with Security but not overloading the requirements

Due diligence the local issues

Does KYC beat you?

Can you work around it? › Not so easy in PXF

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Prepayment

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Producer

Onshore Offshore

4.

Pu

rch

ase

pri

ce

End-buyer

Offtaker (Borrower)

Financer

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Prepayment Prepayment may be documented in a stand alone prepayment

agreement but also often included within the sale contract

Prepayment is usually discharged through delivery with an obligation to make a payment to cover any shortfall

Sometimes see the prepayment structured as a loan rather than an advance payment – need to consider how this fits with obligations under the offtake contract and the loan from financer to borrower

Limited recourse structures are possible

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Key points to avoid/deal with Useful way for lender to provide finance through offtaker

› Hence limited recourse to offtaker › Does it simplify KYC?

One step removed from producer › How to enforce payment?

Legal and regulatory issues on advance payment › Tax including withholding tax

How to take security › From whom? › Over what?

Protect against offtaker financial problems

Can you step in to replace offtaker?

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Tolling

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Toller End-buyer

Suppliers

Financer

Borrower (Offtaker)

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Tolling Has similarities to PXF in that it is a financing of the supply chain

prior to export

However, more parties involved so greater performance risks

There can also be questions about who has ownership / rights in the relevant goods at any time

Nature of the goods may also change (for example, cocoa beans being processed to cocoa oil, cocoa butter etc) which may require different security or renewed security at different stages

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More issues? Can be cross border

› Multi jurisdictional

Transportation issues with raw materials

Protect timing and flow of funds with use of letters of credit

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Warehouse financing structure

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Supplier

Supplier

Supplier

Borrower

Bank

Buyer

Collection Account 2. Goods

6. $

7. $

3. Security over contracts

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Warehouse financing Financing of goods while in storage

Storage arrangements are fundamental to the financing and lender will want to do due diligence on warehouse and any parties involved with the goods

Security over goods central to structure – possession central to security regime in many jurisdictions but due diligence required

Documentation must reflect on the ground operations (e.g. release of goods)

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How to manage warehouse financing Is collateral management the key?

What should be contained in the CMA? › Is it about duties or exclusions of liability?

You get what you pay for?

Remember what you need – control and possession › Try to perfect pledge security › Cover release of goods

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Borrowing base facility

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in ground

Borrowing base assets

Borrowing base

Borrower

Available loan

% % % %

in warehouse

in transit

sold

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Borrowing base A more holistic form of financing

Covers goods at the various stages of the chain (production, storage, export, sale)

May be more than one type of security

Reporting obligations on borrower

Lending levels set as percentage of fluctuating values of the various assets in stages of production

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Can the borrowing base be the solution?

Real issue is to ensure borrower can perform › Structure works best with performance › What happens if transaction stops? › Have liquidity to “kick start” production and performance

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Potential issues with security over goods

Proprietary vs possessory interests

What is possession?

Perfection requirements? › Stamp duty › Registration › Approvals › Notarisation and legalisation

Fungible goods

Commingled goods

Future goods

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Potential issues with the parties Who will be involved in the transaction?

Get the right obligor(s)

Taking guarantees and limitations of guarantors liability

Know who the “other parties” are › Do they help or hinder the transaction? › Can you lock them in? › Does the transaction work commercially with the parties involved?

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Follow the cash, follow the goods Remember cash is king

› Monitor flows of funds › How, when and where lent › Use of proceeds of financing

Monitor performance

Monitor flow of goods

Assignment of sale proceeds – needed?

The collection account

Where and why do you need security?

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Documentary letters of credit They are independent payment undertakings

Widely used in connection with cross-border commercial transactions

They are a way of mitigating payment risk

Also strike a balance between conflicting interests of seller in getting payment before shipping and of buyer in receiving goods before making payment

English courts have tended to be protective of the independent nature of these instruments and their place within the world of trade

Documenting the arrangements › One off or facility › Taking security or cash cover

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Some key issues with letters of credit Governing law and jurisdiction clauses

› Not usually there

Sanctions › Do you need to include?

Fraud › Who takes the risk?

Once letter of credit issued bank must pay following complying presentation

Protection outside the letter of credit

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Silent Confirmations Request by Beneficiary

Outside UCP 600/ISP 98

Document separately

Important to take rights to claim against Issuing Bank

Documenting the facility

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Receivable financings Here for completeness

› You have had, and will have, more detail

Are you financing receivables or buying them?

Key issue in relation to security or ownership

True sale if ownership

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Structure of receivable financing Buyer or supplier led

Use of platforms

Should you have an IPU?

Risks on changing payment terms › Moody’s and trade v bank debt argument

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Interesting cross border issues Could involve a number of jurisdictions

Receivable

Seller (of receivable)

Buyer (of receivable)

Sale and purchase agreement

What to watch out for?

What are we aiming for? › True sale › Right to enforce

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Traps for the unwary How have we structured the transaction?

› Consider the key motivation

Will it repay based on the commercial structure? › Enforcement should not be the exit

The due diligence conundrum › How much time and cost to spend on it? › Commercial and legal › Asking key questions › Not expecting too much!

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The traps Structural issues

› Complicate or simplify?

The legal regime(s)

Consents and registrations › Need › Cost

Obstacles to security › Form of documentation › Constituting security › Losing security rights as assets revolve

Flow of funds › Dealing with local requirements › Working round keeping control of funds

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The traps – and solutions Rights to receivables

› Having the “best right”

Dealing with competing claims on “your assets” › Priorities

Avoiding the impact of insolvency laws › Monitor to take early action

How to promote “trade gets paid”

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Conclusions All transactions work

› It is just how to cover issues

There are techniques to mitigate risks › Positives and negatives

What holds you back? › Real issues or excuses? › Why will some institutions take a positive view but others do not?

The world of fintech in trade › What will happen?

Let’s get on with structuring

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Geoffrey L Wynne Partner Geoffrey Wynne is head of Sullivan & Worcester’s London office and also head of its Trade & Export Finance Group. He has extensive experience in banking and finance, specifically trade and structured trade and commodity finance. He also advises on corporate and international finance, asset and project finance, syndicated lending, equipment leasing and workouts and financing restructuring.

Geoff is one of the leading trade finance lawyers and has advised extensively many of the major trade finance banks, multilateral financers and companies around the world on trade and commodity transactions in virtually every emerging market including CIS, Far East, India, Africa and Latin America. He has worked on many structured trade transactions covering such diverse commodities as oil, nickel, steel, tobacco, cocoa and coffee. He has worked on warehouse financings in many jurisdictions and advised on how to structure involving warehouse operators and collateral managers. He has also advised on ownership structures and repos for commodities and receivables financings.

Geoff sits on the editorial boards of a number of publications and is a regular contributor and speaker at conferences. He is also the editor of and contributor to The Practitioner’s Guide to Trade and Commodity Finance published by Sweet & Maxwell and A Guide to Receivables Finance, a special report from TFR published by Ark.

Sullivan & Worcester UK LLP Tower 42 25 Old Broad Street London EC2N 1HQ

T +44 (0)20 7448 1001 F +44 (0)20 7900 3472 gwynne@sandw.com

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Awards & Recognition TFR “Best Law Firm in Trade Finance”

Trade & Forfaiting Review (TFR) named Sullivan & Worcester "Best Law Firm in Trade Finance" in its 2014, 2015 and 2016 TFR Excellence Awards GTR “Best Law Firm”

Sullivan & Worcester UK LLP was top ranked firm in the Global Trade Review (GTR) Best Law Firm 2015 and 2016 polls The Legal 500 UK 2016

Geoffrey Wynne and Simon Cook are listed as Leading Lawyers and Sullivan & Worcester UK LLP was ranked in the following category in The Legal 500 UK:

› Trade Finance (Tier 1) Chambers UK 2017

Chambers UK ranked Sullivan & Worcester UK LLP, along with Geoffrey Wynne and Simon Cook, in the following area:

› Commodities: Trade Finance (UK-wide)

TFR Fellowship Award 2017

Trade & Forfaiting Review (TFR) honoured Geoffrey Wynne with the TFR Fellowship Award in its 2017 TFR Excellence Awards

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© 2018 Sullivan & Worcester Sullivan & Worcester is the collective trade name for an international legal practice. Sullivan & Worcester UK LLP is a limited liability partnership registered in England and Wales under number OC381549 and is a practice of registered and foreign lawyers and English solicitors. Sullivan & Worcester UK LLP is authorised and regulated by the Solicitors Regulation Authority (“SRA”). The term partner is used to refer to a member of Sullivan & Worcester UK LLP. A list of the names of all the partners is available for inspection at our registered office, Tower 42, 25 Old Broad Street, London, EC2N 1HQ. Please see sandw.com for Legal Notices, including further information on our professional obligations. This presentation is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. We are providing information to you on the basis you agree to keep it confidential. If you give us confidential information but do not instruct or retain us, we may act for another client on any matter to which that confidential information may be relevant.

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