Key Considerations in Analysing the Credit of Structured Trade Finance Transactions
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Key Considerations in Analysing the Credit of Structured Trade Finance Transactions Anne-Marie Woolley AFREXIMBANK SEMINAR Fundamentals of Structured Trade Finance . November 30, 2010. Connecting Africa to the World and the World to Africa. EU. UAE.

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Key Considerations in Analysing the Credit of Structured Trade Finance TransactionsAnne-Marie WoolleyAFREXIMBANK SEMINARFundamentals of Structured Trade Finance

November 30, 2010

Activity driver 1 africa inward fdi flows 2009

EU Trade Finance Transactions


Activity driver # 1: Africa inward FDI flows 2009










Data per

Overseas investment projects above $100m recorded by fDi Markets between January 2009 and March 2010

Activity driver 2 africa trade 2009

$1.63bn Trade Finance Transactions












Activity 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

Activity driver 3 large donor flow recipients

$1.1bn Trade Finance Transactions

















Total ODA into Africa

(2007): $38.7bn

SB presence countries

Non-presence countries

Activity 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

Activity driver 4 favourable business environment

1 -99 Trade Finance Transactions

100 - 129

130 - 159

160 - 183


Activity 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

Sovereign credit ratings enjoy mainly good outlooks

World Bank Index: Ease of doing business

Ranked from 1 to 183; the closer to 1, the conducive the regulatory environment

Source: World Bank

Activity driver 5 growing consumer market
Activity driver # 5: Growing Consumer Market Trade Finance Transactions

  • 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

By income bracket %

100% = 792 964


Note 1: Figures do not sum to 100%, because of rounding

Source: Global Insight: McKinsey analysis

Share of population by region, 2010, %

Sector share of change in real GDP, 2002-2007

100% = $235 billion

100% (mil of people) 1,219 1,032 1,351 830 594 349

Number of cities with >1million people

48 52 109 52 63 48

Source: McKinsey Global Institute analysis

Source: United Nations

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

Structured trade finance transactions
Structured Trade Finance Transactions working capital facilities for the following reasons:

  • 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

Role of banks
Role of Banks working capital facilities for the following reasons:

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)

Risks for consideration
Risks for Consideration working capital facilities for the following reasons:

  • 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)

Good practices
Good practices working capital facilities for the following reasons:

  • 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)

The goods being financed
The Goods being Financed working capital facilities for the following reasons:

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?

The security package
The Security Package working capital facilities for the following reasons:

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?

The legal regulatory frame
The Legal & Regulatory frame working capital facilities for the following reasons:

  • 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 ?

The importance of the agent and of monitoring
The Importance of the Agent and of Monitoring working capital facilities for the following reasons:

  • 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


Current market structures
Current Market Structures working capital facilities for the following reasons:

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


First Quantum, DRC



ZTE/Huawei (suppliers to sector)

Bp angola
BP Angola working capital facilities for the following reasons:

Financing Structure

Nnpc usd97m silent payment guarantee facility
NNPC USD97m Silent Payment Guarantee Facility working capital facilities for the following reasons:


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.

Supplies Product


Fuel Supplier

Issues payment


Claim under gtee



Copy of B/L & PU


Flows and controls chart an example
Flows and Controls Chart – an Example working capital facilities for the following reasons:




Forwarding Agent + Shipping Company


Sale and transport of goods

Collateral Manager + Quality Inspector

Hedge Provider





Collection Account



Disclaimer working capital facilities for the following reasons:

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