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STRUCTURED TRADE FINANCE
International Debate
on
Concept,
Objective,
Technique
Vol. 3, No. 2; February 2006
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Editor's note: About
structured trade finance, LC VIEWS asks Boris
Kozolchyk and Marek Dubovec because they are international trade law
experts and are participating in promotion of Inter-American Free Trade.
It asks most-talented financial product manager in China, Jia Hao, to know what is in his beautiful
mind. It asks a senior management level practicing banker in China, Lei Li, to know what is in banking practice.
It asks Kim Christensen because trade finance is his specialization and
his favorite coffee recharges his mind as answering machine to answer
questions on trade finance. We can't resist the temptation to know T. O.
Lee as he is world-famous Mr. Know-All.
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Boris Kozolchyk
USA
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Jia Hao
China |
Marek Dubovec
USA |
Kim Christensen
Denmark |
T.O. Lee
Canada |
Alan Liu
Taiwan |
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BORIS KOZOLCHYK, Law Professor,
University of Arizona, USA
Dear Ravi: I will give you my own, non
specialist view, on structured finance. This is a term used for various transactions
in which the traditional methods of lending do not suit the needs of the
borrower or of the market. For example, company A in a certain business
where it has done well is offered an opportunity to create a company B in
another type of business. By creating B as an off balance sheet subsidiary
of A, A could satisfy the financial needs of the new company. It could
invest some of its own capital in it and this would help B obtain further
financing from third party lenders would would like to see an association
between A and B. At the same time, it would satisfy the shareholders of A
who would not like to see their ownership in A diluted by including B in
A's operations. This would be accomplished by the creation of a subsidiary
which could be either wholly or majority owned by A. This type of
mechanism has had good and bad effects in the marketplace, as the ENRON
and other recent fiascos illustrate. Structured finance is also used to
mix highly rated bonds with junk bonds in a pool that would help marketing
the latter which would not be able to gain a market on their own. I have
also seen structured finance used in connection with standby letters of
credit to guarantee the payment of otherwise poorly regarded governmental
obligations in Argentina, Brazil and Chile in South America, also with
mixed success. In principle if a loan or investment is properly planned
through repayment and financing plans that are truly liquid and it is properly collateralized
it should be of considerable assistance to developing nations, which would
not have access to credit at reasonable rates otherwise. I hope this helps.
For further information, you can consult any Dictionary or Encyclopedia
of Finance. I hope this helps.
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T. O. Lee,
Managing Director, T. O. Lee Consultants,
Canada
"Structured trade finance"
means to tailor make (structure) a trade financing program for a
particular client of the bank by selecting different modes of financing
to fit into his different financing needs out of a series of financing
options that are available, such as D/A, D/P, L/C, standbys, bank
guarantees, forfeiting, factoring, acceptance, negotiation, discounting,
assignment, transfers, back-to-back L/C etc etc.
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Marek Dubovek, Research Attorney, National
Law Center for Inter-American Free Trade, USA
Most of the major commercial banks
have Structured Trade Finance departments that
provide medium to long term tailored trade
finance solutions to their clients. These financing solutions are
particularly desired by the customers who must meet extended payment
terms. One of the key objectives is to mitigate risks associated with a
large package of receivables that are payable in future and thus provide
financing to the exporter. The solution usually includes pre-export
financing, discount of receivables, forfaiting, etc.
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Lei Li, Deputy General
Manager, China Everbright Bank, China
Structured Trade Finance
service provides assistances to clients with their export-related financing
needs. The service can cover a wide-range of matters, including providing
short- or medium-term financing to support export sales, advising profitable
financial solutions from a wide array of public and private sector
alternatives, assisting with issues of foreign credit exposure and export
financing, as well as suggesting methods for your company to generate
additional export revenue. It can also include tools and resources
available to structure a comprehensive financing program or to assist with
large individual export transactions.
The following are a few
examples of Structured Trade Finance:
Export Working Capital
Guarantee Program
International Receivables
Secured Funding Program
Export Receivables Purchase
Program
Financing Programs for Your
Overseas Buyer
Buyer Financing for Capital
Goods and Services
Buyer Financing for
Agricultural Products
The term "structure" means to design a
solution fitting the needs of a customer. Because the solutions usually
involve several traditional products putting together in one package, or
one package with several features beyond traditional products - the term "structured"
is used to describe this characteristic. Many customers may have similar
needs;, thus there are a lot matured products in this area. However, for
customers with special needs products tailored specifically to their
specific needs can be designed or arranged.
I guess the term "structured" has been
abused to some extent. I am not sure what is the origin of the term and
how it came into use.
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Alan Liu, Guest Faculty,
Taiwan Academy of Banking and Finance, Taiwan
I wonder whether there is a special term
called 'structured trade finance'. If not, the word 'structured' is only
used an adjective, modifying trade finance. That means the trade finance
is arranged or orchestrated or structured (to my knowledge) by the account
officer (who is responsible for that particular customer) according to the
needs of his/her customer.
The trade finance may covers the following
lines of credit for financing:
Import LC issuance, Standby LC issuance
Back-to-back LC issuance, Local LC (in New
Taiwan dollar) issuance
Negotiation (in Taiwan) under export LC
documents
Payment under D/P or D/A collections (post-export
loans)
Pre-export or pre-shipment loans
Packing Loans under LC (before shipments,
more or less like pre-export loan)
Overdraft line under corporate Checking
Account
Discounting on post-dated corporate or
personal checks
Loans against account payables (Open Account)
for importing customers
Foreign-currency or local-currency (New
Taiwan dollar) loans
All negotiations or payments
under export LC documents or documentary-collection documents are legally
considered as 'loans' in Taiwan, without full recourse to
customer-exporters.
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Jia Hao,
Financial Product Manager, Bank of China,
China
In my
understanding, structured trade finance is a sophisticated arrangement
of trade financing products by banks as per customers’ different
financial needs. A bank supplying sorts of trade financing products such
as packing loan, export bill purchase, negotiation, discounting,
assignment, forfaiting, silent confirmation, purchase under factoring
and so on may skillfully choose for his customers appropriate product(s)
considering some specific factors including customer’s credit line,
different financial needs, different modes of payment utilized and the
financing products’ characteristics such as with/without recourse. For
example, when a usance LC is selected by an exporter as the mode of
payment in a specific transaction, if the exporter holds enough credit
line, packing loan, export bill purchase, negotiation, discounting,
assignment, forfeiting, and silent confirmation may be considered and
chosen for a better use according to the exporter’s financial need.
Packing loan may be utilized for pre-shipment financing, and then when
the required documents are presented, export bill
purchase/negotiation/assignment/silent confirmation may be alternatively
chosen to repay the packing loan, and when the maturity is confirmed by
the issuing bank, discounting and fortaiting may be the better choice in
lieu of the previous financing products with less credit line covered. A
good financing product manager may properly combine the products in an
efficient way to satisfy different customer’s needs as well as prudently
control risks related. So I should say how trade finance is structured
well is the homework of every financing product manager.
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THEIR COMMENTS ON HIS VIEWS
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Kim
Christensen, Trade Finance Business and
Product Specialist, Nordea, Denmark
Structured Trade
Finance is such a beautiful "umbrella
expression" - that covers more or less "all" but tells
you nothing really. I think that the very good comment by Jia Hao proves
that. So I think that it is much better to talk about what is really
being done; e.g. who is being financed, based on what instrument, under
which conditions etc etc etc.What it comes down
to is what Jia Hao expresses as "... Properly combine products in an
efficient way to satisfy different customers .."This is in my mind
the backbone of Trade Finance - structured or not: That you are able to
use the instruments, your experience and your knowledge to effectively
support your customers - and thereby world trade as such! I strongly
endorse this statement by
Jia Hao.
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Jia Hao's
explanation is very informative. I would be very interested in reading
more views from bankers who work in this area of financing. This is a very
practical area of finance and I am afraid I can only offer "bookish"
definitions, since I have not had any experience in this field.
As regards the
region of Latin America, the Inter-American Development Bank recently
launched "International Trade Finance Reactivation Program", which
provides pre-export financing, trade-related loans, restructuralization of
existing export/import financing and other monetary incentives to mitigate
trade-related risks. The IADB also undertook to provide financial
guarantees for structured trade finance transactions. These guarantees are
secured by future flows of trade and trade-related receivables.
WHAT WE DO NOT MEAN BY STRUCTURED TRADE AND COMMODITY FINANCE (STCF)
In his book "Structured Trade and Commodity Finance
in Emerging Markets" (published by Woodhead Publishing, Cambridge, England;
2001 edition), John MacNamara, an authority on structured trade finance -
since 2000 he has been Head of Structured Commodity Finance at Deutsche Bank
in Amsterdam - begins his discussion not by saying what is STCF but by
clarifying what we don't mean by STCF. Is forfaiting structured trade
finance as is commonly believed in the New York's financial market ? No,
says John MaNnamara. He excludes forfaiting from his definition of
structured trade finance. He also excludes the ECA-backed (export credit
agencies) deals, which in Europe and America are taken as structured trade
finance. How about the deals of international agencies such as IFC, EBRD?
John MacNamara excludes those also from his definition. Then what STCF is?
He says it is cross-border trade finance in Emerging Markets where the
intention is to get repaid by the liquidation of a flow of commodities
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New! Not part of the
original edition: |
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Reader Reaction
The edition tempts a risk management specialist
with United Overseas Bank, CHEN Jee Meng , to offer his definition
and views:
An STF transaction [footnote 6] is perceived as high
risk; however, the underlying risks should be more palatable to lenders
since a carefully structured transaction substitutes country risk and the
buyer's risks for the risk profile of the structure. STF makes it possible
to go directly to the roots of the problem by isolating the various risks
involved in the financing and systematically mitigating each.
Footnote 6
STF is commonly described by practitioners as the
art of transferring risks in trade financing from parties less able to bear
those risks to those more equipped to bear them in a manner that ensures
automatic reimbursement of advances from the underlying assets.
[The above is taken from CHEN Jee
Meng's article "Alternatives in Trade Finance Tools". The full
article is available in Library] |
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