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