innovative forms of financing and their relevance
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Innovative forms of financing
and their relevance for the Pacific region
An introduction
Regional UNCTAD workshop Nadi, Fiji, 18-20 September 2001
Structure
Relevance
Structured commodity finance: general principles
Applications:
Pre- and post-export finance
Import finance
Bringing finance closer to the producers
Producers
Local traders
Local processors
Exporters
actors Phases requiring finance
Production
Local storage
Transport
Storage of raw material
Processing
Storage of processed product
Transport to port
Pre-export storage
Transport (CIF)
Financing aspects in commodity exports
Deferred payment by buyer
Traditional providers of finance
Producer
Producer/trader
Local trader
Trader/processor
Processor
Processor/bank/exporter
Exporter
Bank/exporter
Exporter/bank
Local bank
What improvements structured finance provide?
Longer-term, lower-cost finance, in several ways
Credit at international rates, for a longer-term and at lower rates, revolving and for a larger part of the value of the commodities.
Farmers can obtain affordable pre- and post-harvest credit
Producers
Local traders
Local processors
Exporters
Production
Local storage
Transport
Storage of raw material
Processing
Storage of processed product
Transport to port
Pre-export storage
Transport (CIF)
Deferred payment by buyer
Import finance, and finance on the back of other foreign exchange earnings
Structuring techniques can also improve
- the financing of commodity imports (e.g., oil products, cereals, sugar, fertilizers), or commodity-like imports (e.g., spare parts), or imports of equipment to produce commodities.
- the benefits drawn from regular and predictable hard-currency revenue streams (e.g., fishing rights, overfly rights, landing rights, oilfield royalties, migrant remittances, tourists’ credit card payments, telephone receivables).
- the ability to invest in commodity-related activities
The Orogen model
Orogen
Capital market
… with a structured finance boost
Orogen
Capital market
SPV
Assignment of part of export receivables or earnings streams
Development Bank
In-country
Off-shore
Migrant workers
Money Transfer Company
Money Transfer Agency Agreement
International Bank (arranger)US$ 40 million
Acknow-ledgement of assignment of receivables
Collection account
Sighting account
Debt Service Reserve account
Orders for money transfer (hard currency)
Debt service
Debt Service Reserve Account
build-up (over first 6 months)
Assignment of all receivables
from migrants’ remittances
US$ 3 mn/month
Surplus over US$ 3 mn/month
Country risk can be mitigated through structured finance arrangements
An example of using revenue streams – migrant remittances-based finance
Development Bank
In-country
Off-shore
Tourists
Credit Card Company
Agency Agreement
International Bank (arranger)Financing
Acknow-ledgement of assignment of receivables
Collection account
Sighting account
Debt Service Reserve account
Credit card payments
Debt service
Debt Service Reserve Account
build-upAssignment of all receivables
from credit card payments
Debt service
Surplus
Using revenue streams
Development Bank
In-country
Off-shore
International Airline Companies
Obligation to pay overfly rights
International Bank (arranger)Financing
Acknow-ledgement of assignment of receivables
Collection account
Sighting account
Debt Service Reserve account
Debt service
Debt Service Reserve Account
build-upAssignment of all receivables
from airline companies
Debt service
Surplus
Using revenue streams
Development Bank
In-country
Off-shore
International Fishing Companies
Obligation to pay fishing rights
International Bank (arranger)Financing
Acknow-ledgement of assignment of receivables
Collection account
Sighting account
Debt Service Reserve account
Debt service
Debt Service Reserve Account
build-upAssignment of all receivables
from fishing companies
Debt service
Surplus
Using revenue streams
Development Bank
In-country
Off-shore
International Postal Companies
Regular purchase of postage stamps
International Bank (arranger)Financing
Acknow-ledgement of assignment of receivables
Collection account
Sighting account
Debt Service Reserve account
Debt service
Debt Service Reserve Account
build-upAssignment of all receivables
from postal companies
Debt service
Surplus
…and so on…telephone receivables, landing rights, oilfield remittances, royalty payments...
Using revenue streams
Through use of structuring techniques, financiers can control their level of risk
Without secured/ structured finance:
financier financier
Potential borrower
Potential borrower
With structured finance:
Will he reimburse?
financier
Potential borrower
With secured finance:
Will the collateral disappear?
$
goods
Will he produce?
The relevance of structured finance (1): shifting the risk
Credit risk on the borrowing company
Risk on another
party, e.g., warehousing
company
Secured finance
Structured finance converts credit risk into production risk, diversion risk and country risk.
Example - how would structured finance for Tonga’s squash exports look like?
Past scheme
Development Bank
Exporters/input providers
FarmersReimbursement
Input provision
Request for inputs on
credit
Advice on credit provision
Granting of credit for
input provision
Disadvantages
- Serious credit risk
- Weakening of bargaining position of farmers vis-à-vis exporters
Example - how would structured finance for Tonga’s squash exports look like?
Past scheme
Development Bank
Exporters/input
providers
FarmersReimbursement
Input provision
Request for inputs on credit
Advice on credit provision
Granting of credit for input
provision
Current scheme
Development Bank
Exporters/input providers
FarmersReimbursement
Input provision
Payment for
inputs
Disadvantages
- Serious credit risk
- Farmers without sufficient collateral do not have access to credit
Credit provision
Example - how would structured finance for Tonga’s squash exports look like?
Past scheme
Development Bank
Exporters/in-put providers
FarmersReimbursement
Input provision
Request for inputs on credit
Advice on credit provision
Granting of credit for input
provision
How could it look like with structured finance?
Development Bank
Exporters/input providers
Farmers
Reimbursement obligation
Sale of squash; payment reduced by debt service
Credit provision - 10% cash, 90% in the form of a ‘credit line’ for the purchase of inputs
Development Bank
Exporters/in-put providers
Farmers
Reimbursement
Input provision
Payment for inputs
Current scheme
Credit provision
Request for
inputs on credit
Input provision
Agreement providing credit lines for input supply, and
exporters acting as collection agents of debt
The relevance of structured finance (2):The asset conversion cycle
Commodities
“Paper” (e.g., warehouse receipts)
Money
To turn commodities into money, they need to pass through a financial transformation - they need to be replaced by “paper” which represents the commodities.
Structured finance
More
Fisher men
Processor/ freezing
plantForeign buyers
Local market
Diesel oil
Foreign bankLocal
bankMonitoring
Loan used for buying oil
Reimbursement
Fish
Diesel
Fish
Fish
Fisher men
Processor/ freezing
plantForeign buyers
Local market
Diesel oil
Foreign bankLocal
bankMonitoring
Loan used for buying oil
Reimbursement
Fish
Diesel
Fish
Fish
Example - revolving finance for fishermen and a fish processing plant
more
Hedging often helps to improve financing
Why manage price risk? Firstly, because it has a development impact.
Oil price increases
Oil import bill increase
Pressure on the currency
Pressure on the government budget
Oil import rationing
Crowding out of other imports
Worsening of debt service capacity
Increase in energy and transport
costs
Pressure on energy-intensive industriesThe terms of trade of farmers producing export crops deteriorates
Public transport requires even larger part of the expenditure of the poor
Social and political unrest
Can’t you anticipate commodity price movements? No. E.g., crude oil.
There are many ways to hedge price risk. The principal ones:
- hedging on any of the established futures and options exchanges
- entering into a risk management contract on the over-the-counter market
- building hedging into physical contracting
- building risk management into a lending programme.
E.g., subsidized credit scheme
Traditional
Development Bank
Farmers
Development Bank
Farmers
Risk management
marketSubsidized
credit at 5% interest
Subsidized credit at 10% interest, but if prices fall, debt is forgiven
Lay off price riskWith risk
management
Practical applications:
• Post-export finance
• Financing goods at the port
• Import finance
• Financing processors
• Financing cooperatives and local traders
• Financing farmers
• Financing for the government
For more info: Lamon.Rutten@unctad.org
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