Trade finance funding opportunities for third party investors
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Trade Finance Funding Opportunities for Third-Party Investors
Master Risk Participation Agreement
- A method for third-party investors with surplus liquidity to obtain 6%-8% annualised yields via secured, credit-insured, transactional finance
- Investors are able to select individual transactions to finance or provide discretionary guidelines
- Short duration and self-liquidating transactions mean that the WAL (Weighted Average Life) of investments can be managed to between 30 and 90 days, ensuring that liquidity targets can be met
- Synthesis – Structured Commodity Trade Finance Limited together with Varengold Bank AG provide back office, credit and advisory services, keeping the workload for the investor to a minimum
Structured trade finance is where a finance company funds a transaction on behalf of a third party. In our case we achieve this by directly purchasing the goods from their supplier and then selling the goods directly to their purchaser, instantly removing a substantial portionof the creditrisk.
The advantage for investors is that trade finance portfolios :
Are self-liquidatingTrade finance transactions are typically 30-60 days so there is a clear exit path for the funder. It also allows funders to quickly reduce exposure to borrowers, sectors and geographies
Have strong returnsTypically trade finance transactions have very strong returns due to the short tenor. By efficiently keeping money deployed, this can be converted to strong annualised returns
Have strong securityThe funder generally has direct ownership or a charge over the assets being financed as well as access to a Letter of Credit or Credit Insurance
Have low default ratesHistorically, structured trade finance transactions have very low default rates and very strong recovery rates, thanks tothe strong asset security
WTO Member Exports per year
Despite global economic uncertainty, global trade continues to grow year-on-year as globalisation continues
SME share ofthat trade
SMEs continue to globalise, moving their goods in greater size, across greater distances
Of the SME share requires trade finance
However, as deliveries take longer, SMEs turn to trade finance to bridge the cashflow gap between production and payment
Is the historical default rate
According to the International Chamber of Commerce Report in 2011, default rates in trade finance stood at around 0.02% - better than investment gradebonds*
|Product||Total Exposure($mio)||Total DefaultedExposure ($mio)||Exposure-weighted Default Rate||Transaction Default Rate|
Why is there an opportunity for investors in Structured Trade Finance?
With the phased implementation of Basel III and tighter lending criteria from banks, many SMEs have lost access to the funding that they previously had.
Banks are reducing exposure due to
- High regulatory costs of capital
- Out-dated technology and KYC infrastructure
- A reluctance to lend on a transactional basis
The Global Financial Crisis created a gap
With banks less willing to lend to SMEs an opportunity has been created for smaller, more nimble financial organisations to enter the market.
Using a combination of experience and understanding of global trade flows, a new breed of trade finance houses is emerging who can lend based upon assets, increasing security whilst maintaining strong returns.
Here at Synthesis, a large part of our success within the group comes from working exclusively with borrowers who have a strong track record in their industry. We look for a minimum of three years of successful trading by the management team and a strong business model with good margins across their product range.
In Structured Trade Finance the key to a successful portfolio is not just to choose the right counterparties, but also to select the deals with the right characteristics. Each commodity has its own idiosyncrasies, but in all transactions we seek verification of the value of the goods and will, where possible, take a charge over the goods. In the event of non-payment, we would liquidate the assets, hence our preference for non- perishable, generic commodities.
The underlying asset must be something that we can take control of, check the quality of and re-sell if necessary. It is always non- perishable
The transactions that we finance are always backed by a Letter of Credit or Credit insurance from an investment grade counterparty, or by alternative arrangements ensuring prompt and secure payment by the customer (performance bonds, payment guarantees)
Typically we look at a “real” valuation of the asset in terms of what price it can be sold at in a variety of jurisdictions
Are we able to identify, monitor and exercise control over the asset at any point during the transaction?
Our Strategy: Risk Mitigation
|RISK FACTOR||RISK MITIGANT|
|Risk of non-payment||Synthesis only lends to companies or management teams with a significant track record in the relevant commodity
Both the arranger of the deal and the debtor are required to pass our KYC process
Each transaction will have in place a Letter of Credit or Credit Insurance to act as a safeguard"
|Risk of rejection of goods||"Goods are checked for quality where necessary and certified by an independent inspector before the transaction is funded|
|Country Risk||In conjunction with leading trade finance law firm Watson Farley & Williams, Synthesis – Structured Commodity Trade Finance Limited continually monitors any potential risks, in particular those relating to currency restrictions, sanctions or embargoes"|
|Commodity Price Risk||Synthesis – Structured Commodity Trade Finance Limited does not engage in transactions where the return is in any way linked to the price of the underlying goods. Each transaction will have a sales contract at a pre-agreed price so that the return is fixed
In the event of non-payment by a borrower, Synthesis -
Structured Commodity Trade Finance Limited would first look to enforce the terms of the contract. It would then seek to sell the commodity to another buyer. It is only after that that they would seek recovery through the Letter of Credit or Credit Insurance. By concentrating on fungible, hard commodities, the risk of depreciation of the asset is minimised"
|Risk of Documentary Failure||Facility Documentation is arranged by WFW and all transactions are documented by experienced professionals"|
Purchase cost of the goods : USD100 Contribution by the Client : USD10 Contribution by Synthesis :USD90
Sales Revenue of the goods : USD105 Returned to Synthesis : USD92 Returned to Client : USD13
Marine Insurance during transit : Typically 110%of purchase price (USD110) with Synthesis as first loss payee
Credit Insurance before payment : Typically 90% of sale price (USD94.5) with Synthesis as first loss payee (note our exposure is only USD90)
Credit Support Providers approved by Synthesis – Structured Commodity Trade Finance Limited
Unless specifically requested by the Investor, our transactions always receive either an LC or credit insurance from one of the following banks or insurers, all of whom are investment grade :
|✓ABN AMRO Bank N.V.||✓Industrial & Commercial Bank of China Limited|
|✓Abu Dhabi Commercial Bank PJSC||✓Industrial Bank of Korea|
|✓Agricultural Bank of China Limited||✓ING Bank N.V.|
|✓Australia and New Zealand Banking Group Limited||✓JP Morgan Chase Bank N.A.|
|✓Atradius Credit Insurance N.V.||✓Korea Development Bank|
|✓Bank of China Limited||✓Lloyds Bank Plc|
|✓Bank of Communications Co., Ltd||✓Lloyds of London Insurance Syndicates|
|✓Bank of Nova Scotia||✓Malayan Banking Berhad|
|✓Banque Cantonale Vaudoise||✓National Australia Bank Limited|
|✓Barclays Bank Plc||✓National Bank of Abu Dhabi PJSC|
|✓Bayerische Landesbank (Bayern LB)||✓National Bank of Kuwait S.A.K.P.|
|✓BNP Paribas||✓Norddeutsche Landesbank Girozentrale|
|✓China Construction Bank||✓Oversea-Chinese Banking Corporation Limited|
|✓Citibank N.A.||✓Qatar National Bank S.A.Q.|
|✓Coface S.A.||✓Royal Bank of Canada|
|✓Coöperatieve Rabobank U.A.||✓Santander UK plc|
|✓Crédit Agricole S.A.||✓Skandinaviska Enskilda Banken AB|
|✓Credit Suisse AG||✓Société Générale S.A.|
|✓CTBC Bank Co., Ltd.||✓Standard Chartered Bank|
|✓DBS Bank Ltd||✓The Toronto-Dominion Bank|
|✓Euler Hermes S.A.||✓UBS AG|
|✓Export-Import Bank of Korea||✓Unicredit Bank Austria AG|
|✓Garant Versicherungs AG||✓United Overseas Bank Limited|
|✓Hang Seng Bank Limited||✓Wells Fargo Bank N.A.|
|✓HSBC Bank Plc|
Third-Party Investment Structure
SSCTF provides all of the legal and transactional structure, simply requiring the Third Party Investor to select transactions to fund. This allows the investor to fund transactions based around their own liquidity and
Spyros Papadopoulos has over 18 years’ experience in alternative investments. He began his career in Private Banking, first with Citigroup in London and Geneva, where he was the key contributor to the development of both the Spanish and Greek Wealth Management Desks, and then with Société Générale in Athens, where he was instrumental to the expansion of the Greek Private Banking division. Spyros resigned from Private Banking in 2006 to set up an asset management company for Deloitte, before returning to London as Director of the hedge fund Absolute Return Partners. He left to found Synthesis in June 2009. His clients came through unscathed, and indeed profited, from the crises of 2000-02 and 2008. Spyros holds the Investment Management Certificate of the CFA-Society of the UK.
Ilya Medvedenko is responsible for business development , transaction origination and monitoring of CIS-based client relationships. Ilya has expertise in corporate development, international trade, corporate financing, credit and equity investments in soft commodities and real estate. Previously he has worked at Investment Banking Division of JP Morgan in London-based European Financial Institutions Group. Earlier Ilya was responsible for trade financing and European business development in Barens Chocolate LLC. Ilya holds MSc in Finance & Investment, M&A, Private Equity degree from London School of Business and Finance.
Matthew Edwards has over 27 years’ experience in financial services. He began his career with Tullet and Tokyo in the city of London in 1990 where he quickly established himself as a leading broker. Matthew worked for two other leading brokerage houses in London before moving to Athens in 1997. He was head of all foreign exchange activities for Sigma money brokers who under his guidance became the global benchmark for GRD brokerage. He has since acted as a business development consultant for ICAP London, BGC Partners and Cleaves Securities. Throughout his career Matthew has developed and managed key client relationships and maintains strong relationships with banks, brokerages and private equity firms
has over 18 years’ experience in alternative investments. He began his career in Private Banking, first with Citigroup in London and Geneva, where he was the key contributor to the development of both the Spanish and Greek Wealth Management Desks, and then with Société Générale in Athens, where he was instrumental to the expansion of the Greek Private Banking division. Spyros resigned from Private Banking in 2006 to set up an asset management company for Deloitte, before returning to London as Director of the hedge fund Absolute Return Partners. He left to found Synthesis in June 2009. His clients came through unscathed, and indeed profited, from the crises of 2000-02 and 2008. Spyros holds the Investment Management Certificate of the CFA-Society of the UK.
With more than 15 years broad experience in the legal and financial sectors, Joseph is an experienced management professional, having grown, re-organised and co-ordinated a number of funds, businesses, teams and departments, with full P&L responsibility and an excellent track record. A key element of his work has been doing business face to face internationally, having undertaken business trips across five continents to more than 50 countries, and with clients in more than 150. In 2015, he founded Old Park Lane Consultancy Ltd, through which he consults on fund structuring, capital raising, product development, international business and communications for a number of clients.
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