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  • 10.5.2-RISK AND THE RELATION TO TRADE CREDIT-SECURITY STRUCTURE

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  • Security structure

     
     
    To safeguard its funds and the underlying transaction flow the lender will establish a security structure. The elements can be summarized as follows:

    Exporter. Assignment of accounts, mortgages on fixed assets, pledges of goods. Assignment of contracts, receivables, insurances. Business experience, track record. Fixed price contracts, risk management or hedging. Monitoring of trading 'book', independent audit of accounts.

    Price risk during and after transaction
    . Agreed transaction structure, hedging tools, in-built margin call financing.

    Contract reliability
    . Pre-approved buyers only; agreed structure; fixed price or agreed hedging arrangement. (Who decides when and how price fixing takes place? For example, is it the trader or someone else? Are there specific time limits? For example, fix no later than so many days after date of contract, or so many days ahead of shipment.)

    Physical stocks. Stored in eligible (approved) warehouses. Properly marked, stored separately and identifiably. Commingling with other goods not permitted.

    Stocks as security. Pledge agreement with title to the goods = warrants. (Note that depending on local law, warehouse receipts are not always title documents in the legal sense and may need a court order to enforce rights.) Take ownership of the goods. (Note though that this does not protect the lender where export licenses are required, or where local law may require collateral to be auctioned locally - sometimes within just 14 days after the default is confirmed. How to ensure no other lender, creditor or authority may have prior assignment over the goods? For example, if the national revenue authority's claims take precedence the goods may remain blocked for long periods.)

    Stock values. Daily verification of market value versus credit outstanding, based on futures exchange values where goods are quoted, or basis to be agreed. Top-up clause in lending agreement in case collateral value becomes inadequate. Monitoring of processing cycles and turnover speed.

    Collateral management agreement (CMA). External legal opinion on the CMA itself, the fiduciary transfer of goods and the power of attorney to sell the goods. Due diligence on transport, shipping, warehousing, inspection and collateral management companies. (Due diligence is the thorough analysis of operations, standing, strengths and weaknesses, profitability and credit worthiness.) Performance insurance including cover against negligence and fraud by collateral manager. What pre-emptive rights, if any, do warehousemen and collateral managers have over goods under their control? Do their storage and management charges take precedence?

    Export. Goods must comply with industry, government and contract specifications. In case of default, does a bank require any special licence to trade or export the goods? What will be the cost of export taxes, shipment, insurance? When does risk move from performance to payment risk? (At what stage does the lender get possession of actual negotiable shipping documents?) Are funds freely transferable in and out of the country? It is no good collecting local currency against an outstanding invoice in foreign currency if that local currency is not convertible or transferable.

    Buyer. Exposure to price risk and volatility (affects both exporter and importer). Due diligence; pre-approved buyers only. Limit total exposure to any one buyer. Buyer must accept that lender may execute contract in case of exporter default.