10.6.4-RISK AND THE RELATION TO TRADE CREDIT-WAREHOUSE RECEIPTS AS TRADE FINANCE COLLATERAL
Warehouse receipts as trade finance collateral
In most countries a warrant automatically provides
to the goods but with warehouse receipts this is not necessarily the case. National legislation may be unclear or silent on the
enforceability (execution) of rights
over the underlying goods. Although warehouse receipts have been in existence for centuries, not all country legislation recognizes them as negotiable documents of title. Even if the common law framework and trade legislation provide sufficient basis for using warehouse receipts as negotiable documents of title, banks and other creditors may still encounter unexpected obstacles when trying to execute a warehouse receipt and take title to the goods. In some countries there will be 'reasons' why a creditor may have title but cannot enforce the rights this supposedly confers.
Where rights under a title are obtained, the execution still needs to be supported by legislation that will permit the creditor to trade or export the underlying goods. Does the creditor need a trade license? An export licence? Can the sales proceeds be transferred out of the country? Can the execution process be interfered with or delayed? In some countries the execution of debt presents banks with huge problems. No credit risk assessment can avoid examining the legal and sometimes physical difficulties surrounding the execution of the lender's rights.
The usefulness of warehouse receipts in general is well established, for example as a source of credit for producers of seasonal crops who may thus avoid having to sell during seasonal periods of oversupply and therefore low prices. But for the coffee export industry, warehouse receipts may represent only part of the answer to the banks' concerns about debt security and debt or collateral execution.
Incidentally, freely negotiable warehouse receipts present a different potential for fraud, in that the documents themselves may be stolen or falsely endorsed. Some international collateral managers therefore prefer to issue their own, non-negotiable receipts as part of 'guaranteed total performance' packages, which they back with liability and indemnity insurance. It could be argued that the real value of such insurance will emerge only when a real claim, a really huge claim arises, because insurance cover is only as good as what is stated in the policy document. One view is that only what is included is covered; the more attractive alternative view is that anything that is not specifically excluded is therefore covered by implication.
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