Structured Trade Finance (STF) is an alternative mean of providing trade financing facility so as to overcome the difficulty of obtaining conventional payment guarantees in the form of government or (Central/Commercial) bank guarantees making it an effective financing solution in the developing markets.
The main security is the Collateral, a current asset, either a commodity (stored in the warehouse run by a Collateral Manager), a Receivable in a secured collection account / Escrow Account or a combination of both.
STF is an Asset-Backed financing allowing banks to retain title of goods till repayment, hence an off beneficiary’s balance sheet financing which enhances the beneficiary’s financial position.
STF can be applied across part or all of the commodity trade value chain: from producer to processor (Pre-Export Financing) to distributor, including traders who purchase and deliver commodities in the international and domestic markets (Import / Export Financing). Structured trade financing is primarily based on performance risk and hence it is particularly well suited for companies doing business in what are considered higher risk markets and industries (emerging markets) or other companies trying to control their leverage level by applying for an off-balance sheet financing.
Unlike traditional financing, STF looks to the flow of the goods and their origins – with repayment realized from the export and sale of commodities in hard currency (preferably). That is to say, the financier's risk assessment is primarily related to the company’s ability to perform – to produce and deliver commodities, even under unstable or uncertain political and financial circumstances.
By focusing on the individual transaction structure and the company’s business performance capability, as opposed to their balance sheet, STF provides an alternative and cost effective financing tool to companies in the commodity arena, and to commodity producers and trading companies doing business in the developing markets. The value-added of STF solutions is their built-in ability to provide maximum security to all parties in a transaction – financier, producer and trader – essentially by converting payment and sovereign risk into performance risk that is carefully identified and mitigated by appropriate control tools, one of which is hiring a collateral manager (CM) which is needed in some cases.
Collateral management is a mean of securing physical commodities (subject of a loan/financing) that are taken under safe custody of a third party on behalf of the financier.
A collateral management agreement (CMA) is formed among the financier, the Beneficiary (or the owner of the commodities) and the collateral manager, a professional independent reputable company with experience in inspection, supervision, quality control, warehousing as well as/or in addition to freight forwarding/transport specialist.
Collateral managers basically “look after” the collateralized commodity on behalf of the financier. Collateral Management is basically the management of physical collateral (an Asset) during several stages of the value chain. It is a third-party commitment accepted by the collateral taker (Financier) to secure an obligation of the collateral provider (Beneficiary).