China Trade & Export Finance Conference Commodity Finance ... · China Trade & Export Finance Conference Commodity Finance in PRC Jolyon Ellwood Russell, Partner James Willcock, Registered

China Trade & Export Finance Conference

Commodity Finance in PRC

Jolyon Ellwood Russell, PartnerJames Willcock, Registered Foreign Lawyer

Gulong Ren, Legal Officer

JOLYON ELLWOOD-RUSSELL

Agenda

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Commodity financing structures

• FX Controls• PRC Security• FX Controls• PRC Security

Pervasive challenges for the Offshore Lender

• Warehouse financing• Deferred payment• Repo• Prepayment facilities

• Warehouse financing• Deferred payment• Repo• Prepayment facilities

Various commodity financing structures

• How are they structured?• Which are the variant structures?• Market trends in prepayment

• How are they structured?• Which are the variant structures?• Market trends in prepayment

Prepayment facilities

Opportunities and development for Offshore Lenders in China

UDR: 7065369

Regulatory framework – capital account

v current account

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RMB/FX

Capital account transactionsinvestment, loans

Current account transactions

import/export, services, rent, dividend, royalties, interest

SAFE APPROVAL/REGISTRATION REQUIRED(BORROWING GAP)

SAFE APPROVAL NOT REQUIRED

Jolyon Ellwood-Russell

Capital v Current Account Transactions

Taking PRC security in cross-border

trade finance structures

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Security law of PRC (Chinese)

• Over goods• Over bank accounts

• "fixing" pledged cash• Escrow Arrangement

• Over goods• Over bank accounts

• "fixing" pledged cash• Escrow Arrangement

Pledge

Pledge over Account Receivables

Jolyon Ellwood-Russell

Warehouse financing

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ONSHORE OFFSHORE

BORROWER BANK A/C

LENDER

SUPPLIERBORROWER BUYER

B. PLEDGE OVER GOODS A. PLEDGE OVER GOODS/BILLS OF LADING

WAREHOUSE COMMODITY COMMODITY

US$ US$

D. ESCROW ARRANGEMENT

LETTER OF CREDIT

US$ FACILITY AGREEMENT

COMMODITY SPA1

CASH ADVANCE

COMMODITY SPA2

C. PLEDGE OVERRECEIVABLES 1

2

3

Document flow Fund flow cargo flow

Notes

Deferred payment (import)

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BUYER(BORROWER)

SELLER(LENDER)

SUPPLIER

COMMODITY

US$ US$

COMMODITY TITLE

ONSHORE OFFSHORE

WAREHOUSE COMMODITY

MASTER SALE AGREEMENT1 COMMODITY SPA12

COMMODITY TITLE

Repurchase arrangements (Repo)

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BUYER(SELLER)

LENDER (BUYER)

OFFTAKER

ONSHORE OFFSHORE

US$

CONDITIONAL OFFTAKE AGREEMENT

COMMODITY

SALE AND PURCHASE

Notes:

1. Repo provider (Lender) takes ownership of commodity pursuant to commodity sale and purchase agreement. Title of goods transfer to. Lender (not security).

2. Conditional offtake agreement is in forward contract that ensures repayment of loan and return of collateral.

Prepayment

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LENDER

BORROWERSELLER

(PRC)

ONSHORE OFFSHORE

5. Delivery

2. Purchase Contract

4. Assignment3.

1. 6.

Notes:

1. Lender to finance prepayment subject to satisfactory CPs and legal documentation

2. Purchase Contract between Borrower and Seller

3. Borrower advances funds to Seller

4. Purchase Contract assigns to Lender to acknowledged by Seller

5. Seller delivers goods to Borrower

6. Borrower repays the Lender in accordance with terms of the facility

Document flow Fund flow Cargo flow

Prepayment facilities

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ONSHORE OFFSHORE

LENDER

BORROWER

OFFTAKER(OFFSHORE)

PRODUCER(PRC)

BG ISSUING BANK(PRC)

Notes:

1: Lender to finance prepayment subject to satisfactory CP's and legal documentation

1a: Offtaker receives intercomopany loan from Borrower

2: Offtake contract between Offtaker and Producer

3a: China Issuing Bank issues an on-demand performance guarantee ("BG") ifo.Offtaker for obligations of Producer under Offtaker contract

3b: Offtaker advances funds to Producer

4: BG + Offtake contract assigned to Lender acknowledged by China Issuing Bankand Producer

5: Producer delivers to Offtaker

6: Borrower places cash with Lender the day Offtaker takes delivery and Lenderdeducts the cash from the account as a repayment

3a: Bank Guarantee

4: Assignment

5: Delivery

2: Offtake Contract

3b

1a

6

Document flow Fund flow Cargo flow

6

1

Prepayment Structure

Prepayment facilities (hybrid)

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OFFTAKER BORROWER LENDER

PRODUCER

ONSHORE OFFSHORE

$

$

BORROWER BANK

ACCOUNTA: Pledge over receivables

B: Escrow Arrangement

Commodity Purchase Contract Facility Agreement

Document flow Fund flow Cargo flow

Notes

Opportunities

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China Trade & Export Finance Conference

Commodity Finance in PRC

Jolyon Ellwood Russell, PartnerJames Willcock, Registered Foreign Lawyer

Gulong Ren, Legal Officer

JOLYON ELLWOOD-RUSSELL UDR: 7065369