Innovative forms of financing and their relevance for the Pacific region An introduction Regional UNCTAD workshop Nadi, Fiji, 18-20 September 2001.

Innovative forms of financing

and their relevance for the Pacific region

An introduction

Regional UNCTAD workshop Nadi, Fiji, 18-20 September 2001

Structure

Relevance

Structured commodity finance: general principles

Applications:

Pre- and post-export finance

Import finance

Bringing finance closer to the producers

Producers

Local traders

Local processors

Exporters

actors Phases requiring finance

Production

Local storage

Transport

Storage of raw material

Processing

Storage of processed product

Transport to port

Pre-export storage

Transport (CIF)

Financing aspects in commodity exports

Deferred payment by buyer

Traditional providers of finance

Producer

Producer/trader

Local trader

Trader/processor

Processor

Processor/bank/exporter

Exporter

Bank/exporter

Exporter/bank

Local bank

What improvements structured finance provide?

Longer-term, lower-cost finance, in several ways

Credit at international rates, for a longer-term and at lower rates, revolving and for a larger part of the value of the commodities.

Farmers can obtain affordable pre- and post-harvest credit

Producers

Local traders

Local processors

Exporters

Production

Local storage

Transport

Storage of raw material

Processing

Storage of processed product

Transport to port

Pre-export storage

Transport (CIF)

Deferred payment by buyer

Import finance, and finance on the back of other foreign exchange earnings

Structuring techniques can also improve

- the financing of commodity imports (e.g., oil products, cereals, sugar, fertilizers), or commodity-like imports (e.g., spare parts), or imports of equipment to produce commodities.

- the benefits drawn from regular and predictable hard-currency revenue streams (e.g., fishing rights, overfly rights, landing rights, oilfield royalties, migrant remittances, tourists’ credit card payments, telephone receivables).

- the ability to invest in commodity-related activities

The Orogen model

Orogen

Capital market

… with a structured finance boost

Orogen

Capital market

SPV

Assignment of part of export receivables or earnings streams

Development Bank

In-country

Off-shore

Migrant workers

Money Transfer Company

Money Transfer Agency Agreement

International Bank (arranger)US$ 40 million

Acknow-ledgement of assignment of receivables

Collection account

Sighting account

Debt Service Reserve account

Orders for money transfer (hard currency)

Debt service

Debt Service Reserve Account

build-up (over first 6 months)

Assignment of all receivables

from migrants’ remittances

US$ 3 mn/month

Surplus over US$ 3 mn/month

Country risk can be mitigated through structured finance arrangements

An example of using revenue streams – migrant remittances-based finance

Development Bank

In-country

Off-shore

Tourists

Credit Card Company

Agency Agreement

International Bank (arranger)Financing

Acknow-ledgement of assignment of receivables

Collection account

Sighting account

Debt Service Reserve account

Credit card payments

Debt service

Debt Service Reserve Account

build-upAssignment of all receivables

from credit card payments

Debt service

Surplus

Using revenue streams

Development Bank

In-country

Off-shore

International Airline Companies

Obligation to pay overfly rights

International Bank (arranger)Financing

Acknow-ledgement of assignment of receivables

Collection account

Sighting account

Debt Service Reserve account

Debt service

Debt Service Reserve Account

build-upAssignment of all receivables

from airline companies

Debt service

Surplus

Using revenue streams

Development Bank

In-country

Off-shore

International Fishing Companies

Obligation to pay fishing rights

International Bank (arranger)Financing

Acknow-ledgement of assignment of receivables

Collection account

Sighting account

Debt Service Reserve account

Debt service

Debt Service Reserve Account

build-upAssignment of all receivables

from fishing companies

Debt service

Surplus

Using revenue streams

Development Bank

In-country

Off-shore

International Postal Companies

Regular purchase of postage stamps

International Bank (arranger)Financing

Acknow-ledgement of assignment of receivables

Collection account

Sighting account

Debt Service Reserve account

Debt service

Debt Service Reserve Account

build-upAssignment of all receivables

from postal companies

Debt service

Surplus

…and so on…telephone receivables, landing rights, oilfield remittances, royalty payments...

Using revenue streams

Through use of structuring techniques, financiers can control their level of risk

Without secured/ structured finance:

financier financier

Potential borrower

Potential borrower

With structured finance:

Will he reimburse?

financier

Potential borrower

With secured finance:

Will the collateral disappear?

$

goods

Will he produce?

The relevance of structured finance (1): shifting the risk

Credit risk on the borrowing company

Risk on another

party, e.g., warehousing

company

Secured finance

Structured finance converts credit risk into production risk, diversion risk and country risk.

Example - how would structured finance for Tonga’s squash exports look like?

Past scheme

Development Bank

Exporters/input providers

FarmersReimbursement

Input provision

Request for inputs on

credit

Advice on credit provision

Granting of credit for

input provision

Disadvantages

- Serious credit risk

- Weakening of bargaining position of farmers vis-à-vis exporters

Example - how would structured finance for Tonga’s squash exports look like?

Past scheme

Development Bank

Exporters/input

providers

FarmersReimbursement

Input provision

Request for inputs on credit

Advice on credit provision

Granting of credit for input

provision

Current scheme

Development Bank

Exporters/input providers

FarmersReimbursement

Input provision

Payment for

inputs

Disadvantages

- Serious credit risk

- Farmers without sufficient collateral do not have access to credit

Credit provision

Example - how would structured finance for Tonga’s squash exports look like?

Past scheme

Development Bank

Exporters/in-put providers

FarmersReimbursement

Input provision

Request for inputs on credit

Advice on credit provision

Granting of credit for input

provision

How could it look like with structured finance?

Development Bank

Exporters/input providers

Farmers

Reimbursement obligation

Sale of squash; payment reduced by debt service

Credit provision - 10% cash, 90% in the form of a ‘credit line’ for the purchase of inputs

Development Bank

Exporters/in-put providers

Farmers

Reimbursement

Input provision

Payment for inputs

Current scheme

Credit provision

Request for

inputs on credit

Input provision

Agreement providing credit lines for input supply, and

exporters acting as collection agents of debt

The relevance of structured finance (2):The asset conversion cycle

Commodities

“Paper” (e.g., warehouse receipts)

Money

To turn commodities into money, they need to pass through a financial transformation - they need to be replaced by “paper” which represents the commodities.

Structured finance

More

Fisher men

Processor/ freezing

plantForeign buyers

Local market

Diesel oil

Foreign bankLocal

bankMonitoring

Loan used for buying oil

Reimbursement

Fish

Diesel

Fish

Fish

Fisher men

Processor/ freezing

plantForeign buyers

Local market

Diesel oil

Foreign bankLocal

bankMonitoring

Loan used for buying oil

Reimbursement

Fish

Diesel

Fish

Fish

Example - revolving finance for fishermen and a fish processing plant

more

Hedging often helps to improve financing

Why manage price risk? Firstly, because it has a development impact.

Oil price increases

Oil import bill increase

Pressure on the currency

Pressure on the government budget

Oil import rationing

Crowding out of other imports

Worsening of debt service capacity

Increase in energy and transport

costs

Pressure on energy-intensive industriesThe terms of trade of farmers producing export crops deteriorates

Public transport requires even larger part of the expenditure of the poor

Social and political unrest

Can’t you anticipate commodity price movements? No. E.g., crude oil.

There are many ways to hedge price risk. The principal ones:

- hedging on any of the established futures and options exchanges

- entering into a risk management contract on the over-the-counter market

- building hedging into physical contracting

- building risk management into a lending programme.

E.g., subsidized credit scheme

Traditional

Development Bank

Farmers

Development Bank

Farmers

Risk management

marketSubsidized

credit at 5% interest

Subsidized credit at 10% interest, but if prices fall, debt is forgiven

Lay off price riskWith risk

management

Practical applications:

• Post-export finance

• Financing goods at the port

• Import finance

• Financing processors

• Financing cooperatives and local traders

• Financing farmers

• Financing for the government

For more info: [email protected]