STRUCTURED FINANCE – Shanghai Capital Group

What Is Structured Commodity Finance?

Structured commodity finance or SCF is a sophisticated commodity-based method of trade finance that is used exclusively to finance transactions involving the import, export or foreign trade of commodities and specifically for commodity producers and commodity trading companies who do business in developing markets. SCF applies to three main commodity groups: metals and mining, energy, and soft commodities or agricultural crops. Structured commodity finance was introduced more than 25 years ago and continues to play an important role in trade finance markets.

SCF provides liquidity management and risk mitigation for the production, purchase, and sale of raw, semi-refined or semi-processed materials. Funding solutions for structured commodity finance include a variety of pre-export finance, toll finance, counter-trade finance, and many others. It can be applied to part or all of the commodity trade value chain: from producer to distributor to processor, in addition to the physical traders who buy and deliver commodities in international and domestic markets. Structured commodity financing is based primarily on performance risk, so it is very well suited for companies doing business in what are considered higher risk markets and industries.

Structured Commodity Financing Includes

Oil and Gas Financing
Pre-export Finance
Letters of Credit
Inventory Finance
Export credits (to reduce risks to funders when providing trade or supply chain finance)
Barter and Inventory Finance

Structured Commodity Finance Performance Risk

Unlike traditional financing which looks to the flow of funds and the sources of the money, structured commodity finance looks to the flow of the goods and their origins, with repayment coming from the export and sale of commodities in hard currency countries. The lender’s risk assessment is primarily based on the company’s ability to perform. That is, to produce and deliver commodities, even in unstable or tumultuous political and financial environments.

By focusing on the individual structure of the transaction and the company’s performance capability, as opposed to their balance sheet, structured commodity finance provides a cost effective alternative to companies in the commodity market, and to commodity producers and trading companies doing business in developing markets. Structured commodity finance adds value to the trade finance deal cycle because of the built-in ability to provide maximum security to all the parties to a transaction including producers, traders, and lenders by essentially converting payment and sovereign risk into performance risk.

Why is Structured Commodity Finance important?

Structured commodity finance allows businesses to grow and develop – as many people cannot access the standard asset type finance; in order to do this they must own an asset of a greater value than their lending requirement. Thus, in order to grow one may not only have assets that they can charge. Using structured financing allows un-fundable trades and expansionary practices to be viable. This is especially necessary within the commodities world, where volumes are high but margins are typically low.

Within the commodities world, structured commodity finance is key because it is not the case that a simple facility can be used. This is due to the high capital amount which is required and the corresponding trade cycles. Different funders will have preferred structures, leverage ratios, commodities that they are comfortable with and jurisdictions that they are interested in or are preferred.

Benefits of Structured Commodity Finance

Structured commodity finance adds value to the deal life cycle because of the built-in ability to provide maximum security to all the parties to a transaction – producer, trader and lender – essentially by converting payment and sovereign risk into performance risk.