《Structured Trade and Commodity financing》.pdfVIP

Structured trade and commodity financing 37 IV. Structured trade and commodity financing A. Introduction Until the onset of the Latin American financial crisis in the mid-1980s, banks involved in international commodity finance relied on balance sheet analysis and government guarantees for ascertaining the creditworthiness of lenders. Security was at times enhanced by tangible assets, such as real estate, offered as collateral. However, these traditional tools were no longer sufficient to deal with increasing economic and political risks, particularly in emerging markets. Indeed, as a number of national trade finance surveys conducted by ESCAP in cooperation with ITC have shown, it is not uncommon for banks in economies in transition to require as collateral physical assets estimated at 150 per cent of the value of the loan. With the consolidation of the commodity industry, only a small number of large creditworthy traders are actively involved in trade, in addition to an increasing number of niche players that are difficult to finance. Most of the traders have large credit requirements (compared with their own equity), short track records, a modest capital base and limited access to government guarantees. Given the high default rate of commodity traders (both large and small), banks have become hesitant to meet their financing needs on an unsecured basis. Hence, the evolution of a range of innovative, structured commodity financing techniques to mitigate the risk of losses and assess the potential losses associated with financing commercial transactions. Globalization and privatization are other factors behind this demand for structured finance. With many commodity trading activities