DIY Investor Magazine
/
2015 Issue
29
WHY INVEST IN TRADE FINANCING?
Trade finance loans are historically considered safer
investments:
• Between 2005 and 2009, only 1,089 trade finance
transactions defaulted out of 5.2m transactions from nine
leading international lenders, for a default rate of about
0.02%, Source: International Chamber of Commerce and the
Asian Development Bank.
• This is comparable to the long-term average default
rate for companies rated AA by S&P, Source: UK
based Equity Development.
• Trade finance is resilient to crisis,:
• During the crisis of 2007-08 only 445 international
trade defaults were reported out of 2.8 million
transactions conducted over this period.
• Source: International Chamber of Commerce
• Essentially world trade continued to function financed
by the trade finance procedures defined over
hundreds of years.
• Even countries in default need to ensure that trade
finance obligations are completed in order to allow
supplies of food and other basic necessities to continue.
• Trade financing is secured: funds advanced to
producers are typically guaranteed by the goods
themselves. Furthermore, they are insured to
overcome weather issues, loss as sea etc.
• Duration; trade finance loans rarely exceed 120 days,
therefore the loan is self-liquidating
WHAT ARE THE RISKS?
The financing of trade has historically formed a
core part of a bank’s own lending activities. Global
banks are active providers of revolving trade backed
financing. Set out below is a table produced by Bank
for International Settlements highlighting the trade
finance assets held by a number of banks in January
2014:
Total assets
(US$ bn)
Trade finance
assets (US$ bn)
Trade finance
as % of total
assets
HSBC
2,556
166
6.5
Standard
Chartered
599
110
18.4
Bank of China
1,878
107
5.7
ICBC
2,456
86
3.5
Deutsche Bank
2,800
74
2.6
JP Morgan
Chase
2,266
35
1.5
Unicredit
1,199
18
1.5
Banco do
Brasil
523
16
3.1
Intesa
Sanpaolo
827
8
0.9
THE REASON? IT IS INHERENTLY LOW RISK.
The loans are short term. The security of loan is
over collateralised against a real asset with real
value (goods). There is no market price movement
risk as the goods are pre-sold. The credit risk is
almost always to the bigger company in the chain
(money goes to a farmer but is owed from the mill,
for example).
•
Loss of goods? Theft? Fraud? Default of the
purchaser? These are the key considerations
in any trade deal. Insurance is normal on all
goods shipped (even e-bay suggests you
do this).
•
The difficult part is the credit checking of the
purchaser and this is where an experienced
operator is essential. Like a bank who collects
all that annoying information when you want a
mortgage, there are systems and people in the
world who are specialists in credit checking. The
right skills are key to reducing risk.
•
How can an investor be sure? Like any other
investment, you can ask for advice, read around
the subject, and look for a credit rating assessed
by an approved credit rating agency.
The impact of the Basel III global banking regulations
has reduced the ability of banks to meet the funding
required to match the predicted growth in international
trade. According to estimates from Standard Chartered
Bank, the new proposals will lead to an increase in
trade finance pricing of between 15% and 37%. This in
turn, according to the bank, could lead to a reduction
in trade finance volumes of 6%, which would also mean
a reduction in global trade by $270bn per annum, and
a 0.5% reduction in global gross domestic product.
Source: The Wall Street Journal, February 2011.
“I AM MORE CONCERNED WITH THE RETURN OF MY
MONEY THAT THE RETURN ON MY MONEY”
