DIY Investor Magazine
/
2015 Issue
30
HOW DO I INVEST IN TRADE FINANCE?
As a result of the Basel III regulations, a number of
global banks including Santander, Citibank, and BNP
Paribas have issued bonds secured by trade loans.
This type of transaction is referred to as securitisation,
and the security is referred to as collateral. Essentially,
the interest on the trade finance loans services the
bonds coupons, at maturity investors capital is returned
as the loans are self-liquidating.
Whilst this sounds complicated a parallel can be
drawn with a previous retail bond issued by Bruntwood
Investments, which was secured on a portfolio of
commercial properties. A bond based on trade finance
would be secured (collateralised) on a portfolio of trade
financing agreements covered by way a 100% first lien
on the underlying commodities.
As with Bruntwood, the issue could be over-
collateralised, e.g. Bruntwood issued £50m worth of
bonds which we secured over £70m worth of property,
protecting investors against potential falls in asset
prices. However, as trade finance loans are of short
duration, typically <100 days, and self-liquidating this
can be less of an issue for investors in that underlying
collateral.
HOW SECURE IS THE SECURITY (COLLATERAL)?
The answer is simple it ‘very secure’. The beneficial
owner of the first lien on the goods is the Trustee on
behalf of Bondholders. All assets of the Issuer will be
held within the Security Trust. Bondholders will have a
direct first legal/security charge over the assets of the
Issuer, via the Security Trust.
INVESTOR/
BONDHOLDER
TRADE FINANCE
CONTRACT
COMMODITY -
THE COLLATERAL
COLLATERAL
ADVISER
FIRST CHARGE OVER
THE COLLATERAL
THE ISSUER
SECURITY TRUSTEE
BENEFICIAL OWNER
OF EVERYTHING THE
ISSUER OWNS
TRADE FINANCE IS A LOAN THAT FUNDS THE SALE OR
PURCHASE OF GOODS, OFTEN ACROSS BORDERS.
THE STRUCTURE OF THAT LOAN MIGHT BE A LETTER
OF CREDIT, FACTORING AND DIRECT LENDING, AND,
IN RECENT YEARS, SUPPLY CHAIN FINANCE - BUT THE
PRACTICE IS AS OLD AS BANKING ITSELF”
“TRADE FINANCE LOANS ARE OFTEN SHORT TERM,
DECREASING THE DURATION RISK FOR INVESTORS.
DEPENDING ON THE SECTOR, THE AVERAGE FINANCE
PERIOD RUNS BETWEEN 90 TO 120 DAYS
Essentially, the assets, either cash waiting to be lent or
re-lent, or the first charges over the assets are locked in
the Security Trust which acts like a safe; the only person
with the key to the safe is the security trustee who is
the beneficial owner of behalf of the bondholders. The
Security Trustee is usually a global institutional such as
US Bank Trustees, Citigroup, etc.
