STRUCTURED FINANCE

1、1STRUCTURED FINANCE DEALSHOW DO THEY WORK AND WILL THEY WORK? by David HewTel:(65) 2501211; Fax: (65)2501277; E-mail: .sg David Hew 2000. All rights reserved David Hew 2000. All rights reservedThe information contained herein should not form the basis of any decision as to a particular course The in

2、formation contained herein should not form the basis of any decision as to a particular course of action; nor should it be relied on as advice or regarded as a substitute for detailed advice in of action; nor should it be relied on as advice or regarded as a substitute for detailed advice in individ

3、ual cases. The services of a competent professional adviser should be obtained in each instance.individual cases. The services of a competent professional adviser should be obtained in each instance. 2PRELIMINARIES Definitional incongruity; UNCTADs definition; Structured Finance pre Asian Crisis; an

4、d Situation post Asian Crisis3DEFINITIONAL INCONGRUITY “Structured financing operations include a wide array of instruments: leveraged buyouts, management buy-outs, restructuring, industrial projects, infrastructure projects; secured debt;term loans, operating loans and asset-based secured lending”

5、- A major U.S. financial institution Comments: Vague. Excludes project finance, does not deal with import or export of commodities as well as non-banking operations such as securitisation4DEFNITIONAL INCONGRUITY “Structured Commodity Finance refers to the sum of banking operations pertaining to an i

6、mport or export of commodities which are not plain vanilla” - A major French bank. Comments: Vague. Implies that anything a bit complex will qualify as structured. “Structured Commodity Finance provide working capital in difficult environments by mitigating the risk through mortgaging an export flow

7、” - Branch of an Austrian bank. Comments: What about structured commodity financing for commodity importers? 5DEFINITIONAL INCONGRUITY “Include asset-based financing, limited recourse project financing, cross-border financing and structured/hybrid debt products” - A leading South African bank. Comme

8、nts: Definition too broad. “Commodity linked financing, also known as asset-backed securitisation or structured finance, makes the use of commodity or asset to improve the credit quality of financing” - Managing Director of the International Commodity Division of a major U.S. commercial bank Comment

9、s: Commodity financing can be structured for use by the banking market and for non-banking investors as well.6UNCTADS DEFINITION “A technique whereby certain assets with more or less predictable cash flows can be isolated from the originator and used to mitigate risks (eg. transfer of foreign exchan

10、ge, contract performance and sovereign risk), and thus secure a credit”. 7UNCTADS DEFINITION DISSECTED “A technique ” A methodology implying certain requisite skills or knowledge. “ certain assets with (1) more or less predictable cash flow (2) isolated from the originator and used to mitigate risk

11、.” (1) Suggests that structured finance is financing based on future receivables which are IDENTIFIED and more or less ASSURED. (2) Suggests that assets to support the financing must be AVAILABLE, ISOLATED and USED to mitigate risk. This implies that there are 2 ESSENTIAL PARTS in a structured finan

12、ce transaction.82 ESSENTIAL PARTS (1) Arrangements which ensure that if a transaction proceeds normally, the financier is automatically reimbursed. The loan is therefore self-liquidated. (2) Arrangements further ensure that, if anything goes wrong, the financier has recourse to some assets as collat

13、eral.9UNCTADS CONCLUSION Overall “this form of finance allows for wider possibilities than other forms of short-term financing, which are normally limited to companies with acceptable credit risk or conditional upon onerous security, and gives access to financing on better terms”. 10UNCTADS CONCLUSI

14、ON Why “ wider possibilities ” apart from the 2 reasons? “Bankability” increased because transaction economics improved. Can be used in both trade and project finance. Can be used in credit structures by bank or non-bank entities How “ financing on better terms ” ? From the financiers perspective, b

15、etter pricing can be offered since credit is either enhanced or the risk shifted to a strong off-taker and all other risks identified and mitigated. From the borrowers perspective, better costing achieved, longer maturity periods and more favourable balance sheet treatment.11PRE-ASIAN CRISIS STRUCTU

16、RED FINANCE Two types of structured finance techniques prevalent before the Asian Financial Crisis. Asset Backed Securitisation (ABS) Fixed income debt instrument whose principal and interest payments are governed by cash flow generated by underlying asset. By convention ABS is backed by non-mortgag

17、e assets. Mortgage Backed Securitisation (MBS) Specific type of ABS where the debt instruments are backed by a pool of mortgage loans.12ASSET SECURITISATION STRUCTUREOriginatorSpecialPurposeVehicleInvestorThirdPartiesProceedsProceeds(3) SPV issues assetbacked & rated securities(1) Transfers righ

18、t toreceive future receivablesPaymentsPrincipal andInterestInitial cash flowFuture cash flowObligors(2) Enhancements added to the Structure to improve credit quality(4) Investors look to future cash flows and credit enhancement for repaymentRather than to the originator.Originator risks eliminated.1

19、3ASSET BACKED SECURITIES Process of distributing risk by aggregating debt instruments or assets in a pool, then issuing new securities back by the pool. Asset pool being securitised has a lower default risk than the company itself and therefore if financed discretely, commands a better rating and ti

20、ghter pricing. Ratings improvement can also occur relative to the issuer or the sovereign ceiling rating if the issuer is resident in a non-investment grade country.14MORTGAGE BACKED SECURITIES (MBS) MBS in Asia emulates the United States success in securitising housing loans mortgages (where fees a

21、nd interest received are not liquid and loans not negotiable), making them liquid and marketable “Fannie Mae” of the Federal National Mortgage Association and “Freddie Mac” or the Federal Home Farm Mortgage Corporation Asias equivalent Indonesia SMF (secondary mortgage facility); Malaysia Cagamas; H

22、ong Kong Hong Kong Mortgage Corporation15HOWEVER, ABS or MBS requires Good credit ratings Examples of AAA rating Thai Cars, LIBOR+22bps, average life 1.5 years ASF 1, LIBOR+17 bps, average life 0.9 years Attractive coupon rates; Stable cash flow; Liquid secondary market; and Range of maturities16SIT

23、UATION POST ASIAN CRISIS ABS and MBS activities to sustain pre-crisis rapid growth momentarily halted by Crisis; Funding still needed (in fact even more needed) but financiers risk tolerance considerably reduced; Asian companies still experiencing difficulty to access capital markets and still needi

24、ng to diversify funding sources; Therefore greater need for structured finance solutions because of the risk mitigating characteristics.17TERMS OF REFERENCE How do they work? Project which link trade and investment Structured finance deals for trade finance How much of a solution? Conditions for the

25、ir wider use Links to underlying markets, which markets and their robustness18Project which links trade and investmentOBJECTIVE:To illustrate a structured finance transaction embedded in a project financing structure linking trade and investment.KARNAPHULI US$423 MILLION FERTILISER PLANT DEAL19KARNA

26、PHULI DEAL - THE BACKGROUND Funding of US$423 million sought by the Bangladesh government to finance the engineering, procurement, construction, operation and maintenance works of a fertiliser plant in Bangladesh. Typical project financing structure with payment of the loan to be by way of the proce

27、eds of the future sale of urea and ammonia produced from the plant.20KARNAPHULI DEAL - THE CONSIDERATIONS How to link the borrowers commercial activities to its financial obligations; again using the commodities not yet physically available as collateral and payment. 21KARNAPHULI DEAL - IN SUMMARYTr

28、ansammonia(Switzerland)Marubeni(Japan)Karnaphuli FertiliserCompany limitedEquity investors (of whichGovernment of Bangladeshholds 41%)BanksyndicateExport Credit AgencyBakrabad GasSystems (BGSL)GovernmentEscrowaccountPayment for purchasesGovernment guaranteeon performance of BCGL&Guarantee to app

29、roveescrow account andmake foreign exchange availableContractto buyfull ureaoutput,atmarket priceContract to buy full ammoniaoutput, at market price20-year gas supply contractat price linked to urea outputSecurity over plant, site, property, equipment7-10 year loan of US$ 423 millionInvestment ofUS$

30、130 millionInvestmentinsurance coverPayment22KARNAPHULI DEAL - POINTS TO NOTE Debt/Equity ratio is high. Would conventional loan be possible? The fertiliser company sold its production forward. A Swiss and Japanese company agreed to commit themselves to buy this entire production for an extendible p

31、eriod of at least 7 years starting from the commencement of plant operations. These 2 companies also agreed to deposit their payments for the fertilisers in an offshore account, from which the debt would be served. The banks took additional security over the plant.23KARNAPHULI DEAL - POINTS TO NOTE

32、Agreement for offshore escrow account needed to be approved by the government of Bangladesh, which it did. The government also agreed that it would not limit the amount of foreign exchange available to this escrow account, eg. by forcing the fertiliser plant to directly repatriate its foreign exchan

33、ge earnings. Financiers obtained insurance from a number of export credit agencies which would be triggered if the government interfered in the escrow account arrangement or otherwise expropriate the plant.24KARNAPHULI DEAL - POINTS TO NOTE A 20 year agreement was signed between Bakrabad Gas Systems

34、, a government parastatal, for the delivery of gas, the main input to the fertilizer production process. The gas company promised the delivery of minimal annual amount (which will ensure that the fertilizer company has sufficient inputs to produce the required amounts of urea and ammonium) and in ad

35、dition agreed to tie the payments for this gas to regional bulk market urea prices. As a result, the fertiliser company automatically hedged one of its major price risks, locking in a minimum profit and a certain operational efficiency.25KARNAPHULI DEAL - POINTS TO NOTE The government in turn, guara

36、nteed the gas companys performance. The banks ensured that their loans were indeed used for constructing the fertilizer factory and not diverted for other uses by using an independent third party to approve all project expenditures.26KARNAPHULI DEAL - POINTS TO NOTE Further comfort over the operatio

37、nal efficiency of the fertilizer plant was given by the fact that those constructing the plant were willing to take part of the equity. The Bangladeshi government retained 41.2% of the equity, but more than half of the equity was held by foreign companies (with a small part in the hands of local inv

38、estors). These foreign companies thus kept a strong control over the future day-to-day management of the facility, once it becomes operational. 27TERMS OF REFERENCE How do they work? Project which link trade and investment Structured finance deals for trade finance How much of a solution? Conditions

39、 for their wider use Links to underlying markets, which markets and their robustness28Structured Deals for Trade Finance OBJECTIVE:To illustrate use of structured finance techniques in trade finance.29COMPOSITION OF ASIAN EXPORTSE Ec co on no om m y y Y Ye ea ar r P Pr ri i m m a ar ry y P Pr ro od

40、du uc ce e ( (% % ) ) T Te ex xt ti i l l e es s a an nd d o ot th he er r l l a ab bo ou ur r i i n nt te en ns si i v ve e i i t te em m s s ( (% % ) ) E El l e ec ct tr ro on ni i c cs s a an nd d m m a ac ch hi i n ne er ry y ( (% % ) ) O Ot th he er r m m a an nu uf fa ac ct tu ur re es s ( (%

41、% ) ) 1970 98.6 0.2 0.0 1.2 I I n nd do on ne es si i a a 1994 60.7 22.8 4.8 11.7 1970 94.7 0.9 1.0 3.4 M M a al l a ay ys si i a a 1994 29.4 8.3 44.4 17.9 1970 71.2 6.8 8.0 14.0 S Si i n ng ga ap po or re e 1994 17.1 4.9 57.7 20.3 1970 35.2 39.6 6.3 18.9 S So ou ut th h K Ko or re ea a 1994 8.1 22.

42、2 34.5 35.2 1970 94.0 1.4 0.1 4.5 T Th ha ai i l l a an nd d 1994 31.1 23.8 27.7 17.4 SOURCE : EM ERGI NG ASI A CHANGES AND CHALLENGES 30THREE MAIN TYPES Export receivables backed financing Inventory financing Prepayments31EXPORT RECEIVABLES BACKED FINANCING DEFINITION: A loan is made with recourse

43、to the exporter whereby the security is provided by the assignment of export sales contracts and receivables, and the repayment comes from the export proceeds paid by identified buyers directly to the lender. Is the basic form of structured commodity finance. The other two namely, inventory financin

44、g and prepayments are variants of the same theme the future sale of the commodity will provide the borrower with the means to repay the financing.32EXPORT RECEIVABLES BACKED FINANCING Sale contract between exporter and importer Sales proceeds assigned to bank Against assignment, bank advances loan t

45、o exporter Export made by exporter to importer Importer makes payment to escrow account controlled by bank Loan is repaid from escrow account Excess after agreed deductions released to exporter33INVENTORY FINANCING DEFINITION: A loan is made with recourse to the exporter whereby the security is prov

46、ided by an assignment of the commodity stored (or about to be stored) in a warehouse and the repayment comes from export proceeds paid by future buyers directly to the lender. It is the only structured finance solution, if the exporter has not identified a buyer yet. Can be used by importer to obtai

47、n pre-shipment finance to pay for a portion of the cost of imported commodities pending re-imbursement from its sale.34INVENTORY FINANCING Exporter puts goods in warehouse Bank takes security interest over goods in warehouse Goods inspected and security interest perfected Bank makes loan to exporter

48、 Exporter sells goods If necessary Bank obtains top-up goods and gives order to warehouse for sold goods to be delivered to buyer Buyer pays sale proceeds into escrow account Bank is repaid from escrow account and excess after agreed deductions release to exporter35PREPAYMENT DEFINITION: A loan is m

49、ade without recourse to the buyer for prepayment of the commodity sold by the exporter whereby the security is provided by an assignment of the prepaid export sales contract and by an assignment of the commodity stored (or to be stored) in a warehouse and whereby the repayment comes directly from th

50、e buyer. Used when relationship between the buyer and the exporter is strong eg. when the exporter is a subsidiary of the buyer. Is generally with limited recourse and buyer is responsible to service loan only if commodity is delivered.36PREPAYMENT Sale contract between exporter and importer providi

51、ng for prepayment by the importer assigned to Bank Bank inspects goods for purposes of loan to importer to enable importer to prepays goods to exporter. Bank takes security over goods stored in warehouse upon prepayment. Can make advance without security over goods. Importer sells goods to sub-buyer

52、s with sub-sale proceeds from sub-buyers assigned to Bank Goods released from warehouse against payment paid to Bank with excess split between exporter and importer.37TERMS OF REFERENCE How do they work? Project which link trade and investment Structured finance deals for trade finance How much of a

53、 solution? Conditions for their wider use Links to underlying markets, which markets and their robustness38HOW MUCH OF A SOLUTION? Trade & project finance perspective By comparing characteristics of traditional vs. structured trade & project finance Asset backed securitisation perspective Se

54、en from the borrower or seller of the assets for purposes of a securitisation program; Seen from the financier or investor in a securitisation program; and From the perspective of other participants39TRADE & PROJECT FINANCE PERSPECTIVETRADITIONAL vs STRUCTURED FINANCE Traditional financing rely

55、heavily on creditworthiness of borrower and not the payback from the borrowed funds. Structured Financing relies heavily on the payments to be received from the transaction being financed. The transaction is structured such that the repayment of the loan is automatically made via the transaction pro

56、ceeds NB: Traditional financing may require the purpose of the loan to be approved but is generally not concerned with the profitability of the transaction. In Structured Finance performance of the transaction is key and must be carefully evaluated and controlled.40TRADE & PROJECT FINANCE PERSPE

57、CTIVETRADITIONAL vs STRUCTURED FINANCE Traditional financing require a strong balance-sheet. In Structured Finance the reliance is on the soundness and merits of the transaction and not the balance sheet. Borrowers must provide chargeable assets to give financiers the comfort they need in event of a

58、 default. Borrowers must equally provided chargeable assets in Structured Finance. The assets however are limited to and usually related and specific to the transaction. 41TRADE & PROJECT FINANCE PERSPECTIVETRADITIONAL vs STRUCTURED FINANCING All direct and indirect (in varying degrees, dependin

59、g on the financier, country and borrower concerned) factors relating to the borrower taken into account in Traditional Financing. In Structured Financing all direct and indirect factors relating only to the transaction in question and not the borrower are taken into account. Country risks can be a d

60、eal-breaker in Traditional Financing. Country risks is surmountable in Structured Finance provided the performance and risk of the transaction is acceptable.42TRADE & PROJECT FINANCE PERSPECTIVETRADITIONAL vs STRUCTURED FINANCING Expertise required in Traditional Finance are relatively straightforward. Specialised and broad-based