Whilst the need for the export of commodities from the emerging markets has never been greater, with populations in vast countries such as China and India continuing to open up to the influences of urbanisation and consumerism, the continued scarcity of finance to facilitate these trade flows remains of great concern to those operating in the industry.
The great question today within trade finance is simple: "Where's The Money?" The primary (IPO) and secondary (rights issues) equity markets are as good as shut for business, and traditional international structured trade and commodities finance from banks, particularly the Eurozone ones that dominated the industry pre-financial crisis, remains patchy at best. The return of these banks to the asset class is eagerly awaited, but consolidation of capital appears to be their watchword for 2012 at least.
Over-regulation of the commodities industry, the restrictions, at least in the US, on proprietary trading, along with reduced margins on trading activity and disintermediation taking root in the supply chain, are all factors that may dissuade banks from re-entering the commodities market, at least until the regulators re-open the stable door that they have recently tried to close long after the horse bolted.
Key trading entities and investors in the commodities markets have always relied on a combination of structured trade bank finance, IPOs, rights issues, or on general borrowing-based revolving credit facilities to finance their pre-export, prepayment and general international trade operations. Now, however, with these sources being largely unavailable, at least in sufficient quantity to satiate the needs of traders and other commodities players, the bond markets are opening up as an attractive alternative, with relatively low investor yields providing a comparatively cheap and available finance opportunity for commodities houses.
Mining entities have led the way throughout 2012, as bond insurances in this sector are expected to peak at about 100 billion US dollars by year end (source: Financial Times).
Trading entities are now following suit, looking to tap into the bond markets through use of the dreaded "S" word – but this time not built on a wing and a prayer, on a pool of remote, over-valued and under-performing assets, but instead constructed with solid foundations, on actual hards, softs, and energy resources necessary for the world and its wife to live. When one considers that often such receivables are backed by insurance or bank/sponsor guarantees, "securitisation" does not seem to be such a dirty word after all.
As traditional trading houses continue to follow a re-vamped business model predicated on diversifying up and down the supply chain, their financing needs will need to become increasingly solution-orientated; it is not just that traders will look to raise any form of capital, it is that they will need to find the right type of capital to mesh with their diversified supply chain activities without hand-cuffing them at the same time. Financing, for example, will be particularly attractive if it is not only viable financially, but also if it is committed and unsecured, but secured trade financing will still be attractive to traders if the security is against the individual assets financed by the lender(s) concerned, rather than by way of all-assets debenture type security, more suited to the world of corporate finance.
But banks hoping to return to the asset class will have credit committees looking to ramp up security packages from those that were taken pre-financial crisis, and will not necessarily be selective in their security demands. This will not aid traders who will be looking to a portfolio of banks, on either a syndicated or bilateral basis, to finance their needs.
Insurance could provide an answer; perhaps as a buffer between commodities houses and banks so that, when allied to trader risk and bank risk, and when supplemented by intelligent hedging and enhanced risk mitigation techniques, it could still be the final piece of the jigsaw which comprises an overall financing package for international trade flows that is acceptable to all parties. Even in these cash-strapped times.
It is much needed; and it will supplement the unstructured receivables-based supply chain and reverse factoring that is flavour of the month at the moment, but which alone does not suffice.
Finally, if structured trade and commodities finance becomes more freely available to facilitate international trade, that can surely only help the longed-for resurgence of the world economy.
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