Documente Academic
Documente Profesional
Documente Cultură
Financing Structures
Session 9 + Session 10 + Session 11 + Session 12
360 Evaluation Framework
1
8 2
7. Regulatory Aspects 2. Proposed Solution
7 3
6. Legal Aspects 3. Commercial Considerations
6 4
5. Basel Capital &
5 4. Risk Aspects (Credit Risk, Market
Associated Considerations Risk, Operational Risk)
Commodities 2
1. Reserve Based Financing (“RBF”)
Commodities 3
1.1 RBF: Problem Statement
Commodities 4
1.1 RBF: Problem Statement (continued…)
Commodities 5
1.1 RBF: Problem Statement (continued…)
Commodities 6
1.1 RBF: Problem Statement (continued…)
Commodities 7
1.1 RBF: Problem Statement (continued…)
Commodities 8
1.1 RBF: Problem Statement (continued…)
Source: Wikipedia
Commodities 9
1.1 RBF: Problem Statement (continued…)
Commodities 10
1.1 RBF: Problem Statement (continued…)
Exploration
Lifecycle of an Oil Field
Technical Appraisal
Construction
Project Financing
Commodities 11
1.1 RBF: Problem Statement (continued…)
Commodities 12
1.2 RBF: Proposed Solution
• Loan Amount is present value of net cash flows from production from
the given oil field
Commodities 13
1.2 RBF: Proposed Solution (continued…)
Commodities 14
1.3 RBF: Commercial Considerations
Commodities 15
1.3 RBF: Commercial Considerations (continued…)
Commodities 16
1.4 RBF: Risk Aspects
Credit Risk
• Reserve Risk
• Bank’s lending is based solely on assessment of reserves (P1, P2, P3)
• Change in technical assessment can lead to change in borrowing base case
• Way-out
• Banks finance mainly basis P1 and partly basis P2. No lending is done against P3. Further
haircuts are taken to arrive at borrowing base case
Commodities 18
1.4 RBF: Risk Aspects (continued…)
Credit Risk
• Off-taker Risk
• Need to assess who is the off-taker
• Way-out
• Sole off-taker, or multiple off-taker?
• Check the type of offtake contract entered into. Is it ‘Take or Pay’ contract?
• What are Condition-Precedent? Tenor of such contract?
• Off-taker’s financing standing?
Commodities 19
1.4 RBF: Risk Aspects (continued…)
Credit Risk
• Evacuation Risk
• Specially high for land-locked projects
• Way-out
• Are there near-by pipelines available?
• Who operates them? What’s the capacity utilization of those pipelines?
• Can they carry grade of crude produced by this oil field?
• Is there ready-access near well-head?
Commodities 20
1.4 RBF: Risk Aspects (continued…)
Market Risk
• Commodity Price Risk, FX and Interest Rate Risk
• Way Out
• Mandatory hedging
• Layered hedging approach
Commodities 21
1.4 RBF: Risk Aspects (continued…)
Operational Risk
• Operator Risk
• Way Out
• Deal with operators with credible track record
• Regular visits by independent technical experts
• Independent technical audits, paid for by banks
Commodities 22
1.4 RBF: Risk Aspects (continued…)
Operational Risk
• Political / Regulatory / Environmental Risks
• Way Out
• Selecting your ‘Target Market’ correctly is probably the best line of defense!
• Adherence to ‘Equator Principles’
• https://en.wikipedia.org/wiki/Equator_Principles
• Political insurance
Commodities 23
1.5 RBF: Basel Capital Considerations
Commodities 24
1.6 RBF: Legal Aspects
Commodities 25
1.7 RBF: Regulatory Aspects
Commodities 26
1.8 RBF: Accounting & Tax Aspects
• Accounting Aspects
• Off-balance sheet treatment at parent company level (SPV structure used)
• Adequate disclosures needed
• Tax Aspects
• Minimum Alternate Tax (MAT) related considerations
Commodities 27
2. Catalyst Leasing (“CL”)
Commodities 28
2.1 CL: Problem Statement
Cracking
• Process whereby complex
hydrocarbon molecules are
broken down into simpler
molecules
• Rate of cracking and the end
products are strongly
dependent on the temperature
and presence of catalysts
• What is a Catalyst?
• A substance that speeds up a chemical reaction
• But is not consumed by the reaction
• And hence a catalyst can be recovered chemically at the end of the reaction
• Aluminum
• Manganese, Nickel etc.
Commodities 33
2.1 CL: Problem Statement (continued…)
• Lifecycle of a catalyst
• Refinery buys metal (required for manufacturing of catalyst)
• Now, that metal is purchased and owned by refinery
• They have price risk on metal
• They have working capital locked in that catalyst over entire life of the catalyst (typically
5 years)
Commodities 34
2.1 CL: Problem Statement (continued…)
• Lifecycle of a catalyst
• Manufactured catalyst is installed in refining complex
• Typical life of 5 years
• At the end of usable life, catalysts is removed and sent back to manufacturer
of metal recovery
• Typically, recovery rates are around 80%
Commodities 35
2.1 CL: Problem Statement (continued…)
• With rising metal prices, the working capital costs, as well as price
volatility have become significant
Commodities 36
2.2 CL: Proposed Solution
• Leasing !
Commodities 37
2.2 CL: Proposed Solution (continued…)
• What is leasing?
• A contractual arrangement for the lessee (user) to pay the lessor (owner) for
use of an asset
Commodities 38
2.2 CL: Proposed Solution (continued…)
Lessee (user) pays lease rentals during entire life of Lessee (user) pays lease rentals during entire life of
the lease. The ownership of asset is with lessor the lease. While the ownership of asset is with
Description (owner). Lessee does not have any contractual lessor (owner), the Lessee (user) has right to
right or obligation to ownership of asset. ownership of asset, typically at end of lease.
Commodities 39
2.2 CL: Proposed Solution (continued…)
Refiner Bank
(Company A) (Bank XYZ)
1
Commodities 40
2.2 CL: Proposed Solution (continued…)
• Metal Lease
• Instead of “lending” a certain amount (say USD amount), a bank leases
certain quantity of metal (e.g. 100 Kg of Platinum) to a client
• Banks hold unallocated metal in their metal account
• Recall our discussion on Allocated and Unallocated Accounts!
Commodities 41
2.2 CL: Proposed Solution (continued…)
• Metal Lease
• During the life of the lease, client pays lease rentals to the bank
• Option 1
• Lease rentals can be linked to LIBOR, and can be calculated on “notional” value of leased
metal
• Option 2
• Lease rentals can be direct % of metal leased out
Commodities 42
2.2 CL: Proposed Solution (continued…)
• Metal Lease
• On maturity, the lease is typically settled in metal terms
• Client credits unallocated metal back to bank’s metal account
• Some banks also offer a facility to ‘cash-settle’ the lease
• In other words, client just buys the metal on market and delivers to the bank
Commodities 43
2.2 CL: Proposed Solution (continued…)
Refiner Bank
(Company A) (Bank XYZ)
2
Commodities 44
2.2 CL: Proposed Solution (continued…)
Refiner Bank
(Company A) (Bank XYZ)
3
Commodities 45
2.2 CL: Proposed Solution (continued…)
Refiner Bank
(Company A) (Bank XYZ)
Refiner Bank
(Company A) 5 (Bank XYZ)
Refiner Bank
(Company A) (Bank XYZ)
6
Refiner Bank
(Company A) (Bank XYZ)
7
Refiner Bank
(Company A) (Bank XYZ)
9
Commodities 51
2.3 CL: Commercial Considerations (continued…)
Commodities 52
2.3 CL: Commercial Considerations (continued…)
Commodities 53
2.4 CL: Risk Aspects
• Credit Risk
• Carries full credit risk on Refiner (lessee)
• Market Risk
• Limited market risk (to the extent of unrecoverable portion of catalyst)
• Operational Risk
• Very limited
Commodities 54
2.5 CL: Basel Capital Considerations
Commodities 55
2.6 CL: Legal Aspects
Commodities 56
2.7 CL: Regulatory Aspects
Commodities 57
2.8 CL: Accounting & Tax Aspects
• Till 2019
• Standard accounting (off-balance sheet) and tax treatment
Commodities 58
3. High Seas Financing (“HSF”)
Commodities 59
3.1 HSF: Problem Statement
• High Seas
• (noun)
• the open ocean, especially that not within any country's jurisdiction
Commodities 60
3.1 HSF: Problem Statement (continued…)
Source: Wikipedia
Commodities 61
3.1 HSF: Problem Statement (continued…)
• World’s EEZs
Source: Wikipedia
Commodities 62
3.1 HSF: Problem Statement (continued…)
Commodities 63
3.1 HSF: Problem Statement (continued…)
Voyage of
30 days
Voyage of 45 days
Commodities 64
3.1 HSF: Problem Statement (continued…)
• Crude Purchase
• Say an Asian refinery purchases crude from LatAm
• The voyage, via CoGH, typically takes about 45 days
• For that entire period, that crude is inventory of the books of refiner
• This inventory can cause problem for refiner due to
• Price risk
• Locked up working capital
• Higher balance sheet debt to finance the working capital
Commodities 65
3.1 HSF: Problem Statement (continued…)
Commodities 66
3.1 HSF: Problem Statement (continued…)
• With rising crude & product prices, the working capital costs (i.e.
balance sheet impact), as well as price volatility have become
significant
Commodities 67
3.2 HSF: Proposed Solution
Commodities 68
3.2 HSF: Proposed Solution (continued…)
Voyage of 45 days
Commodities 69
3.2 HSF: Proposed Solution (continued…)
Commodities 70
3.2 HSF: Proposed Solution (continued…)
Commodities 71
3.2 HSF: Proposed Solution (continued…)
Commodities 72
3.2 HSF: Proposed Solution (continued…)
Commodities 73
3.2 HSF: Proposed Solution (continued…)
• In other words
• Out of the entire 45 day voyage period
• Bank owns and finances the cargo for 44 days
• Indian Company’s working capital is locked only for 1 day (in total)
Commodities 74
3.2 HSF: Proposed Solution (continued…)
Commodities 75
3.2 HSF: Proposed Solution (continued…)
• Same solution can be used for refined product shipped from India
• In parallel to earlier solution:
• Out of the entire 30 day voyage period
• Bank owns and finances the cargo for 29 days
• Indian Company’s working capital is locked only for 1 day (in total)
Commodities 76
3.3 HSF: Commercial Considerations
Commodities 77
3.3 HSF: Commercial Considerations (continued…)
Commodities 78
3.3 HSF: Commercial Considerations (continued…)
Commodities 79
3.4 HSF: Risk Considerations
• Credit Risk
• Minimal credit risk
• Bank is extending financing against a highly marketable security (Crude /
Refined Product) in international waters
• FRR can reach as high as AA+ (international ratings)
Commodities 80
3.4 HSF: Risk Considerations (continued…)
• Market Risk
• Commodity price risk is mitigated by Bank through hedging
• Bank hedges itself through Futures / OTC hedges
Commodities 81
3.4 HSF: Risk Considerations (continued…)
• Operational Risk
• Massive !!!
• Cargo quality inspection, certification
• Cargo Operator’s record and credentials
• Sanctions risk
• Type of Vessel (Single Hull / Double Hull)
Commodities 82
3.4 HSF: Risk Considerations (continued…)
• Operational Risk
• Massive !!!
• Environmental Risks & associated liabilities (can run into billions of dollars)
• Any accident, related remediation, financial liability and SOP protocols
• Piracy and SOP protocols
Commodities 83
3.4 HSF: Risk Considerations (continued…)
• Reputational Risk
• Very high
• Needs sign-off from senior approvers, possibly from a committee of Board of
Directors
Commodities 84
3.5 HSF: Basel Capital Considerations
• Extremely efficient
• Bank is extending financing against a highly marketable security (Crude /
Refined Product) in international waters
• FRR can reach as high as AA+ (international ratings)
• Low RWA, Very high RoB3C
Commodities 85
3.6 HSF: Legal Aspects
Commodities 86
3.7 HSF: Regulatory Aspects
Commodities 87
3.8 HSF: Accounting & Tax Aspects
Commodities 88
High Seas Financing
Commodities 89
4. Ore Pre-Pay (“OPP”)
Commodities 90
4.1 OPP: Problem Statement
Commodities 91
4.1 OPP: Problem Statement (continued…)
Commodities 92
Source: Wikipedia
4.1 OPP: Problem Statement (continued…)
• Galena
• Natural mineral form
• Important ore of Lead + Zinc, and
• An important source of silver
Source: Wikipedia
Commodities 93
Source: Maps of India Commodities 94
4.1 OPP: Problem Statement (continued…)
Sulfur Silver
13% 1%
Lead
Silver 32%
68%
Lead
86%
Commodities 95
4.1 OPP: Problem Statement (continued…)
Commodities 96
4.1 OPP: Problem Statement (continued…)
• Reference:
• Annual Report
Commodities 97
4.2 OPP: Proposed Solution
Commodities 98
4.2 OPP: Proposed Solution (continued…)
• This helps the bank estimate future silver production – quantity and timelines
– with reasonable certainty
Commodities 99
4.2 OPP: Proposed Solution (continued…)
Commodities 100
4.2 OPP: Proposed Solution (continued…)
• Armed with this data, Bank ABC enters into Ore Pre-Pay structured
loan as follows:
• Bank ABC lends to mining Company XYZ an amount as loan
• To repay the loan (notional and associated interest), Company XYZ needs to
deliver Silver to Bank ABC
• Amount of Silver to be delivered and delivery dates are pre-determined and
agreed upon under structured loan
Commodities 101
4.2 OPP: Proposed Solution (continued…)
Commodities 102
4.2 OPP: Proposed Solution (continued…)
• LBMA warehouses give credit entry for Silver metal to Company XYZ’s
Unallocated account
• Recall our discussion on Allocated and Unallocated Accounts!
Commodities 103
4.3 OPP: Commercial Considerations
Commodities 104
4.3 OPP: Commercial Considerations (continued…)
• Upfront Fees
• Healthy Loan NIM
Commodities 105
4.4 OPP: Risk Aspects
Credit Risk
• Ore Quality Risk
• Bank’s lending is based solely on assessment of ore
• Change in technical assessment can lead to change in future cash flows
• Way-out
• Haircuts are taken to arrive at loan amount
Commodities 106
4.4 OPP: Risk Aspects (continued…)
Market Risk
• Commodity Price Risk, FX and Interest Rate Risk
• Way Out
• Bank manages its market risk through OTC / Futures hedges
Commodities 107
4.4 OPP: Risk Aspects (continued…)
Operational Risk
• Operator Risk
• Way Out
• Deal with operators with credible track record
• Regular visits by independent technical experts
• Independent technical audits, paid for by banks
Commodities 108
4.4 OPP: Risk Aspects (continued…)
Operational Risk
• Political / Regulatory / Environmental Risks
• Way Out
• Selecting your ‘Target Market’ correctly is probably the best line of defense!
• Adherence to ‘Equator Principles’
• https://en.wikipedia.org/wiki/Equator_Principles
• Political insurance
Commodities 109
4.5 OPP: Basel Capital Considerations
Commodities 110
4.6 OPP: Legal Aspects
Commodities 111
4.7 OPP: Regulatory Aspects
Commodities 112
4.8 OPP: Accounting & Tax Aspects
• Accounting Aspects
• On-balance sheet loan treatment at Mining Company level
• Tax Aspects
• Minimum Alternate Tax (MAT) related considerations
Commodities 113
5. Location Swaps (“Loco Swaps”)
Commodities 114
5.1 Loco Swaps (Crude): Problem Statement
Commodities 115
5.2 Loco Swaps (Crude): Proposed Solution
E&P player
contracts location
swap deal
Commodities 117
5.4 to 5.8 Loco Swaps (Crude): Other Aspects
• Risk Aspects
• Minimal credit risk and market risk, as typically used in Spot purchases
• Operational risk is identical on both legs
Commodities 118
5.4 to 5.8 Loco Swaps (Crude): Other Aspects
(continued…)
• Legal Considerations
• Standard purchase / sale documentation
Commodities 119
Other Type of Loco Swaps
Commodities 120
Other Type of Loco Swaps (continued…)
Commodities 121
Disclaimer
• This presentation, including all references / links / related material, is intended to be used and must be used for
informational and educational purposes only.
• The purpose of any discussion / presentation is for analysing, learning and discussing general and generic information,
and should not be construed as financial advice, tax or legal advice, or advice of any nature whatsoever.
• The views and opinions expressed are those of the authors and do not necessarily reflect the official policy or position of
any other agency, organization, employer or any company.
• The author cannot be responsible for use of the information contained in or linked.
• The author is not responsible for any errors or omissions, or for the results obtained from the use of this information. All
information is provided as-is, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the
use of this information.
Commodities 122