Structured Commodity Finance: handy tool for Uzbekistan commodity producers
Uzbekistan now stands in the start of long-awaited industrial, construction and services boom with the new political discourse targeted by the newly formed executive institute led by president Shavkat Mirziyoyev.
With greatly underdeveloped equity market and difficult access to foreign loan markets, businesses have only a few options to attract cash as working capital or to initiate new investment projects. Traditionally, the loan market has included long and short-term credit financing in national currency or one of the most popular foreign currencies (Euros and US Dollars) and a recent trend has made structured foreign finance loans with ECA (Export Credit Agency) coverage.
With expected rise in production and services market, businesses are now in thirst for more structured, comparatively convenient and internationally widespread financing mechanisms that were not present during the last 28 years of post-soviet-union era.
For a great number of textile, non-ferrous metal and other commodity exporters Structured Trade Finance or Structured Commodity Finance (SCF) could be one of the fastest methods to collect long-term finance. SCF is a term used to define several trade and commodity finance mechanisms including pre-export finance and prepayment finance facilities (McGreal, 2019).
Final-user manufacturers or commodity traders often provide finance facilities to commodity producers with advance payment for future deliveries under off-take contracts. This type of prepayment finance is useful both for (i) producers with easier access to loan finance and for (ii) buyers with greater room for price and terms negotiation. Further, prepayment finance tool comes in handy for producers located in countries with tough exchange control regulations or complex taxation regime which penalizes or complicates loan finance from financial institutions abroad. This way, long-term prepayment for future delivery of commodities are often permitted and even encouraged in most jurisdictions.
There are two documents to be entered into to collect finance facility in prepayment finance transactions:
1) A prepayment contract between the producer and commodity buyer (off-taker) to provide advance payment from the off-taker for the purchase of commodities (Prepayment Contract)
2) A loan finance agreement between a lender (finance institute) and an off-taker through which the former provides funds for the advance payment of the latter under Prepayment Contract (Off-taker Loan Agreement).
Common types of security mechanisms under this type of prepayment financing is further discussed in the next article.
1) Lexisnexis.com. (2019). Pre-export finance and prepayment finance-overview. [online] Available at: https://www.lexisnexis.com/uk/lexispsl/bankingandfinance/ document/391289/5617-JTC1-F185-X3X6–00000–00/Pre_export_finance_and_prepayment _finance_overview# [Accessed 18 May 2019].
2) McGreal, D. (2019). Wright Legal Services: Offtake Prepayment Financing. [online] Wrightlegal.com.au. Available at: https://www.wrightlegal.com.au/offtake-prepayment-financing.htm [Accessed 16 May 2019].