US firm Delphi Trade is set to launch an investment fund that will provide exporters with a new source of trade finance. With banks being more conservative in their lending, an alternative pool of credit is much needed. US firms, such as car manufacturers, will be able to use the fund to finance overseas exports.

The Delphi Trade fund is also unique in that its trade finance instruments are intended to comply with Islamic finance requirements, therefore helping US exporters find new markets in the Middle East.

The fund is set to go live on September 30, with the firm aiming to raise around US$1bn of seed money from US investors, although it aims to expand this up to US$2-3bn. Its targeted investors are institutional investors, with some initial private equity money, but funds primarily drawn from hedge fund investors. The minimum investment is US$20mn.

Through the fund, the firm will be offering in-transit finance and some pre-export finance to customers. Delphi Finance will be purchasing pre-sold goods, whereby the firm steps in between the original buyer and seller, and makes instalment payments to the seller before collecting from the buyer.

Craig Allen, head of Delphi Trade, tells GTR: “For example, we might make a payment of 30% of the invoice value to a manufacturer when a purchase order is received from a qualifying buyer, we might take that to a level of 70% of the invoice when the goods are shipped, and we would then make a final payment of the balance owing on the invoice, less our trade margin, when we receive final payment from the importer.”

The concept of this fund reverses some of the historical trends in the trade finance world, in that usually trade finance tools are used when the credit quality of the importer is lower than the exporter, and the exporter is concerned about payment risk. However, this fund is designed for those exporters, such as the beleaguered car manufacturers in the US, which are considered high quality in terms of having a good quality commercial performance, but are considered of low credit quality, due to a prevailing negative economic climate.

Allen elaborates: “We can often take advantage of their commercial performance history by advancing to them against their trade record and against the higher credit quality of their purchasers.”

The fund has also been established to serve as a foundation equity layer for a much larger funding structure that Delphi trade is developing with many banks in the Gulf Cooperation Council (GCC) region, such as Abu Dhabi, Dubai, Bahrain and Saudi Arabia.

The aim is to ultimately create a short-term investment product for Islamic investors that works in a similar manner to commercial paper. The firm will be creating a commercial paper conduit that issues short-term paper – between 30 and 120 days – that is based on specific buy-sell agreements. “These instruments will be shariah compliant – and allow an investment that produces trading profit rather than 'interest’,” explains Allen.

The short-term investments are intended to be based on well-known names familiar to the investor, and will be available to large blocks.

“We expect the entire facility we create to be in excess of US$1bn very quickly, and we intend to develop exposure in just the auto sector to total US$3-4bn.”

Delphi Trade is expecting to offer financing to some of the largest manufacturers as well as more mid-market clients. The new fund is also viewed as a strategic move for Delphi’s customers, providing access to large Islamic sources of funding.

Allen adds: “We see that our product will shorten the ‘cash conversion cycle’ within a manufacturing operation and the demand will be driven as much by the operating side of the business as well as by the financial side.”

Delphi Trade was developed from the International Structured Finance Corp, which was also set up by Allen in 1992. Initial Delphi transactions were in the area of pre-export finance. The firm also worked with a number of commercial banks including Dresdner Bank and Nordea Bank on various structured finance transactions.