The Inter-American Development Bank (IADB) has expanded the capabilities of its trade finance facilitation programme to provide loans as well as guarantees to participating banks, aiming to release more liquidity into the Latin American market. Rebecca Spong reports.
Amidst the array of conferences, meetings and networking at last year’s Felaban (The Latin American Federation of Banks) conference in Miami, the Inter-American Development Bank (IADB) unveiled a new product aimed at pumping liquidity into the Latin American trade finance market.
The product falls under the bank’s trade finance facilitation programme (TFFP) which provides guarantees for trade finance transactions between the programme’s issuing and confirming banks. However, this new product targets the problem with accessing funding in the first instance.
“How could our guarantee help, if there is no trade loan raised in the first place?” questions Joao Vianei da Silva, senior trade finance officer, trade finance facilitation programme at the IADB.
The loan product works whereby IADB’s team originates deals with approved issuing banks. The loans will be provided via an A/B loan structure where one of IADB’s approved confirming banks will act as the B lender, and agree to take on the commercial and political risk on their B portion.
During the Felaban event, Standard Chartered, Wachovia and Citi all committed themselves to the new product, signing master participation agreements.
Closely following these banks and signing up to the scheme in mid-December is German bank Commerzbank.
The new product mainly targets Latin America’s small to medium-sized banks, which are still struggling to access liquidity.
“These medium-sized banks know how important it is to rely on a stable source of funding during good times and especially during hard times,” Vianei da Silva notes.
He adds: “The TFFP now gives our Latin American and Caribbean issuing banks the possibility to utilise their line both for loans and guarantees. They will determine what will be most appropriate for their needs, and we will be ready to support their needs in a quick fashion.”
Already one issuing bank, Brazilian bank Banco Industrial e Comercial (BicBanco) signed up to the TFFP loan facility during Felaban. It has secured a US$50mn A/B loan from IADB and the three commercial banks.
Vianei da Silva explains that the new programme has been designed to enable the development bank to respond as quickly and as flexibly as possible to banks’ requirements.
Under the terms of the loan product, IADB does not want banks to approach them for a loan disbursement of anything under US$1mn. It is anticipated that loans will be more in the US$5-10mn region.
The loans will be used only for export and import financing, with information on the underlying transactions provided through a tested swift message to IADB. However, the loans are not extended to support one particular trade transaction. Rather an issuing bank will approach IADB for an A/B loan, which they may not need immediately. However, when they do, they can request a disbursement and access the funds within a matter of days.
The loan agreement can be signed and will be valid for one year. Within that year, the bank can approach IADB for a loan disbursement. The issuing bank can use their underlying transactions, presenting IADB with any trade-related transactions they have financed over the previous 60 days. Or if they don’t have enough transactions completed, ie the total is under US$1mn, they have a further 60 days to generate new transactions after drawing down the loan.
For instance, a bank might ask for a certain amount of money, and have 70-80% of the deals ready to finance. IADB will then grant the facility and allow the bank a further 60 days to generate the remaining portion of deals.
In terms of pricing, Vianei da Silva comments that they anticipate pricing should reflect the commercial market pricing. “The B lenders will be an important source of information on what the market pricing is for trade financing in a specific country and specific issuing bank borrower.”
More global commercial banks are expected to sign the master participation agreement in the coming months. “The door is open,” remarks Vianei da Silva, “many other confirming banks are analysing the agreement.”