The first deal of its kind in China signed documentation at the end of last year – a multi tranche pre-delivery financing which later converts into a warehousing facility.
According to sole arranger Standard Chartered Bank, through the financing of its distribution channel, the client, Shanghai Milan, has achieved multiple benefits including i) securing of product sources, ii) securing funding for purchases and iii) price risk alleviation.
Shanghai Milan, a leading Chinese steel trader set up in 1999, purchases quality steel products from top Chinese steel mills for distribution in the export and domestic markets.
The facility combines two tranches for Shanghai Milan, consisting of pre-delivery finance, and warehouse finance to fund the completed steel distribution channel.
The pre-delivery finance is supported by acceptable performance risk from top tier China steelmakers for goods delivery of up to 60 days, and the warehouse finance is supported by traditional collateral management methodology.
Tranche 1 is a Rmb160mn pre-delivery finance subject to sub-limits for each steel supplier. A tripartite agreement signed between the borrower, supplier and Standard Chartered ensures the lender holds the title of goods on behalf of the borrower.
Standard Chartered will advance a 100% payment to the supplier’s account (subject to the borrower placing a 20% cash deposit as pledge to the bank), and in turn receives acknowledgment and receipt from the supplier. Goods are then delivered to a designated warehouse within 60 days.
Post delivery, the facility will be converted into Tranche 2. This is a Rmb160mn warehouse financing under a collateral management agreement for goods received from Tranche 1.
Before drawdown, a tripartite agreement will be signed between the collateral management company, Standard Chartered, and the borrower. Goods are stored in the designated warehouse(s) against warehouse receipt issued by the collateral manager for up to 90 days. There is 100% insurance for this type of facility for the lender as loss payee has also been incorporated.
With Standard Chartered’s structured financing, the borrower has not only secured funding for sourcing of raw materials but also benefited from an effective trading mechanism achieved through a rigid and robust risk monitoring system supported by detailed legal documentation.
“Structured trade finance transactions are still relatively new in China, despite there being a wide degree of use in similar products throughout Asia, Africa, the Middle East and the Americas,” claims Standard Chartered “The highly impressive growth story in China in recent years has led to the expansion of a whole spectrum of industries and the potential is only just now starting to be explored by the international banks. The combination of this with the Chinese banking sector opening up following earlier WTO agreements means conditions are now optimal for the international financial sector to offer its wide range of capabilities in a serious, client focussed manner.
”The outlook for steel in China is very strong and steel consumption continues to grow due to the high population growth in China. Increasingly, global manufacturing industry is relocating to China, and China’s large population requires the construction of a lot of steel-intensive high-rise buildings.
“Supporting this growth, the increasing demand for infrastructure development and improvement, important steel-made consumer products like electrical appliances and automobiles are also providing firm support for the increasing consumption of steel.
“The legal situation in China is continually evolving and enforcement of the rule of law, perhaps especially those for the resolution of commercial conflicts, is more difficult for private enterprises than it is for state-owned enterprises (SOEs). Such risks however can be mitigated through the use of (for example) early termination capabilities, the use of a collateral management agent and facility structuring in general.”
Borrower: Shanghai Milan
Amount: Rmb160mn (US$20mn)
Mandated lead arranger: Standard Chartered Bank
Tenor: 1 year
Margin: PBOC rate x 120%
Law firms: Allbright (lenders)
Date signed: December 2006