SCB’s China innovation
Standard Chartered Bank (SCB) signed the first structured trade finance transaction in China that utilises a trading company, back in October. The pre-shipment finance for Sinochem International Corporation (SIC) is uniquely, according to SCB, structured as a commercial transaction by utilising the bank’s Hong Kong trading company to source raw materials on behalf of the client and subsequently on-sell to end buyers via an associated entity.
The financing provides a US$/Rmb hedge permitting greater certainty to Sinochem – the pre-shipment finance uses the trade structure to assist Sinochem in managing its foreign exchange exposure for the duration of the deal. Given US$/Rmb exchange controls, this could not have been achieved through a straight US$ trade loan, claims SCB.
SIC, majority owned by the Sinochem Corporation, was jointly founded by Sinochem and five other shareholders in December 1998 and listed on the Shanghai Stock Exchange in 2000. SIC operates primarily in trading and logistics and industrial investment in the fields of chemicals, petrochemicals, metallurgy, energy resources and rubber.
As one of the top four exporters of coke in China, Sinochem accounts for 10% of China’s total coke export quota and supplies more than 80% of European steel makers. SIC also has a manufacturing base for coke in Shanxi Province for purposes of upstream integration.
Through this transaction, SCB assisted Sinochem in buying coke from Chinese producers, and subsequently prepaying against future deliveries. These purchases are then sold to Sinochem International Overseas (SIO) in Singapore for onward sale to end buyers.
SCB’s in-house trading company, Standard Chartered Trade Support (HK) (SCTSL) acts as a trading entity which stands between SIC’s purchase of coke from sellers and SIO’s sale of coke to buyers.
SCTSL then prepays 80% of the contract amount upfront and the remaining amount upon delivery of coke (within 120 days). SCTSL receives repayment, plus the financing margin, by selling the goods on to SIO.
The innovative structure allowed Sinochem to lock in the coke purchase price four months ahead of time, ie, for the duration of the transaction on an end-to-end basis.
Given the strong client credit and innovative risk mitigation features incorporated in the structure, SCB was able to provide tight pricing on the financing for the client. Although lower coke prices delayed the start of the transaction, financial close was achieved within a year.
The two primary risks with the deal are non-performance risk by Sinochem International and non-purchase risks from the end buyers of coke. These risks are however mitigated through the transaction structure – SCTSL retains full ownership over the coke when purchasing from SIC. In addition, the trading company also retains full control over the coke until the final release of goods (coke) takes place.
China is the largest country in the world for coke production and export. Coke exported from China accounts for 50% total world export volume so China is and will continue to be a significant player in the coke industry, states SCB. Although the coke price has fallen recently the demand for coke exports from China is expected to remain stable and the medium-term outlook, backed by global economic growth, remains positive.
Following the successful implementation of this transaction SCB is working with other large Chinese exporters in respect of similar types of transaction.
On a more general basis, adds SCB, 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 Americas.
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-focused manner, claims the bank.
As announced in December 2006, SCB also plans to locally incorporate its business activities in China in 2007 to enhance its client offering even further.
Mandated lead arranger: Standard Chartered
Tenor: 1 year
Law firms: Lovells; Allbright (lenders)
Date signed: October 2006