Golden touch for structured commodity deal
In February 2008, HSBC and Duferco signed a US$50mn secured coke export-backed revolving facility for Hong Kong-based trading company Huscoke International.
The unique transaction blended borrowing base and pre-payment techniques to meet a number of customer requirements, local regulations and risks.
The concept for the deal first emerged when Xiaoyi Golden Rock Electric Coal Chemistry (Golden Rock), one of China’s leading coke manufacturers and exporters, was looking to raise cost-efficient offshore funding to finance working capital requirements through its Hong Kong-based trader Huscoke.
Golden Rock is a privately-owned Chinese company involved in coal exploration, coke manufacturing and coking chemical products, and has its main operations in Shanxi Province, the largest coal producing province in China.
It aims to become one of the leading integrated coal-based energy companies in China. However in 2007, it was facing increasingly costly domestic liquidity and needed to seek alternative financing options.
The Chinese firm also wanted to close the financing in a relatively short timeframe to secure an adequate supply of coking coal before the mines it sourced from ceased production for the Chinese New Year break (in February 2008).
Under the terms of HSBC’s financing package, Huscoke acted as the borrower, which enabled it to provide the funds to Golden Rock as a trade-related debt rather than as foreign debt, which minimised the legislation regarding the registration of the facility with the relevant Chinese authorities.
Erwan Cesbert, senior vice-president, structured trade finance, Asia Pacific, HSBC, elaborates on the achievements of this transaction: “HSBC provided a sophisticated, end-to-end solution that enabled Golden Rock to structure its financing costs more efficiently and raise the profile of its trading partner, Huscoke.
“This structure was truly tailored to meet the intricacies of the business operations of the parties involved. Multiple types of risk were mitigated through the precise arrangement of the export contract and its mirroring offtake contract, along with the procurement of perfected assignments and a partial on-demand guarantee from the final offtaker. The expertise involved in structuring this deal reinforces HSBC’s commitment to delivering solutions which maximise clients’ growth potential and future success.”
Under the structure of the deal, Golden Rock and Huscoke entered into a US dollar-denominated export contract which specified the sale of coke by Golden Rock to Huscoke over the lifetime of the financing facility.
Duferco, an internationally-recognised corporate player in commodity trading, then signed a back-to-back offtake contract with Huscoke. This transaction mirrored the original export contract and transferred Huscoke’s logistical liabilities to Duferco.
Acting as lenders, HSBC and Duferco then granted Huscoke a secured coke export-backed facility to finance Huscoke’s prepayments to Golden Rock under the terms of the export contract. HSBC provided US$30mn, while Duferco provided US$20mn. The facility is secured by a perfected assignment of Huscoke’s rights under the export contract and the offtake contract.
The facility works in such a way that when Golden Rock issues prepayment requests to Huscoke under the export contract, the lenders will fund the same amount. The proceeds are transferred directly to Golden Rock’s onshore bank accounts and Huscoke is able to continue drawing under the facility on a revolving basis.
Coke cargoes are then delivered by Golden Rock to Huscoke for onward sale to Duferco. Duferco then pays the corresponding coke proceeds into HSBC’s collection account, and any surplus cashflow after repayment of all sums due and payable under the facility are released to Huscoke and Golden Rock.
Risk exposure for the lenders is minimised as cargoes of coke are prepaid up to 12 months in advance and only allocated under the facility when the financing is required. This structure also provides greater flexibility for Golden Rock.
The deal structure has provided the banks with a new way of approaching structured commodity finance, and is set to be used as a template for future transactions.
As HSBC’s Cesbert concludes: “We are delighted that this deal represents a fresh approach to structuring finance and have already replicated the structure for another client, namely to finance the working capital requirement of a steel mill in South Africa.”
Borrower: Huscoke International Group
Supplier: Xiaoyi Golden Rock Electric Coal Chemistry (Golden Rock)
Lenders: HSBC; Duferco
Law firms: Norton Rose (Hong Kong and English law); Kind & Wood (Chinese law)
Tenor: 2 years
Date signed: February 2008