INTERNATIONAL TRADE FINANCE

INTERNATIONAL TRADE FINANCE
IFF, LONDON. Course Director: Howard Palmer

DAY 1 SESSION 1 OVERVIEW INTRODUCTION TO INTERNATIONAL TRADE FINANCE
What is Trade Finance ?

WHAT IS TRADE FINANCE ? From a Financier’s perspective, at best it is a logically sound and prudent alternative to working capital lending that is more concerned with what Securities you have than the health of your balance sheet. It is a TRANSACTIONAL problem-solver that has evolved into a high-earning, fee-driven and low capital-use (But Hi-return) set of products that are harder to sell internally than externally.

WHAT IS TRADE FINANCE ? WHY ? Because International Trade Finance is based on a Transactional outlook rather than a balance sheet outlook which puts it at odds with risk-averse credit committees, often with a history of political/sovereign risk issues. Who wants to sell to Nigeria for example. China would get a different reaction. The whole point of trade finance is that, aware of the mechanics of its risks and documents, we structure risk mitigants into the finished product. However we need to be able to present prudent and safe deals in a manner understandable to sanctioning authorities.

WHAT IS TRADE FINANCE ? Likewise financing traders with their typically thin and highly-leveraged balance sheets does not help the comfort any sanctioning committee will feel. We may KNOW that Traders do not amass assets but pick up margins on every deal, its just that we feel safer with them. And what is worse, I may be lending YOU money but I am dependent on your overseas buyers paying me back.

AND THE CREATION OF TEMPLATES
Structural Risk-Mitigation sticks. 1) If you find a solution to a problem in Emerging Market X it is likely to be tweakable for Country Y. 2) If you are financing a PROCESS be it RAWS into Refined Sugar Products Blister Copper into Cathodes Crude Oil into Gasoline Goats into Burgers Many features are the same and require the same risk analysis and mitigation.

AND UNDERSTANDING THAT
The Largest Trading Companies are increasingly offering trade finance facilities for smaller, trading companies and buying trading assets from Banking to the point that they are filling the vacuum left by risk-averse bankers and financiers feeling squeezed by BASLE. Previously only expensive Forfaiters and Discounters offered such a potential solution by buying the debt.

Symbolic view of the Operating Cycle
Raw Material Inland Transport Shipment Work in Progress Finished Goods & Storage Documents Transport Money Storage 8 8

COUNTRY A Raw Material Inland Transport Shipment Work in Progress Finished Goods & Storage Documents Transport Money Storage 9 9

COUNTRY A Raw Material Inland Transport Shipment Work in Progress Finished Goods & Storage Documents Transport Money Storage Country B 10 10

COUNTRY A Raw Material Inland Transport Shipment Work in Progress Finished Goods & Storage Documents Transport Money Storage Country C Country B 11 11

IMPORT FINANCING Import LCs, Import Collections INVENTORY FINANCING Raw Material Inland Transport Shipment Work in Progress Finished Goods & Storage Documents Transport Money Storage Working Capital Finance ACCEPTANCE FINANCING EXPORT CREDIT FINANCE Buyer’s /Seller’s Credit EXPORT FINANCING Export LCs, Export Collections RECEIVABLE FINANCING INVENTORY FINANCING WAREHOUSE FINANCING 12 12

THE PRODUCTS SEEM ENDLESS…
A Trade Payments Collections Integrated with Cash management Pre-shipment Finance (LC, BBLC/contracts) Exp LC Confirmation Import Loans Trust receipts (LC.open a/c) Import-Export LCs -Regional Centre OR Outsourced OR Bolero Invoice Disc Factoring (single) Standard trade finance – Documentary credit, Collections, Loans C B FI risk LC Confirmation Jumbo LC syndication Forfaiting Export APNs (held/traded) Commodity BBF Borrowing Base Facilities Commodity REPO Repo/SIP WH stock Chain Limit Stock finance A-Z, BBLC, Bilateral SPF Confirmation & Forfaiting Bilateral Commodity Finance D SPF- Tolling PSA, RBL Specialised Pre-finance Production sharing agreement Reserve based lending SPF- Port Stock Pre-finance Post-production Securitised Pre-Finance Structured Expo Note (SEN- FIS,FRN) MLA Co-Finance IFC,WB,EBRD Co-finance against future Trade flows Structured Pre-Finance (SPF) Pre-production Prepayment/pre-finance Structured Trade & Commodity – Inventory & Pre-production Finance E Integrated Logistic-Rec Fin IT platform based trade flow financing Structured Export Rec Fin SERF pool SPV Insured, defeasance Buyer Credit Non-recourse/insured Buyer Credit/Financing programme Structured Trade – Receivable Finance F ECA Export Finance Buyer Credit/SCF ECA Export Finance

AND EVERYBODY WANTS IN…….
POLITICAL RISK ENVIRONMENT BASLE III PRODUCT RISK ASSESSMENT INTERNAL RISK ASSESSMENT FSA RORAC POINT of SALE

What do the following “Commodities” have in common ?
Sugarcane Wood Pulp Wheat Potato Skins Millet Willow Trees Barley Switch Grass Citrus Rind Sorghum Rapeseed Urban Waste Rice Straw Sawdust

PARADIGM SHIFT There is a noticeable movement, globally towards TRANSACTIONAL and ASSET BACKED lending and away from traditional “Working Capital” lending based on the Balance Sheet health of a Company. This movement, which links ABL with TF is based on lending against the securities your client has. The reason is simply that the value of the Asset is easier to evaluate , secure and finance than say, Tantalite or Ethyl Alcohol

Traditional Characteristics Of Trade Finance
1. Short term 2. Self liquidating 3. Heavy in documentation 4. Subject to 'time lags' needing financing 5. Primary with (possibly) acceptance facilities 6. Viewed as minimal risk (e.g. goods in transit could be considered a security) 7. Dependent on custom, trust, 3rd parties 8. "Off the balance sheet" (from a bankers perspective) © PBC World Ltd. U.K.

Contemporary Characteristics Of Trade Finance
1. Widening considerably to mid-term in tenor 2. Heavily based on the quality of an asset 3. Computerised - same day documentation and payments 4. Primary, secondary and intermediate (broker) market involvement - Movements into : Pre-Shipment Finance and Tolling Debt/equity Commodity swaps, options and derivative Hedging. © PBC World Ltd. U.K.

Contemporary Characteristics Of Trade Finance
5. A non-interest sensitive fee generator 6. Subject to central authority intervention as assets get risk-weighted and go above the line 7. Viewed in the context of capital adequacy 8. Reliant on international commercial attorneys 9. Re-invented by trade financiers but presented to “accountants” for decision-making. (Credit Committee) 10. Explaining and “Selling” transactional Banking harder internally than externally. © PBC World Ltd. U.K.

Contemporary Characteristics
Most RISKS are now viewed as POLITICAL/SOVEREIGN (Performance) Risks leading Bankers into a DICHOTOMY: The Emerging Market nations require Tenor (Time/Usance) Facilities and the more difficult the Country the longer they will request. BUT, the analysis will start against them. THE ANSWER lies in the PRODUCTS and STRUCTURE. © PBC World Ltd. U.K.

TRADE FINANCE RISK LEAGUE TABLE
1) Negotiating Letters of Credit 2) Issuing On-Demand and Unconditional Guarantees 3) Issuing Payment L/Cs. 4) Issuing Bid Bonds 5) Issuing Deferred Payment Letters of Credit 6) Checking Documents under an L/C 7) Advising L/Cs. 8) Issuing Standby Letters of Credit. 9) Acting as the Issuing Bank of L/C 2 under a Back to Back 10) Issuing an Advance Payment Guarantee 11) Issuing a Red Clause (pre-Finance) L/C 12) Issuing a Demand Guarantee under URDG 758 13) Issuing a multi-conditional Guarantee 14) Issuing a conditional guarantee (without URDG 758)

LETTERS OF CREDIT THE FUNDAMENTALS.

Exploring Fundamental Principles
There are four parties to an irrevocable letter of credit. Applicant (Importer) Issuing Bank Advising/ Confirming Bank Exporter Beneficiary

Simplistic (?) View Of The Mechanics Of Documentary Credit
CARRIER AGENT Or CLG. Agent Goods 7. GOODS 14. Release of Goods against Bill of lading or ‘Shp . Guarantee’ (Moral) 8. Contract of affreightment 10. Bill of Lading 10.B Seller Submits to CB :- • L/C copy • Bill of Exchange • Commercial Invoice • Bill of Lading (CTD, AWB • Insurance Policy • Packing List • Consular Invoice • Chamber of Commerce Invoice • Weight & Chemical Analysis • GSP Certificate • GR1 Form etc. for local exchange regulation 1. Sale Contract 10 A Contract of Marine insurance SELLER BENEFICIARY Shipper BUYER Applicant 2. Firm Order 9 M I Policy BROKER INSURER 1. Performa Invoice 10.A. Shipping contract commercial, Political risk Comp. Policy 3.B 12 16. Buyer Pays - $ 9. Performance Guarantee Remember Owen!! 3.A 13. Presentation of Documents , Buyers Acceptance & Release of Documents on D/A Basis 4. Forward Sale contract 8. Performance Bond Counter Indemnity 2. L/C Contract I ( margin?) 3. L/C Application 7. Pre-Ship Loan 6. L/C Contract - III ECGC COPEC ECGD ERIC 6. Confirmed advice of L/C $ 4. L/C Contract - II co exists with III (?) 13. Pre-shipment Exp. Finance Exp. Performance G’tee 5. L/C Contract IV ISSUING BANK - IB CONFIRMING BANK - CB Restricted negotiating Bank 10.A & B Documents Checked If Documents in order, seller receives negotiation proceeds without recourse 5. L/C Copies with Request for Confirmation & Advice 10 B & D If Documents NOT in order CB MAY ‘Negotiate Under Reserve’ against seller’s indemnity 14 11. Document Despatch with Reimbursement Claim Advice 10 Parties 15 Contracts Acts & Regulations Governing this transaction: ICC Regulation Number 500, 322, 325, Contract Act, Sale of Goods Act Carriage of Goods by Sea Act, B/Lading Act Marine Insurance Act Bill of Exchange Act Exchange Control. Importing/Exporting Regulations 15. Loan Contract Documents Checked 12. Drawing Honoured: Or Drawing Dishonoured / SWIFT/ TEL/ FAX - $

There are four parties to an irrevocable letter of credit. Applicant (Importer) Issuing Bank Advising/ Confirming Bank Exporter Beneficiary

Documentary Credit – An Overview of LC Flow
EXPORTER n Shipment of Goods IMPORTER IMPORTER/ APPLICANT IMPORTER j Commercial Contract ADVISING/ PRESENTING BANK s o m Payment Shipping & Transport Documents (“Export Docs”) Presented to Negotiating/ Presenting Bank Advising Bank Advises the LC to Beneficiary k r s Importer Applies (as Applicant) for a Letter of Credit Export Docs Released to Applicants against Payments Payment ISSUING BANK l Letter of Credit Issued in favour of Exporter (as Beneficiary) ADVISING/ PRESENTING BANK ISSUING BANK q Export Docs Presented to Issuing Bank according to Exporter’s Instruction s Issuing Bank Accepts Export Docs Presented and Make Payments for Export Docs Negotiating Bank/ Presenting Bank Examines Export Docs Presented and inform Exporter for any discrepancies for rectification p 27

Constructive Delivery.
The main issue has always been that the Seller (Beneficiary) will get a payment NOT against shipping goods but against a tender of documents as requested by the Buyer (Applicant) through their Letter of Credit. By giving money against a set of documents , we (The Bankers) are valuing those documents. We can ask for third party documents (Inspection Certificates) as a risk reducing factor but the reality is that we are giving money to a selling party, who is not our client, against their documents. That puts the emphasis on understanding and checking those documents.

But who actually takes the most RISK ?
APPLICANT or MAIN BUYER (IMPORTER) ?? APPLICANT AS COMMODITY TRADER? ISSUING BANK? BENEFICIARY or MAIN SELLER (EXPORTER) ? ADVISING/ CONFIRMING/ PAYING BANK?? NEGOTIATING BANK ??

EXPLORATORY SESSION Please read the Oil L/C for Product from Abu Dhabi. Who takes the MOST RISK ??? Please bear in mind that the ISSUING BANK has, through its CONFIRMATION, turned a 30 day deferred payment L/C into a Sight Payment L/C.

Deferred Payment Oil Credit
WHOLE WORLD OIL BERMUDA c/o HOLLAND (IMP) ABU DHABI OIL CO 3/9 (Payment due 3/10) (EXP) L/C Advised 27/8 Correct Docs. 4/9 Payment? L/C Application 27/8 Docs. L/C Issued 27/8 BANQUE PARIS LONDON (ISSUING BANK) B.G.T. ABU DHABI (ADVISING/PAYING BANK) Docs. By Courier 6/9 Cover SSS

Confirming an L/C means that the confirming bank “steps into the shoes” of the issuing bank and gives its own irrevocable undertaking to the beneficiary that it (the confirming bank) will pay against a correct tender of documents.

If the issuing bank is unacceptable to the advising bank/market, who funds their deferred payment, usance/time/tenor or acceptance obligations? Applicant (South Sudan) Issuing Bank (South Sudan) 180 day South Sudanese L/C Advising Bank (Turkey) Beneficiary (Turkey)

Some definitions for Red & Green Clause credits.
Pre-Shipment finance (EG Timber, Wool) represents goods that are ready for delivery but the seller requires funds for freights etc. Pre-Export Finance, the goods are not yet ready so the Financier may be financing at any point from the purchase of a raw material for refining to the actual process itself.

Silent Confirmations SILENT CONFIRMATION OR PAYMENT GUARANTEE L/C
USED CAPITAL EQUIPMENT UK/EC/EXPORTER IMPORTER E.G. Viet./Nepal REIMBURSEMENT SILENT CONFIRMATION OR PAYMENT GUARANTEE PROVIDES OPTION 2 L/C MAINSTREAM ADVISING BANK VIETNAM ISSUING BANK OPTION 1 PROCEEDS/ REIMBURSEMENT OPTION 2 ‘TRIGGER’ OF ASSIGNMENT ON DEFAULT SPECIALIST UK/EC/GUARANTEEING BANK

REALITY OF “SILENTS” They are a Bi-Lateral contractual agreement between the Beneficiary and the Silent Confirming House/Bank. They are a Payment Guarantee similar to confirmation. They are offered by Political Risk Insurers as well as Banks. They are “Off the L/C.”

What is a Red Clause L/C? Now used for pre-export finance.
Highlights the risk on the performance of the beneficiary. Originally designed for pre-shipment finance. Where that risk seems unacceptable – The job of the real trade financier is to:- Mitigate that risk into acceptability; or Park the risk somewhere else. 5. Our job here is to know what to do with them, as , after a decade in the wilderness the product has come back with a “Bang”..

The Red Circle A (Coal/Energy) L/C
SELLER Richards Bay Coal Mines South Africa RECIPIENT Korea Circle 1 J.S.A. Docs & Invoice Circle 2 All docs 2 CYCLES Both sets of docs. to be approved by issuing bank BUYER Northern Coal (Toronto Canada) ISSUING BANK Commercial Bank of Canada ADVISING BANK Standard Barclays South Africa 38

Financing Zimbabwe? The Countertrade L/C.
APPLICANT MEGACORP USA TRANSFER BULK COMMODITY L/CS WITH RED CLAUSES AND “CONDITIONAL PAYMENTS”. COMPARE TO TOLLING BENEFICIARY AND ADVISING BANK THE NATIONAL BANK OF ZIMBABWE TRANSFEREE AND PRODUCER ISSUING BANK SWISS BANK OF TRADE 39

STANDBY L/Cs and their main risks.
Joker Brokers and non-supply.

A standby L/C acts like a “guarantee”. It is subject to ICC 500 and/or ICC 590. But why is it essentially different from an unconditional, on-demand guarantee?

Definition of a Standby L/C
“….. a promise by the issuer (issuing bank) to honour the beneficiary’s presentation of the document or documents specified in the letter of credit. The standby letter of credit, however, is not typically used as a payment mechanism. In a standby letter of credit, the parties do not normally expect that presentation of documents will occur.

Definition of a Standby L/C (Cont.)
The issuer is merely “standing by” just in case the obligation in the underlying transaction is not performed by the obligor” (As quoted in Standby and Commercial Letters of Credit – Wunnicke. Wunnicke and Turner, 2nd Edition 1996)

A Standby Flowchart L/C L/C L/C
Applicant Jowali Trading Corp. (Switzerland) Debt covered Beneficiary, Uzbek Nafta (Uzbekistan) L/C L/C L/C Issuing Bank, Raiffeisen Swiss Bank Advising UZBEKBANK

So Why Issue a Standby? Uzbek NAFTA seek a third party Guarantee from a Bank that should the Trading Buyer not pay, the Bank will step in and take over the liability. Their Bank may even view this instrument as a kind of “Cash Collateral”. However, all parties, by accepting the Standby Issuing Bank as the Primary Obligor have taken the debt out of Corporate Finance into the Bank/Documentary Risk area.

RECIVABLES FINANCING. BUYING A PALM OIL PROCESSOR.

BOTTOM LINE As banks are going down the value chain to provide solutions to their customer’s needs, they are getting more exposed to Operational Risk events. The reality is that you will need a risk-exit strategy for every deal that is as conscious, entrepreneurial and pro-active as the deal itself.

THE PALM OIL FACTORY. LUCKY GOLDENSTAR ARE NOT BUYING OIL:- THEY ARE BUYING THE WHOLE FACTORY. MALAYSIA IS NOW ONE OF THE BIGGEST SUPPLIERS OF PALM OIL IN THE WORLD BUT THEY PRODUCE MORE THAN THEY CAN PROCESS THEIR EXECUTIVES ARE CONTINUOUSLY SEEKING BANKRUPT STOCK OR UNDER-UTILISED EQUIPMENT THAT THEY SHIP TO MALAYSIA AND INDONESIA TO PROCESS THE OIL. HOWEVER THEY NEED 30 MONTHS TO PAY. FORFAITING IS THE IDEAL MEDIUM TO PAY FOR CAPITAL EQUIPMENT LIKE THIS. THEY HAVE FOUND SEVERAL PLANTS THAT NEED RE-FURBISHING IN NIGERIA AND THEY WANT TO BUY THE FIRST ONE.

AGRICUTURAL ENTERPRISES
SALES CONTRACT LUCKY GOLDENSTAR & AFRICAN AGRICULTURAL ENTERPRISES. PALM OIL FACTORY LUCKY GOLDENSTAR OIL PRODUCTS MALAYSIA AFRICAN AGRICUTURAL ENTERPRISES LAGOS, NIGERIA SALES CONTRACT

FORFAITING - THE PRIMARY PARTIES
1.DISCUSSIONS EXPORTER/SELLER AFRICAN AGRICULTURAL ENTERPRISES, NIGERIA. IMPORTER/BUYER LUCKY GOLDENSTAR MALAYSIA 2. SALES CONTRACT 4. BANK agrees to avalise P-NOTES 3. Request BANK 6. BANK requests MARKET ADVICE 5. Offer Submitted BUYER’S BANK BANK INDUSTRI MALAYSIA SELLER’S BANK AGRICULTURAL BANK of NIGERIA

PALM OIL FACTORY LUCKY GOLDENSTAR, AFTER CONTACTING THEIR BANK HAVE MADE AN OFFER OF US$ 5 Million to be paid over a period of 30 months. That is they have offered 5, semi-annual (amortising) PROMISSORY NOTES of US$ 1 million per note (which as nobody really knows Lucky Goldenstar outside Malaysia) has to be avalised by their BANK :- BANK INDUSTRI MALAYSIA BERHAD. This avalisation which is similar to accepting bills of exchange makes BANK INDUSTRI the PRIMARY OBLGOR. However, nobody, including the Seller, their Bank or the Ministry of Agriculture in Nigeria will want to wait 30 months for their funds. They want the money now. Time to call in an expert Discounting/Forfaiting Bank STANHOPE BANK of South Africa.

1.DISCUSSIONS EXPORTER/SELLER AFRICAN AGRICULTURAL ENTERPRISES, NIGERIA. IMPORTER/BUYER LUCKY GOLDENSTAR MALAYSIA 2. SALES CONTRACT 4. BANK agrees to avalise P-NOTES 3. Request BANK 6. BANK requests MARKET ADVICE 5. Offer Submitted 7. STANHOPE BANK of SOUTH AFRICA BUYER’S BANK BANK INDUSTRI MALAYSIA SELLER’S BANK AGRICULTURAL BANK of NIGERIA 8. INDICATIVE DISCOUNT of NOTES for CASH NOW !

THE PALM OIL FACTORY STANHOPE BANK ARE KEY TO THIS DEAL BEING DONE.
THEY WILL LOOK AT THE SELLER’S COUNTRY (MALAYSIA), THE TIME FACTOR (30 MONTHS) , THE RISK FACTOR (knowing that arranging the sale of a factory will involve several shipments leaving Nigeria) BUT THEY DO KNOW BANK INDUSTRI of MALAYSIA. Their INDICATIVE OFFER (subject to documentation) will be LIBOR + 6% This is something the SELLER has to consider in their PRICING or INVOICE. STANHOPE, however are not looking to invest in this paper, they are BUYING TO SELL ON THE SECONDARY MARKETS. They have already contacted likely partners and RISK SHARERS and will soon issue their own OFFER to the MARKET for these notes even before they are signed.

1.DISCUSSIONS EXPORTER/SELLER AFRICAN AGRICULTURAL ENTERPRISES, NIGERIA. IMPORTER/BUYER LUCKY GOLDENSTAR MALAYSIA 2. SALES CONTRACT 4. BANK agrees to avalise P-NOTES 3. Request BANK 6. BANK requests MARKET ADVICE 5. Offer Submitted 7. STANHOPE BANK of SOUTH AFRICA BUYER’S BANK BANK INDUSTRI MALAYSIA SELLER’S BANK AGRICULTURAL BANK of NIGERIA 8. INDICATIVE DISCOUNT of NOTES for CASH NOW ! 9. ACCEPT STANHOPE’S LIBOR + 6 % DISCOUNT

PALM OIL FACTORY After contacting their Bankers and the Ministry of Agriculture in Nigeria, Stanhope’s offer has been accepted. African Agricultural Enterprises now indicate their acceptance to Stanhope and tell Lucky Goldenstar to make the notes, which will be avalised by BANK INDUSTRI, MALAYSIA. There is a lot more paperwork to do as Stanhope’s offer is SUBJECT TO DOCUMENTATION as can be seen on their INDICATIVE TERM SHEET. If approved by Stanhope, AFRICAN AGRICULTURAL ENTERPRISES gain the cash on a NON-RECOURSE basis, meaning that because Stanhope have purchased the P Notes no future party can go back to the SELLER for a refund.

BANK INDUSTRI AVALIZING BANK
PALM OIL FACTORY AFRICA to MALAYSIA DISCOUNTED PROCEEDS AFRICAN EXPORTER MALAYSIAN IMPORTER STANHOPE BANK S.AFRICA BANK INDUSTRI AVALIZING BANK PAYMENT DOMICILE CCB JHB FORFAITING HOUSE QUASI BANK B MERCHANT BANK PART SYNDICATION 5. PALM OIL FACTORY 1.SALES NEGOTIATION 2. DETAILS OF PNs 4. SERIES OF US$ PROM. NOTES ‘PLACING THE PAPER’ 3. FORFAIT AGREEMENT ENDORSEMENTS 7b PROCEEDS 6. ENDORSEMENT 7a PROCEEDS

Typical 2011 Deal (Africa-EC.)
Chinese IMPORTER KENYAN EXPORTER LOCAL L/C FORFAITER STANBIC (KENYA) State Bank of CHINA. DETAILS: ONE ASSET 180 DAYS, 75 bps. OVER LIBOR MARGIN

The Benefits of Fixed Rate Discounting
Clarity – on a straight discount basis of e.g. a promissory note, the exporter will be able to plan in advance how much hard currency he/she will gain for the export of the goods. This “straight” discount will be loaded on to the invoice where the importer’s paper is discountable. All fixed rate discounts calculated partly on an interest basis look attractive in a “bull” interest market.

The Benefits of Fixed Rate Discounting (contd)
Likewise a “Bear” interest market may not make forfaiting so desirable. To a bank – they will buy at “straight” discount at an exporter’s market price but sell in the Interbank markets on a “discount to yield basis”. Where they: a) Decide to sell b) Where there is a secondary market c) Sell in the future using an “underwriting limit”

Fortis Bank Innovation Again …..
Spare Parts Gecamines (Zaire) South African Spare Parts Supplier Excess Cobalt $10m p.a.) Fortis Funds Sold to China Escrow Buys a ‘Put Option’ (see Commodity Swap) to remove price risk on Cobalt 61

‘Tolling’ Pre-Export Finance
Founded in the metals industry Provides ‘revolving’ finance for raw materials e.g. ore Payback is through the refined material Price-sensitive to the refined material Heavily dependent on performance of processor Subject to political risk analysis ‘Stops’ or ‘tolls’ disallow freely revolving credit 62

Copper Tolling case study – Romania/Zambia
Deal Input & commercial transaction Originating client : Delco BM, Lucerne has a tolling contract with Smelter-Refiner : Mufulifa (Zambia) Contract : Toll Conversion Agreement between Delco & ZCCM. Concentrates to smelter (anode) & to refinery (cathode off-take) for 14,000 mt ZCCM produces 40,000 mt cathodes pa =$80m) Price 2007:$12340.Price 2012 $ outlook $1950. Production up 6% in 2008 LME stock :300,000t Delco, an existing client of CSFB, Switzerland, asked CSFB, London to structure and set up a multiple tranche revolving 3.5 months facility to enable them to supply copper concentrate to Mufulifa or tolling and off-take of output by Delco for sales to buyers and brokers Facility required: 1. LC issue line 30 days to finance purchase of concentrates delivery CIF Zambia repaid by 2. Tolling Finance (40-days cycle) $16 m with 80% LTV ($12.8m) with Delco off-take at Zambia FOB/DAF 3. $10m non-recourse Buyer Credit 30 days with a stock financing at LME WH cap of $6m-60 days and assignment of a tripartite hedge contract ( with bank issuing margin guarantee) Bank report on the Zambian smelter was positive Pricing indication 5% pa performance risk + 1% on receivable + fee 50 bp flat Risks Reward – nearly $1m pa 64

Romanian Copper Tolling Risk Assessment
Risks Risk mitigation Concentrate non-delivery risk No risk. LC not payable Concentrate quality risk Inspection at port of loading as LC document Smelter performance risk Key risk. Assessment report result Smelter sale diversion risk Possible but unlikely Smelter credit risk ( concentrate return- give or pay) Assessment to repay concentrate value Smelter ownership/ equity impact ?? Nationalisation is a political risk. Can Glencore be a risk? Zambian/Romanian warehouse risks SGS inspected warehouse LME warehouse risk on stock held LME approved warehouses Transportation and loss risks Insurance covers Buyer credit risk To be assessed and accepted Political risk Very little. Econometric. Hedge counterparty risks Pre-approved party (Sucden) Discuss In any case this a short term uncommitted line revolving 3 months. Risks are acceptable. Let us proceed 65

Copper : Import-Tolling-Warrant sale with Buyer Credit
Concentrate supplier Local W/H Buyers Greece, Germany, Italy 5 9 6 8 9 Smelter Refinery Zambia 7 LME w/h 11 4 1 LME Broker Suppliers bank Delco (Main Buyer) 3 10 6 11 2 LME Traders Tolling bank, CSFB 66

MUFULIFA Very large and well known Zambian Major.
What would be the problems involved with “Artisan” Col-Tan mines in DRC and can we re-structure these deals to take in all associated risks? Or Oil from Equatorial Guinea? 67

INTERNATIONAL TRADE FINANCE

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