Profit Participation Lending & Third-Party Trade Clearing: A Detailed Overview
Trade origination, primarily driven by emerging commodity shortages, often requires bulk purchasing to leverage economies of scale, attain volume discounts and minimize per-order costs. Suppliers generally require security, commonly in the form of bank payment guarantees like Standby Letters of Credit (SBLC) or Documentary Letters of Credit.
When a trade administrator lacks the required bank credit facilities, they may engage a qualified lender to facilitate clearing and settling of the commodity transaction, utilizing mechanisms such as Profit Participation Lending (PPL) and Third-Party Trade Clearing.
Understanding Third-Party Clearing
Third-party clearing pertains to the necessary funding to secure export supply transactions on behalf of a responsible counterparty importer. This transaction usually takes the form of a profit participation loan, allowing the lender to partake in a larger portion of profits in exchange for risk exposure.
Role of a Qualified Lender
A qualified lender, endowed with the collateral resources, can secure a commodity supplier on behalf of a counterparty importer by issuing a bank payment guarantee. This facility is collateralized by the underlying transactional assets, all under a Special Purpose Company (SPC), and conveyed via a 100% equity pledge favoring the lender. This equity pledge is entrusted with the Collateral Control Manager until the transaction is satisfactorily settled, and the bank payment guarantee is released unencumbered by the supplier.
Trade Finance Applicants
Typically, trade finance applicants are licensed importers who require goods procurement beyond their existing financial working capital capacity. Qualified lenders primarily consider applications from well-established trade administrations demonstrating competent management and understanding of securing transactional assets as collateral.
The Qualified Borrower (Trade Administration)
Trade Administrations are incorporated Special Purpose Companies that contract with a Collateral Control Management (CCM) firm at the receiving port. These administrations register 100% of the SPC equity under a possessory pledge in favor of the lender. The CCM is delegated with management control over receipt, discharge, inspection, storage, and control of goods release against payment.
The Role of Collateral Control Management
The Collateral Control Manager serves as a crucial link between the borrower and lender. They ensure lending terms align with ground operations and the overall transaction flow. Acting as the custodian of the transactional assets ceded to the lender via a registered possessory pledge, they maintain significant liability insurance, including professional indemnity and fraud insurance.
- Supplier SPA / Buyer SPA
- Bank payment guarantee
- All-risk full marine insurance
- Fixed and floating debenture/cession over all stock
- Tank-farm or warehouse receipts
- Accounts Receivable
- Credit insurance on Debtors ceded to Project Funder
- Collateral Control Management Agreement
- Transaction Account
The Transaction Account
The Trade Administration establishes a Transaction Account under the SPC to manage all income, expenses, and inbound guarantees related to the transaction. Dual signature authority governs this account, and periodic reports and account statements are provided to both the lender and trade administrator.
The transaction involves several key parties:
- The Borrower (Trade Administration = SPC + CCM)
- The Supplier (the goods)
- The Ultimate Buyer (exit money)
- The Lender (Facility)
Several contracts formalize the roles and responsibilities of the parties involved:
- Sales Purchase Agreement – Trade Administrator and Supplier
- Facility Agreement – Trade Administrator and Project Funder
- Collateral Control Agreement – Trade Administrator and Collateral Manager
- Sales Purchase Agreement – Trade Administrator and Ultimate Buyer
Comprehensive risk mitigation strategies are deployed to safeguard the process:
- Supplier risk of non-performance: Suppliers issue a 2% performance bond as part of the contract.
- Delivery Risks: Suppliers are responsible for delivery risks; all contracted purchases are insured and subjected to pre- and post-shipment product testing. Full marine insurance protects all goods from loss or damage during transport and storage.
- Inspections: SGS or equivalent inspections are conducted during loading and receiving by a fully insured professional company.
- Collateral Control: A Full Management Agreement between the Project Funder and Collateral Manager safeguards the Project Funder’s interest in the financial guarantee.
- Tank-farm or warehouse Insurance: This insurance covers malfeasance.
- Release of goods: Goods are released only upon evidence of payment.
- Payment risks: The risk of payment default by the ultimate buyer is mitigated by a call on the buyer’s bank payment guarantee or against credit insurance coverage.
- Credit insurance: This is applied to Debtors.