Commodity finance is the financing of the supply of goods or services by one party to another, and may take the form of a “structured trade credit” between corporate entities.
Political Risks Insurance coverage for commodity finance or structured trade finance is called “Contract Frustration Indemnity”, Commercial Default Coverage is called Credit Insurance. The risks covered are
- non-payment under the contract;
- non-delivery of the goods or services; and/or
- non-honouring of government or commercial guarantees.
- Non-payment cover insures the bank against non-payment by the obligor of the underlying trade contract that is being discounted or financed by the bank, whether open account, under a bill of exchange, or under a letter of credit.
- Non-delivery coverage applies to pre-delivery (typically pre-export) finance transactions when an advance payment is made and the products shipped / delivered over a period of time.
- Non-honouring of government guarantee coverage is similar to project finance PRI, but Contract Frustration coverage can be bought in isolation rather than as comprehensive cover for all of the government’s underlying obligations.