Commodity Finance
COMMODITY FINANCE
Commodity Finance
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.
The maximum tenor for PRI available from the private insurance market is currently 15 years (with greater liquidity up to 10 years). CRI is usually provided for tenors of no more than 5 years, although some insurers may consider providing cover for 7 years or longer.
PRI is generally available for all countries provided they are not subject to sanctions (whether by the U.N., the U.S.A., the E.U. or the national government of the relevant insurer); insurance premiums will reflect the relevant sovereign risk, the tenor of the policy, the record of previous claims and recoveries in the relevant country, the nature of the underlying asset / project, and the current use of the insurer’s available country limits.
There are many insurance companies and Lloyds syndicates that underwrite PRI and CRI policies; those with a Standard & Poor's credit rating of A+ or better (or equivalent) are usually acceptable for policies with long tenors, and a rating of A may be acceptable for tenors of up to 3 years.
