Serbia Warehouse Receipt Conference 1
What are we trying to achieve Where are we coming from: Where do we want to end up: Limited Availability of Financing Warehouse receipts = Financing If available, only if CMA/SM High LTV Low Loan to Value (LTV) ratio What will it take to get there: Legal Basis Licensing and Inspection WHR Indemnity Fund Framework Reliable Warehouses Price Transparency 2
The Bankers Perspective What is important to banks within the WHR Framework? Legal Basis - Clear legislation establishing: – Easy enforcement mechanism – Proper title – Clear first ranking security interest – Level playing field Licensing & Inspection: – Clear and standardised terms for receiving a license, including financial standing – Reliable monitoring – Severe punishment for malpractice 3
The Bankers Perspective Indemnity Fund: – Making the receipt as liquid as possible – Provides financial commitment from system implementers – Centralised collection/enforcement agency Reliable Warehouses: – Probably the most important aspect, if warehouses can not be trusted to manage the security the system will fail Price Transparency: – On a country wide basis to enable mark-to-market, if not in place, LTV’s will continue to be low 4
The Experience Kazakhstan • Less than 10 years after the law was introduced (softs only), there is significant lending against warehouse receipts, estimated at around US$1bn from international banks and in excess of this by local banks • However, international banks still have collateral managers involved, although no longer on a CMA basis but now on a fortnightly stock monitoring basis • Margins have improved significantly with initial margins of 4%+ and now (pre-crisis) being at around 2% • LTV’s have improved from around 60 -70% to 80-90% 5
The Experience Ukraine • Although warehouse receipt legislation is in place, key elements such as easy enforcement mechanism and indemnity fund is missing • Irrespective of this, pre-crisis international lending mainly to the large crushers was continuing, pre-crisis, at aggressive advance rates (and pricing) and only with stock monitoring. • Examples including syndicated loans to Nibulon (large local exporter), Allseeds and Kernel (both local edible oil crushers). 6
The Experience Bulgaria • Indemnity Fund fully privately funded now. • System has worked for +10 years without any problems. • WHR have become a normal way of providing financing against soft commodities. • Today all EU intervention stocks can only be stored in licensed warehouses 7
The Experience What has been witnessed in other countries where warehouse receipt legislation is implemented is a relatively quick take up by local banks, with international banks being a bit slower and less comfortable relying on the system Support of local banks is key to the success of the system 8
Local bank opportunities What has been witnessed in other countries is that local banks have a strong competitive advantage, because of: • Knowledge of warehousing companies (good and bad) • Can follow the actual progress being made by the inspection/monitoring agency and react quickly if adequate/inadequate • Financing of commodities for local consumption, where international banks will usually only finance in port and preferably for export with strong offtakers 9
Other Opportunities Increased earnings opportunities: • Enables lending to none credit worthy borrowers, on the basis of pure asset backed lending • Strong warehouse groups can team up with banks and use their storage capacity as bank balances on the basis of which banks can lend with limited questions Example, the Indian experience, a group of local banks joined forces and created MCX (www.mcxindia.com), using warehouses as if they were banks and deposited commodities as if they were credit balances for which financing could be raised by smallholders 10
Other Opportunities Fund raising opportunities: • Local banks can raise funds through securitisation of portfolios, trade finance credit lines and co-financing of larger clients • Repo structures are simplified through the easy transfer of title that the warehouse receipt enables, thereby enabling the creation of SPV’s which can allow for off balance sheet financing of traders, processors etc. If repo’s are possible, it also means that Islamic (Sharia Compliant) structures can be implemented 11
Other Opportunities Fee/Ancillary Opportunities: • Opportunity for local banks to establish agency departments doing the on-the-ground work on behalf of international syndicated – for a fee • Commodity exchanges are a natural follow on and although this has not yet been achieved in the Former Soviet Union, it was created in India alongside the lending (as mentioned earlier) and in South Africa where it was the driver for the creation of the private warehouse receipt system currently operating there 12
How can EBRD assist? EBRD can share in the risk of the underlying portfolio through a funded or unfunded participation. 13
Success Drivers To prevent conflicts of interest, it is important to Pari-passu: ensure that all participants share in the risk on a pari-passu basis. To avoid complicated procedures, as to which sub- Blank Cheque Approach: borrowers are eligible to benefit from financing, it is important to establish simple and clear criteria for when EBRD is on risk, i.e. if pre-established criteria are fulfilled the Local Bank can proceed to grant the loan, without a separate approval from EBRD. 14
Minimum Risk Taking Criteria • The advance rate will be a maximum of for example 80%. • Warehouse receipt is endorsed to the Local Bank and in possession of the Local Bank. • The commodities are inspected prior to draw down and on a regular basis thereafter. • Maximum tenor 12 months. • Standard pre-approved documentation, e.g. loan agreement • Minimum margin. 15
Risk and Risk Mitigation Measures Approriate Due Diligence, Monitoring & Enforcement by the Local Bank During due diligence for the transaction, flow chart procedures will be developed which will detail how each transaction has to be approved and monitored by the Local Bank and in the unlikely event of a default step by step procedures to be taken by the Local Bank. Naturally these procedures will be part of the minimum risk criteria, i.e. if they have not been followed EBRD is not ‘on risk’ and if we are funded we revert to the risk of the Local Bank. Portfolio Concentration To ensure that the risk is spread over a large portfolio, concentration limits will be established once a pre-established minimum amount has been disbursed. 16
Risk and Risk Mitigation Measures Cherry Picking To avoid the Local Bank tweaking the terms and conditions of the underlying loans so that the good ones do not fulfil the minimum risk criteria, the Local Bank undertakes to invite the EBRD into all transactions using warehouse receipts as security. However, to ensure that this does not delay the building of the Portfolio, the EBRD will undertake to accept such loans into the portfolio within 3-5 business days and if no response within this deadline the Local Bank can proceed with the loan outside of the Portfolio. Ensuring Pari-Passu Basis The Local Bank will undertake to keep its risk (55-75%) on their own books and not sell it down or take out cover for the risk of the Portfolio. 17
Risk and Risk Mitigation Measures Conflicts with other business of the Agent To avoid conflicts between the loan in the Portfolio and other loans from the Local Bank to the same borrower or group of borrowers outside of the Portfolio, the Local Bank will undertake, that any recoveries under any loans they have with the borrower (or group of borrowers) will firstly go towards recovering the loss under the loan in the Portfolio. 18
EBRD’s experience with Risk Sharing EBRD has been offering this product for a number of years to local banks, taking risk on ‘asset based’ transactions, i.e. in transactions where we believe we have an easily marketable asset as security (mainly agricultural commodities and agricultural machinery to date) The EBRD has successfully implemented and completed a number of these transactions already in countries such as Serbia, Russia, Kazakhstan, Romania and Croatia. The cumulative risk taken by EBRD to date in these portfolio’s exceeds $500 million (taking around 1/3 of the risk, i.e. EBRD has participated in portfolio’s exceeding $1.5bn). 19
In Summary What Have We Learnt? WHR can be very safe lending – There has been no defaults so far... – … but this should not be the reason for complaisance, and relevant risks have to be mitigated in each case. Role of local banks cannot be underestimated – Expertise of local banks in credit analysis and managing security and loan documents on behalf of EBRD is key. – Some technical support for training of local staff is often needed. 20
And Finally - A word of warning… Although Warehouse Receipts are an excellent lending instrument, it does carry significant risks as volumes tend to be large The warehouse risk should never be underestimated and even though this may be covered by an indemnity fund, one should always question the integrity of the warehouse operator who holds the security 21
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