Case Assignment: SMU Executive Certificate in Structured Trade $ Commodity Finance
Institution Affiliation
Interoil Group Ltd, based in Geneva, was established in the year 1990s as an independent trader of crude, petrochemical and refined oil products. In the year 2002, Interoil Group Ltd was incorporated in Singapore. Singapore has been one of the main training and at the same time the operating main office since 2002. Global trader program was awarded to the group and it enjoyed a concessionary tax rate. The main market of the company involves countries like Europe, Asia, and the Americas. The Interoil business type of model includes distribution, local domestic sales involving refined oil and petrochemicals and lastly storage as well. Majority of its assets are current assets which involve inventories and at the same time current assets as well. Trade receivables cannot be mentioned without involving the fact that they include demurrage claims on buyers. In addition to that Interoil Trading assets are financed by Trade Payables and not forgetting to mention bank loans.
Interoil Trading Pte Ltd
USD Millions FYE 16 FYE 17 FYE 18
Revenue 4,280 4,135 3,589
Gross Profit 50 100 200
Tangible Net Worth 40 46 72
Net Profit Margin 0.4% 2.3% 5%
Debt/EBITDA 9.5x 10.6% 4.5x
Trade Payable Days 30 25 22
Trade Payable Days 32 21 19
Inventory Turnover Days 10 11 15
In every stage of the purchase of goods or sales the transaction has to be secured and therefore there should be security documentation for the sight LC. According to Bazerman, et al, (1985), the LC is payable within the shortest time possible that is after the requirement of the seller is met by the buyer. This helped in resolving credit facilities, InterOil trading Pte Ltd having facilities like back-to-back, front-to-back letters of credit (LCs) and standby letters of credit (SBLCS), freight financing, margin finance, inventory finance, Lois and silent confirmation of LC and payment undertakings. The company’s revenue in USD millions experienced growth in the financial year FYE 16 at 4,280 and FYE 17 at 4,135 and later experienced a decline to FYE 18 at 3,589.
In suggesting suitable security documentation I would propose back to back letters of credit which are made up of two different LCs, the use of back-to-back is useful in transactions involving an intermediary between the seller and the buyer such as involving a broker. According to Giovannucci, D. (2007), the seller is responsible for paying upon fulfilling the terms of the contract and at the same time presenting appropriate documentation. Freight financing helps in slowing down payments and cash flow. There are several advantages of freight financing like being used on a revolving basis, in providing constant liquidity for the business according to ones, S. A., & Weis. (2018).
Inventory finance involves a form of asset-based on allowing business in using inventory as collateral in obtaining a revolving line of credit. The main advantage of inventory is allowing seasonal fluctuations in cash flow Pettenuzzo, Det al, (2018).In addition to that when it comes to margin finance as the only money borrowed from a brokerage between the securities total value held in an investors account with the brokerage loan amount.Europe, Singapore, and the Americas confirming the LOIs and LCs and open account sales thus Beall, et al, (2018). The product of selling price together it’s its cost of production or the total ratio of profit to revenue.
5 a)
a) Highlight the factors of considerations to assess the Company’s suitability for such a facility (6marks)
Factors of consideration in assessing company’s suitability are choosing of a suitable location for venturing into the business or even when expanding business like in this case the Interoil Group Ltd selected Geneva as the main country of operation and expanded its head office to Singapore in the year 2002. Accessibility is one of the main factors I would consider when starting any business due to the fact that business growth is experienced through infrastructure accessibility such as roads that can make clients reach the place easily Cao, et al,(2018).
Security is another factor that must be considered when it comes to selecting a business operation remise due to the fact that areas that are blacklisted or marked crime areas make clients fear to access them hence there is a big loss when it comes to business Hicks, A. (2018). The statistics from the UK government confirmed populations in relation to business informed decisions that in setting up a new office the first consideration should be secured to avoid inconveniences and wastage of resources that risk being stolen by thieves Lamagni, et al, (2018).
Competition is another major factor to be considered in starting a business to predict ways and means at which the study can use in withstanding the pressure received from the competitors. According to Camarero et al. (2015), a competitive advantage is met at that time when an estate is in a position to generate economic values as compared to a situation where real estate investment generates very little or no profit at all. Therefore the logic relies on two different assumptions on how the organization resources are used to improve on performance and if not why the resources were not appropriately used and the reason as to why some companies outperform others in the market or why the mentioned companies have more students admitted in them than others.
As indicated by Rothaermel (2015), the investors of organizations who were not engaged with the everyday operational issues needed confirmations that those responsible for the organization, particularly the executives and directors, were defending their speculations and precisely through vital advancements. According to Kidman, S. (2019), in the ongoing past, vital improvement has picked up footing in associations that are keen on achieving an aggressive edge in quick changing worldwide commercial centers that are progressively being molded by the elements of advances and business situations.
b) Make reasonable assumptions on the nature and size of the facility intended to be offered to the Company. (6marks)
In my own assumptions concerning the nature and the size of the facility that is intended in offering to the company is that stock prices will be affordable the stock price will rise. If the market is efficient for example when the market is efficient meaning the company is making a profit and the value of stock grows hence it is beyond any reasonable doubt that the price will automatically adjust immediately after the announcement.According to Brest, et al, (2018). Investors don’t take chances to invest in a collapsing company unless there is a potential for the company making profits in the future that will not make them lose their money towards investment. This is why in some cases investors practice purchase on margin in which trusted entities or retailers are given money to use in their business in stock addition and then after some agreed time the money is returned to them, or they can buy shares in that company Johnson, T. H. (2018).
c) Establish the eligibility criteria for (i) inventory and (ii) receivables to be included in the borrowing base certificate (6Marks)
Establish the eligibility criteria for inventory means a borrowing of inventory in compliance with each and every representation for the warranties that are made concerning loan documentation which is included as an eligible virtue that may be viewed as a criteria used from time to time. The criteria are cited as shown below:
Action-which requires the immediate response that is incurred at the period which eligibility happens
Identification and verification-Done as approve of selecting a reasonable, justifying the financial management procedures.
Budget-Estimation of the budget should be done that is overall for the action
The above criteria apply for both partners in signing the specific Grant Agreement and the potential implementation of partners.
d) Suggest the nature of security documentation appropriate for this borrowing base financing facility. (5Marks).
When it comes to the borrowing of credit based facilities which banks use when in the raising of corporate clients secured commodity finance. Lenders can manage to offer more leverage concerning specific identification of assets which can be offered as collateral in improving access to credit without restricting credit lines Fernandez et al, (2018). When the collateral value fluctuates up or down which may be due to supply chain changes? According to (Bastian, 2013) supply chain transparency refers to the disclosure of trading information to buyers, sellers, shareholders, and business regulatory authorities.
The need for effective and efficient supply chain system has emerged in many of today’s organizations as a result of changing customer preferences and intense competition among organizations. Supply chain transparency has become one of the major factors informing decisions concerning the supply and purchase of products. These aspects of the supply chain process are advantageous in that it builds up confidence between the supplier and consumer.
Interoil Trading Ptd Ltd has been approached by a supplier to provide a two-year prepayment financing facility.
a) With the aid of an appropriate deal structure diagram reflecting the parties involved, explain the flow of such a transaction (in terms of movements of money proceeds (including repayment) and goods) and highlight the relevant documentation required (10Marks).
Interoil Group Ltd, situated in Geneva, was built up in the year 1990s as an autonomous broker of rough, petrochemical and refined oil items. In the year 2002, Interoil Group Ltd was consolidated in Singapore. Singapore has been one of the principles preparing and in the meantime the working fundamental office since 2002. Global broker program was granted to the gathering and it delighted in a concessionary charge rate. The fundamental market of the organization includes nations like Europe, Asia, and the Americas. The Interoil business kind of model incorporates dissemination, neighborhood residential deals including refined oil and petrochemicals and finally stockpiling also. Lion’s shares of its advantages are a present resource which includes inventories and in the meantime present resources also. Exchange receivables can’t be referenced without including the way that they incorporate demurrage guarantees on purchasers. Notwithstanding that Interoil Trading resources are financed by Trade Payables and not neglecting to make reference to bank credits.
b) Identify and assess the main types of risks exposed to the Company and the financing bank, in agreeing to the supplier’s approach.
Risk types involve several factors like strategic risk, compliance risk, operational risk, reputational risk, and financial risk. Which according to Interoil Group Ltd suffering the main type of risk as financial risk thus according to Block, et al, (2018). Even though the net profit margin is positive which is an indicator in every organization that the result is positive which is contrary to the statement that even at that point that the return is positive the company can still be experiencing a net loss. This happens on the grounds that for a case when a bank supervisor of a branch need to build the number of bank stores or point of confinement withdrawals for instance then the main choice they have is to discover a method for acquainting advancement or reward with those that will figure out how to store to some degree a particular measure of cash every day or every week except can’t really control withdrawals or bank stores since that is outside their ability to control.
This presently clarifies why an association measured return can be certain yet at the same time, the organization isn’t doing as such well monetarily. The main solution for this is to set techniques that adjust the circumstance. Furthermore, it is genuine organizations make a benefit or loses on their ROI; this is the watchword in which all organizations work to decide gainfulness which is the main goal in each working business. This is the main figure to decide whether an association can pay its bills in future and in light of those financial specialists can settle on a firm choice on whether to draw in more money towards the speculation or not which to some degree a few speculators will go the degree of offering their offers. Along these lines, a positive return rate is a thing that all speculators need to tune in to with respect to venture.
As much as most business owners may prefer buying on margin to loan. The advantages may outweigh the disadvantages, but at the end of it, all this money will be paid back to the owner even though its interest rate may not be defined as fix interest rate like banks do but according to the agreement between the two parties. Not forgetting to mention that buying on margin is one of the problems facing most businesses where a lot of capital is needed for an investment in which the business owner may borrow from a bank or from a broker when purchasing on the stock which is normally returned within the agreed period. According to Li, R., Li, et al, (2018). An increase in stock increases the amount of cash flow in the stock, and this stabilizes the fixed amount available to run the stock. In case the vice versa happens then the amount of available cash will decrease hence less or no fixed amount of money.
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