Case Study 6
Trade Finance
Intelligence
Introduced by AMSCI (‘Advanced Manufacturing Supply Chain Initiative’), part of Frontier Development Capital, the client was incorporated in 2018 and is a family owned business which produces automotive lubricating oil in Greater Manchester. The client was seeking funding to purchase a waste oil refining plant from a supplier in China for cUS$600k.
The establishment of a waste oil re-refining facility would enhance the client’s business sustainability by transforming their model from a ‘linear economy’ to a ‘circular economy’ as well as generating additional income for the business.
Most of the products produced will be exported to emerging markets such as Nigeria.
Introduction
The funding request was ‘forecast led’ which meant that whilst there was expression of interest from Asset Finance providers to re-finance the plant when the project was income generative and achieving financial milestones set out in the forecasts, it was not possible to secure an Asset Finance facility.
Also, the Chinese supplier required a 15% deposit with order, stage payments during the build process and the balance prior to shipment, liquidity that the client did not have. Even if an Asset Finance provider has appetite to provide funding, they would not have been able to provide funding until they had undertaken their asset inspection once that the plant had arrived in the UK.
Challenges
Following consultation with the client & supplier, it was proposed that the client would pay the 15% deposit from their own resources and that the Chinese supplier would accept a Letter of Credit for 85% of the purchase price. The supplier required that the Letter of Credit was issued minimum one month prior to expected date of shipment from China.
We proposed that the Letter of Credit was paid to a Trade Loan whilst the plant was in transit from China, with the funder repaid from draw down of the AMSCI facility once the plant arrived in the UK. With this structure, AMSCI were able to obtain sanction from their Investment Committee.
We were then engaged by the client to provide a funding package to enable the plant to be imported from China. Clearly this would not be via a mainstream lender.
We secured a facility from a specialist second tier lender who were able to issue a Letter of Credit in favour of the Chinese supplier with draw down to a Trade Loan facility once compliant documents were presented under the Letter of Credit, with their source of repayment being via the AMSCI facility. Security was via a Debenture ranking behind AMSCI with a Deed of Priority in place. An unsupported PG was also required.
As the AMSCI facility was in £, we helped to secure a Forward Foreign Exchange deal to purchase US$ which meant that the client was not exposed to adverse Foreign Exchange movements and AMSCI had certainty of the £ amount that would be drawn down.
AMSCI held an irrevocable signed draw down request from the client in £ to repay the funder when the plant arrived in the UK and the AMSCI facility was drawn down.
