Interest in trade finance as an asset class has grown considerably over recent years but means of accessing investments has been largely limited to alternative investment funds. Although these funds are suitable for some investors, they do not fit everyone’s investment mandate.
At the same time, trade assets have a very similar profile to short dated fixed income instruments; money is lent at a discount to a producer of goods and is repaid when the buyer of goods takes delivery. The cash flows are not dissimilar to treasury bills, although the credit profile is very different.
The ARIA Commodity Finance Fund addresses the credit risk associated with commodity trade finance risks in a unique way, by removing the risk of a commodity importer, and replacing that with a bank guarantee. To further protect investor monies, the fund maintains title to the underlying goods, and the whole transaction is wrapped by a structured credit insurance policy against loss which is underwritten by Lloyds of London and Chubb.
Matt Brittain, the CIO of Aria Commodities explains, “Our bespoke credit insurance policy allows us to only trade with a pre-defined list of counterparties, such as those who are large enough to have a recognised bank guarantee their payments by letters of credit. By transforming credit risk into documentary risk, we generate a high degree of confidence that transactions we finance will by repaid in a short period of time.”
Despite obvious attraction of funds such as ARIA’s CFF, not all investors are able to invest into a fund structure. Working with private credit investors, Aria built a fixed income solution backed by trade finance assets. The result was Serica Finance PLC Secured Medium Term Note Programme, which allows for the issuance of up to EUR 200 million and USD 200 million of secured fixed coupon notes. The notes provide investors with semi-annual interest payments, secured by assets, bank guarantees and credit insurance. The instrument settles in Euroclear/Clearstream, is listed on the Frankfurt stock exchange and is transferrable.
Matt continues, “ARIA is privileged to be a firm built from two cultures: asset management and commodity trading. By listening to our customer’s needs we were able to build a bespoke solution, not just to serve our investors, but also to provide security of finance to our suppliers for their next production cycle.”
The first notes were successfully issued in April 2019 and have a maturity of one year, providing investors with a fixed return od 7% in USD and 5.5% in EUR.
By ariaJune 3, 2020
Documentary Credits Series: Letters of Credit
By ariaJune 3, 2020
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