Structured Finance / Trade Finance

  • Benefit from Our Innovative Collateral Offer / Retain Your Valuable Working Capital.
  • Trading internationally without established relationships can feel like a leap of faith.
  • That’s why we provide solutions so that both parties can trade with increased security and reduced risk.
  • From producers to commodity traders and processors, SFO covers a wide spectrum of offerings utilising innovation to help support end-to-end commodity flows. Our global network matches the geographic reach of the commodity industry.

Sekhon Family Office are providers of

Structured Finance Solutions

Commodity Trade Finance 
    • Trade Finance Solutions.
      • Trade Finance.
      • Bonds BGs and Lease Bank Guarantee ( Bank Guarantees ).
      • Documentary Credits
        • Letters Of Credit.
          • Providers of DLC / Letters of Credit - Payable immediately – within five to ten days – after the seller meets the requirements of the letter of credit.
          • Providers of LC ( Usuance ) - Also known as Deferred Payment LC or Time LC or Term LC is a letter of credit payable at a predetermined time / future date after the conforming documents are presented.
        • Standby Letter of Credit (SBLC)
          • We provide compliance and brief underwriting duties to ensure the credit quality of the party seeking the letter of credit, then send notification to the bank of the party requesting the LC (a seller or creditor).
    • Performance Risk Financing - Potential Benefits:
      • Mitigate potential volatility.
      • Enables successful commodity producers to borrow against the value of future production.
      • Offers stable source of financing to emerging markets.

    More Features

    • Trade instruments are issued worldwide, communicated via SWIFT
    • Fast-track your cross-border transactions with our Smart Trade Finance Solutions accessible within 48 hours.
    • We are also currently exploring emerging innovations to help digitise and transform the commodity trade industry.
    • With an extensive range of guarantees available, we can provide added support and security to meet your import and export needs.

    What Is Credit Enhancement?

    • Credit enhancement is a strategy for improving the credit risk profile of a business, usually to obtain better terms for repaying debt.
    • In the financial industry, credit enhancement may be used to reduce the risks to investors of certain structured financial products.

    Understanding Credit Enhancement

    • A business that engages in credit enhancement is providing reassurance to a lender that it will honor its obligation. This can be achieved in various ways:
      • By providing additional collateral.
      • By obtaining insurance guaranteeing payment.
      • By arranging for a third-party guarantee.
    • The company might also increase its cash reserves or take other internal measures to demonstrate its ability to pay its debts. Credit enhancement reduces the credit risk/default risk of the company's debt and thus can make it eligible for a lower interest rate.

    Credit Enhancement of a Bond Issue

    • A company that is raising cash by issuing a bond may use credit enhancement to lower the interest rate it must pay to investors. If the company can get a guarantee from a bank to assure a portion of the repayment, the rating on the bond issue might improve from BBB to AA. The bank guarantee has enhanced the safety of the bond issue's principal and interest. The issuer now can save money by offering a slightly smaller interest rate on its bonds.

    Credit Enhancement on Structured Products

    • Structured products derive their value from underlying assets such as mortgages or credit card receivables. Some of those assets are riskier than others. For such investment products, credit enhancement serves as a cushion that absorbs potential losses from defaults on the underlying loans.

    Credit Enhancement 

    • There are obvious benefits of using credit enhancement techniques. Some of them have been listed below.
    • Firstly, from the issuer’s point of view, the benefit is twofold. Firstly, when the credit rating increases, the security becomes palatable to a lot more investors. It is a known fact that many pension funds and mutual funds only invest in AA assets. Hence, when the rating of the assets is increased, it becomes easier to sell the security. This ends up increasing the liquidity of the underlying security.
    • Secondly, credit enhancement significantly decreases the cost of borrowing. If the size of the issue is large, this could mean substantial dollar savings for the entity involved.
    • Investors, also benefit from such arrangements. This is because their money is now secured by more than one parties and hence the likelihood of default decreases exponentially.
    • Since all the parties gain from credit enhancements, they have been widely used in the past few years. Some of the commonly used forms of credit enhancement are as follows:

    Over-Collateralization : 

    • The face value of the underlying loan portfolio is larger than the security it backs, so the issued security is overcollateralized. Even if some of the payments for the underlying loans are late or in default, principal and interest payments on the asset-backed security can still be made. It is a known fact that secured loans are cheaper than unsecured loans. This is because, in the event of a default, lenders can recover their money by selling the assets which were used as collateral. However, a lot of times, the value of these assets fluctuates as well. Hence, having collateral does not ensure that 100% of the funds will be recovered. In such cases, overcollateralization can be used to reduce the cost of borrowing. In order to do so, the deal has to be structured in such a way that the amount of collateral provided exceeds the amount of the loan. For instance, if gold worth $100 is collateralized for a loan of $75, then the interest rate can be reduced. This is because even if the market for gold crashed 25% during the period, the investors could still recover 100% of their money by selling the underlying collateral. Overcollateralization is mostly used by individuals or small companies to lower their cost of borrowing.

    Bank Guarantees:

    • As far as corporations are concerned, bank guarantees are the most commonly used form of credit enhancement. This arrangement works because many times investors do not trust that the issuing company has the wherewithal to repay the loans it is undertaking. However, these same investors have a lot of faith in the financial situation of other entities such as banks. Under this arrangement, the issuing company pays a fee to the bank in order to guarantee the payments. Hence as far as the investors are concerned, it is like lending money to the bank which is much safer when compared to lending money to a company. As a result, investors are willing to accept a lower rate of interest. It needs to be understood that guarantees only work if they are issued by banks or other entities that people place trust in. The guarantee will have no meaning if it is issued by another firm whose financials are also questionable. Lastly, it also needs to be understood that the bank does not necessarily have to guarantee the entire loan. A partial guarantee may also be issued, and that will help in reducing the interest rates proportionately.

    Credit Wrapping / Wrapped Securities

    • A third party, such as an insurance company, ensures the security against any losses by agreeing to pay back a certain amount of interest or principal on a loan or buy back some defaulted loans in the portfolio. Credit wrapping is another form of credit enhancement. It works in a similar manner when compared to bank guarantees. The difference is that credit wrapping is done by a monoline insurance company. These insurance companies work exclusively to improve the credit ratings of bonds. These insurers take a premium from issuing companies. Against this premium, they provide insurance to the investors. Hence, even if the borrower goes bust, the insurance company will pay the agreed upon principal as well as interest. As a result, investors do not have to consider the credit ratings of bond issuers. Rather, only the ratings of insurance companies remain relevant. Credit wrapping is commonly used by many municipalities when they issue bonds.

    Subordination / Tranching:

    • Securitized financial products such as asset-backed securities (ABS) are issued in classes, or tranches, of securities, each with its own credit rating. The tranches are categorized from the most senior to the most subordinated, or junior. Credit enhancements are attached to the highest-rated tranches, giving their buyers priority in any claims for repayment against the underlying assets. The junior tranches carry the greatest risks and pay the highest yields. If a loan in the pool defaults, any loss is absorbed by the junior tranches. Tranching is a credit enhancement method which was made infamous by the 2008 mortgage crisis. Under this method, the issuer divides securities into tranches. The first tranche is the riskiest and absorbs all losses before they are passed on to anyone else. This method of loss distribution is different. Normally, losses are equally borne by all bondholders. However, tranching makes this distribution unequal. As a result, some bonds become riskier whereas others become less risky. This allows the issues to change the rating of some bonds to a higher level whereas the ratings of other bonds are reduced. The effect on the cost of borrowing may not be much. However, tranching makes it possible to sell risky assets to pension funds and mutual funds who are only authorized to buy high rated securities.

    Surety Bonds

    • These bonds or insurance policies are provided by an insurance company to reimburse the asset-backed security for any losses. An ABS paired with surety bonds has a rating almost equal to that of the surety bond’s issuer.

    Letter of Credit

    • A bank issues a letter of credit as a promise to reimburse the issuer for any cash shortfalls from the collateral, up to an established amount.

    To sum it up, there are many credit enhancement techniques which are available to the issuer which can help reduce the overall cost of borrowing. This is the reason why there are special intermediaries who exist to facilitate credit enhancement.

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