Caveat Emptor Investor – Banks Lack Transparency in defining Trade Finance Defaults Post 1


So just how do banks go about defining a default around Trade Finance?  I was able to get some insights by reading the prospectus of Citibank’s TradeMaps $1 billion note issue.

First a bit of a background to understand the source assets for these structures.  A Letter of Credit does not provide receivables financing to the seller nor credit to the buyer.  The seller must carry the receivables for a period AFTER the seller has shipped the goods if there are discrepancies.  On the other hand, the buyer has had to put up collateral or his line of credit from the time he placed the order.  Many banks will provide working capital finance for the exporter because of the certainty of payment when the seller’s documents precisely conform (to the location of the comma) to the letter of instructions in the L/C. The take-out for working capital finance is the receivable. As a practical matter most Letters of Credit are paid “on sight”, that is immediately, when all discrepancies are resolved and the bank accepts the bill of exchange.

A few banks have gone the route of developing a structure to sell these financed short term assets to investors.  Citi’s program, called TradeMaps, was completed by Citibank and Santander back in 2013.  As part of the TradeMaps structure, Trade finance products generally fall under three broad categories: “Import Finance”, “Export Finance” and other trade finance products that fall outside of the first two categories. Import Finance can include import loans under letters of credit, documentary collections and open accounts receivables. Export Finance arises includes loans under documentary collections and open accounts receivables as well as bills negotiation under sight letters of credit with full recourse to the related obligor.

As it relates specifically to TradeMaps, the structure raised $1 billion from investors.  This helped both banks take these assets off their books, very important in this new era of lower bank leverage and higher capital costs.  As you can see from the graphic, this was a very complex and expensive structure to set up and maintain.

TradeMaps Structure

Citi Santader loss structure2


Now here is where it gets interesting.  On examination of how the banks define what is a trade finance write off, you will find both banks are pretty lenient, especially Santander.

Santander writes off trade finance assets IF any one of the following is true;

  1. The related Obligor is subject to bankruptcy proceedings for which there is notice that the liquidation phase has been or is to be declared
  2. The trade finance asset is in arrears by more than 4 years!
  3. Santander considers the possibility of recovery on such trade finance assets to be remote. Use of this standard by Santander is consistent with guidance provided by the Bank of Spain.

Citibank on the other hand has different criteria –if the related Obligor is more than 90 days past due on its payment, it is considered a Write-Off.

Tomorrow, we will look at why this matters.

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