commodity trade finance

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Commodity Trade Finance CAIA Zurich

February 2013


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GALENA ASSET MANAGEMENT | CAIA Zurich - FEBRUARY 2013

Contents

Some statistics about world trade 03

Financing the commodity trade flows 06

Commodity trade finance : the market 08

Why invest in commodity trade finance 12

Contacts 13

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Some statistics about world trade I

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Source : WTO


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Some statistics about world trade II

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Source : WTO (*) Financial crisis in 2008 led to a general fall in commodity prices in 2009

(*)


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The ten biggest traders of world commodities

Name 2010Turnover 1

Activities Main Office

Vitol 195 Physical oil trading and refining Geneva, Switzerland

Glencore 108 Metals and minerals, energy and agricultural products Baar, Switzerland

Cargill 108 Metals and minerals, energy and agricultural products Minneapolis, Minnesota

Koch industries 100 Oil refining and transportation, petrochemicals, forestry and paper, and ranching. Wichita, Kansas

Trafigura 79.2 Crude oil, products, non-ferrous, concentrates and refined metals trading andtransportation

Geneva, Switzerland

Gunvor international 65 Oil trading with emphasis on Russia. Has expanded in power and coal trading Geneva, Switzerland

Archer Daniels Midland(ADM)

62 Oilseeds, corn processing, agricultural services, storage and transportation, wheatmilling, cocoa processing and food ingredients business.

Decatur, Illinois

NOBLE Group 56.7 Soybeans, oil seeds, grains, coffee, cocoa, sugar, cotton, coal, clean fuels e.g.ethanol, ferrous and non-ferrous metals and vessel chartering.

Hong Kong, China

Mercuria Energy Group 46 2 Physical crude oil and oil products including fuel oil, middle distillates, naphtha andgasoline. It also trades power, natural gas, coal and biodiesel.

Geneva, Switzerland

Bunge 45.7 Oilseeds and grains, produces sugar and ethanol, mills wheat and corn to makeingredients used by food companies and sells fertilizer in North and South America

White Plains, New York

Total 865.6

Source : The Telegraph, April 2011,1 in USD Billions 2 2009 Turnover

Trading houses extensively use trade finance structures to finance their physical trading

activities. These can have different forms and are generally provided by large internationalbanks. These players are at the heart of international trade flows.

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Financing

Producers Traders Processors Traders End users

Commodity trade finance : the value chain (s impl i f ied)

The different players have different financing needs adapted to their respective production cycles

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Post trade financing (short term)

Borrowing base financing (revolving)

Transactional financing (short term)

Pre-payments / Pre-export finance (medium term)

Origination Destination DOWNSTREAMING


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Commodities generate trade flows that in turn generate financing needs at all stages of thesupply chain:> Producers / exporters> Trading companies> Processors> Importers> End users / distribution

Commodities trade flows intervene at an early stage of industrial processes and economic life indeveloped and emerging countries. They are therefore highly strategic for most countries,industrial companies and end users which makes the financings attached to them strategic too

As a result, financings linked to commodity trade flows have demonstrated a high level ofresilience and robustness, particularly during economic down cycles

FINANCING NEEDS:Pre-payments / Pre-export finance

Transactional financingPost trade financing

Borrowing base financing L e n

d e r s

Commodity trade flows need financing

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> Commodity finance is predominantly a bank market dominated by large commercial banks.European banks are among the top players with global reach (geographies, commodities,borrowers)

> Commodity Trade Finance has grown faster than other syndicated financings:

Development of free trade policies

Growing investment and consumption needs in emerging countries

Significant increase in volumes traded and in prices fuel for growth effect

Growing demand for secured assets due to change in risk appetite by banks, new regulatoryframework and constraints on liquidity

> Despite the credit crisis and tougher regulations several top commodity finance banks have statedthat commodity trade finance remains within their core lending activity. As a comparison these verysame banks have closed or dramatically reduced other lending activities. This demonstrates furtherthe resilience of the asset class through the cycle

> Regulatory capital treatment remains favorable when compared to other lending businessesalthough at a level higher than historical performance

Commodity trade finance : the market

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Commodity trade finance : challenges

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> Growing capital and liquidity requirements> Restrictions on banking business model and activities> More constraints on accounting rules> Greater scrutiny of regulators and governments

> Pressure on European banks to reinforce their capital baseand stable funding

> Greater defiance of USD lenders vis--vis European banks> Banks seeking solutions to meet their funding requirements

of their USD assets base

REGULATIONS

ENVIRONMENT


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Trade finance example - Crude oil from Angola to the US

Pre Export Financing example of Angolan crude oil exports to US refineries

Largest consumer of liquidfuels with 23 mbbls/day

Imports account for approx.50% of consumption

Largest importer of Angolancrude oil with more than

500000 bbls/day

OPEC member

7 th largest producer with1.8 mbbls/day

Crude oil accounts for 90% ofexport revenues and 80% of

GDP

Angola USA

Pool of Lenders1

Based on solid track recordof Angolan crude oil exportsto US refiners, a pool ofLenders will pre-financefuture exports of Angolancrude oil by a local exporter

(the Borrower) to USrefiners.

The financing is secured as the Borrower assigns theproceeds of the exports contracts payable in an offshorecollection account pledged to the Lenders.

The actual and future value of the export proceeds (basedon prevailing market prices) shall at all times representmore than 100+% of the outstanding amounts under thefinancing.

Additional security package can include securityinterest in onshore current and fixed assets.

Offshore Account

Refiner

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1 2 3

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On receipt of the cargo theRefiner pays into an Offshore

Account pledged to the Lenders.The financing is then repeated.

During the wholetransaction price riskis mitigated.!

LocalExporter

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Understanding the commodity

C o m m o

d i t y

( C o

l l a

t e r a

l )

Payment

Corporate

CommodityPrice

Country

Legal

Damage or loss of goods

Understanding and mitigating the risks behind a commodity transaction is at the heart of theexpertise

Mitigants

Self Explanatory

Self ExplanatoryFX

Self Explanatory

Quality & QuantityGoods delivered do not comply with contractual specifications in terms of quantity andquality

Performance

The risk that an importer does not comply with its payment obligation in the context of acommercial contract backing a credit facility

The risk related to the financial health of a counterparty based in most cases on anassessment of the business model, balance sheet and income statements and cash flowanalysis

The risk that commodities price volatility negatively impact the cash flows of aspecific transaction or the value of assets

The risks inherent to the situation of a particular country that may directly or indirectlynegatively affect a transaction

The risk that an exporter does not deliver the goods in the context of a c ommercialcontract backing a credit facility

Track record , letter of credit or payment guarantee

Financial analysis of the company, ownership andstrategy. In-depth liquidity analysis .

Overcollateralization, marked-to-marketadjustments or hedging

Analysis of commoditys strategic importance ,offshore repayments, political risk insurance.

Legal opinions (local and international)

Trade is back to back in USD , offshore repayments

Track record, Client/Supplier relationship,overcollateralization , first class inspectioncompanies

Track record, insurance

Track Record , contractual terms, capacity and costanalysis

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Why invest in commodity trade finance

> Global commodity trade of strategic commodities will continue to grow fuelled by newemerging demand

> The default rate is minimal compared to other debt investments as credit line is secured orbacked by underlying commodity flows. Risk profile is also improved by the strategic natureof commodities that provide a strong incentive to the parties involved to perform their

obligation even in times of stress: commodities need to flow on a continuous basis

> Enables to participate in global commodity trade without being exposed to underlyingcommodity volatility

> Tightening regulations are forcing banks to limit the size of their balance sheets and pushingthem to increasingly syndicate their very good quality assets

> Current risk free levels highly improve the strategys risk return attractiveness.

Today more than ever Commodity Trade Finance represents a stable and de-correlated yieldenhancer

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Contacts

United KingdomGalena Asset M anagement Limited

Portman House2 Portman StreetLondonW1H 6DU

Tel: +44 (0) 207 170 7917Fax: +44 (0) 207 170 7800

Singapore Galena Asset Management Asia Pte. Ltd.10 Collyer QuayOcean Financial Centre #29-00Singapore 049315Singapore

Tel: +(65) 6319 2960Fax: +(65) 6734 9448

SwitzerlandGalena Asset Management B.V.Geneva BranchRue de Jargonnant 51207 GenevaSwitzerland

Tel: +41 (22) 594 6900Fax: +41 (22) 594 6901

This Document has been prepared by Galena Asset Management Ltd, authorized and regulated by Financial Services Authority, for circulation to persons reasonably believed by it to be of a kind described in Article 238(6) of the F inancial Services &

Markets Act 2000 (Promotion of Collective Investment Schemes)(Exemptions) Order 2001 or to whom this document may otherwise lawfully be issued or passed on to give preliminary information about the investment proposition described herein. Itis confidential communication to, and solely for the use of the recipient. It is not addressed to and may not be used by any other person. It expresses no views as to suitability for the individual circumstances of any recipient. This Document may onlybe delivered to a U.S. person who is an Accredited Investor as such term is defined in the U.S. Securities Act 1933, as amended (The 1933 Act), a Qualified Purchaser as defined for purposes of Section 3(c)(7) of the U.S. Investment Company

Act of 1940, as amended (The 1940 Act), and Qualified Eligible Participants as such term is defined under the U.S. Commodity Futures Trading Commission Rule 4.7. It is not anticipated that these securities will be registered under the 1933 Act orqualified under any applicable state securities statutes. Nor is it anticipated that the Fund will be registered as an investment company under the 1940 Act in accordance with Section 3(c)(7) of that Act. This Document is based on, or derived, frominformation generally available to the public which we believe to be reliable. No representation is made that it is accurate or complete. The Trafigura group of companies and those associated with it may have positions in, and may effect transactionsin, securities and instruments of issuers mentioned herein. The presentation has been solely prepared for informational purposes and is not a solicitation or an offer to buy or sell any security or instrument or to participate in any trading strategy. ThePrivate Placement Memorandum relating to the Funds mentioned in this document includes information as to certain risks, supersedes the information contained herein and should be requested and carefully reviewed by persons interested ininvesting in any of the Funds. Past results are not necessarily indicative of future results. Price and availability are subject to change without notice.Examples of transactions contained herein may not represent actual trades and similar results may be obtained only if the parameters described can be duplicated, of which there can be no certainty. Each recipient must satisfy himself as to theobservance of relevant laws and regulations, including obtaining any consent which may be required. Company registration number: 4657028. Country of registration: England. Authorised and regulated by the Financial Services Authority.

For additional informationplease contact:

[email protected]

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