Pre Export Finance – What is it and how is it used?
Pre-export finance (PXF) is a type of finance product with a specific aim of providing finance for producers of commodities and other products. The reasoning behind these facilities is so that it can make the underlying producer a credible partner to finance; so that the product is available.
How is pre-export finance used?
A PXF is very different to the more vanilla type facilities; such as corporate loans against the balance sheet of the borrower.
In a PXF funds are provided directly from the lender or a syndicate of financiers directly to producers; in order to assist with the working capital needs of the company. Raw materials can be purchased along with processing, storage costs and transportation.
Usually, a PXF will have a tenor of 1 to 5 years, but it is common for facilities to be amended and restated throughout their life.
Clauses within agreements will focus on the borrower being able to produce commodities and sell product.
What are the key legal provisions?
- Offtake agreements
- Top-up clauses
- Information and reporting
- Details on production and sales
- Debt service cover ratios, and
- Governing collection accounts
How do you take security in PXF?
We will usually see:
- Rights of assignment by the producer under an ‘offtake contract’;
- Charge over collection or segregated bank accounts that proceeds from a sale are paid into; and
- Security over the goods or commodities.
It is important to note that registering security in different jurisdictions along with perfection requirements and governing law in enforcement situations need to be taken into consideration. This is along with the understanding of how the goods move and where security is taken throughout.
Lawyers usually use the PXF Loan Market Association documentation; which is effectively a template of what a PXF facility should look like prior to making it relevant to a specific deal.
What is a Prepayment facility?
A buyer will pay for product in advance; so that producers are able to manufacture goods. Therefore a facility is extended to the buyer of goods; that is used to pre-pay for commodities. Thus, providing producers much needed credit and the purchasing party can agree to the long-term supply.
How are prepayments agreed?
- An agreement outlines the prepayment that are to be funded by the off-taker and paid to the producer for commodities (the sales or off-take contract could incorporate this); and
- A facility agreement between the off-taker and financier where the loan is financed
It is important to note that under the contract between the producer and buyer or offtaker; there will be an agreement setting out what is pledged by the producer. There will be a similar document setting out what is pledged by the offtaker to the lender.