No haircuts

Blog | 29 May 2015

Clarissa 2014 web.jpg

Trade debt finances the export and import of goods, is not speculative and should be paid in full. One would have thought this was the whole raison d'être of trade finance.

If eurobonds, syndicated and other loans are treated no differently from trade, what would be the point of all that structuring to secure loans against the flow of the goods? Trade finance creditors work hard for their lower non-speculative returns - in the fond anticipation of being repaid.

I was reminded of this principle when Geoff Wynne and Sean Edwards addressed our TFR Receivables Finance Masterclass students on 19 May. Both speakers have long memories of the 2009 Kazakhstan banking default where definitions of what actually was trade finance determined who got their money back and where the haircuts were. "Know not just who your immediate client is, but who the clients of that bank are, what's being imported and exported, and see as much documentation as you can," said Edwards in a 2011 interview with my predecessor Graeme Burton.

The problem facing Metinvest's creditors is that all of this was done, but nobody could have foreseen the Ukraine crisis, the plunge in commodity prices, along with depreciation of the hryvnia all conspiring to wipe more than US$2bn of its revenues in 2014 and put it in a position of being unable to meet its payment schedules.

In the natural order of trade finance, if pre-export finance (PXF) lenders didn't get their US$113m repayment in March 2015, it would have been worrying if the principal on Metinvest's US$114m outstanding 10.25% notes had got paid two months later on 20 May (they didn't). Of course, none of the lenders could possibly comment - to do so would be illegal. And readers may remember the somewhat painful discussions around the treatment of PXF debt during the Rusal restructuring during the summer of 2014.

With Ukraine's FDI having plunged from US$58bn in 2013 to US$45bn in 2014, investors are clearly adopting a 'wait and see' approach. And it was good to hear from EBRD's annual meeting in Tbilisi that the development bank led from the front by doubling its investment from €500m to €1.1bn.

But as Ukraine rebuilds its economy, it can't afford to send the wrong message about trade finance. So, whatever the outcome of the restructuring discussions, Metinvest needs to ensure that trade does get paid.

Give Feedback