Consulting & Finance
Cornerstone has access to substantial non-bank financing and can facilitate financing solutions for commodity industry participants on terms and tenors suitable for their particular business and investment needs.
- Banks are partially or wholly exiting the commodities sector because of
- Capital – Higher capital requirements are increasing hurdle rates for structured commodities transactions, banks are becoming less competitive in the market and are seeking better returns for each dollar of equity capital.
- Regulation – Increased regulatory scrutiny and direct regulatory action, both in threatened legislation as well as in enforcement actions with high ticket fines.
- Reputational risks – Increased media and government scrutiny on bank operations relating to physical commodities.
- Remaining bank funding will likely remain restricted because of
- Capital – Following the G20 summits in Pittsburgh and Brisbane, there is clear global political impetus towards increased capital buffers for systemically important financial institutions.
- Harmonization – To reduce regulatory arbitrage, regulators will continue to push for similar standards globally. US standards, responsible in part for banks’ withdrawal from the commodities sector, will set the benchmark.
- Politicization – Until there is substantial recovery from the Great Recession, banks will remain legitimate political, media and regulatory targets.
- Banks will therefore continue to require high hurdle rates, in terms of return and risk, which makes a wholesale return to commodity trading and financing unlikely in the medium term.
- This presents a substantial challenge for commodities market participants seeking conventional funding sources and structures.
- What is commodity inventory financing?
- Commodity inventory financing (“CIF”) can take many forms but is generally the sale and repurchase of commodity inventory or related assets. Since it is not debt, and is non-recourse to the seller, CIF preserves bank debt and debt capital markets capacity for the client and has a higher financing-to-value ratio than traditional borrowing base lending.
- To date, bank CIF arrangements have been large, bespoke and complex, with substantial documentation and long lead times, often over six months of negotiation, documentation and diligence. This has been driven by banks’ high costs, internal capital and credit requirements and extensive procedural hurdles. These requirements have made deals large to achieve required returns on capital after implementation and maintenance costs, and complex in order to maximize volumes, achieve indisputable true sale, minimize risk and consequent capital charges.
- Many energy sector participants have constrained financing options and substantial inventory holdings, but are not willing or able to enter arrangements of the size and complexity offered by banks. The non-bank financing structures which Cornerstone is able to offer are modular, flexible and more quickly accessible than conventional bank financing.
Types of Commodity Inventory Financing:
- Factoring: Purchase of receivables from sale or refining of commodity
- Finances period from sale to receipt of funds
- Non-physical exposure
- Credit risk on clients of producer, seller or refiner
- Inventory Monetization: Sale and later effective repurchase of commodity inventory
- Eg. purchase of crude oil/product in tank or in floating storage or in pipeline; metal in warehouse; refined product during transportation.
- Effective repurchase on agreed date with premium embedded in price differential or fees.
- Broad application across commodity sector from E&P to refining to distribution to industrial consumers.
- Volumetric Production Payments: Purchase of non-operating royalty interest in confirmed oil or gas properties
- Royalty gives right to receive hydrocarbons upon production, which are passed to seller for marketing
- Funds advanced recouped out of proceeds of hydrocarbon sales