‘Pre-export Finance Facility Agreement Promotes Market Efficiency’
Export business practitioners have been advised to embrace pre-export finance(PXF) as a means of accessing capital to fund their exports.
There are endless opportunities for Nigerians to access foreign exchange through the export of goods and services from various commodities, especially as the country was being positioned as a hub for self-sufficient production.
However, export business is a capital intensive and how businesses access export funds is critical to the success or failure of developing a working export model.
To Trade Finance Partner at Hogan Lowells, David Leggott, described the PXF as a good solution to export financing.
Speaking at Loan Market Association(LMA)’s training programme in Lagos, Leggott said traditionally , many producers of goods and commodities, predominantly in emerging markets, were not considered to be satisfactorily bankable for the purposes of obtaining finance by more orthodox means, saying the PXF
structure was developed in order to mitigate a number of risks and provide lenders
with a better chance of being repaid.
According to him, in a typical PXF facility, funds are advanced by a lender or syndicate of lenders to producers to assist them in meeting either their working capital needs or capital investment needs.
“The funds advanced are then repaid, together with interest, from
proceeds generated under certain export contracts entered into by the producer/
borrower and secured in favour of the lenders. To this end, a typical PXF facility agreement will contain various provisions which focus on the ability of the borrower’s
production activity with a view to ensuring that sufficient income is being generated to service the amounts borrowed,” he said.
Leggott disclosed that the PXF Agreement was created in response to increased demand from practitioners in the pre-export finance market, who felt that a LMA recommended form would help improve efficiencies within the PXF market, by providing a common framework and language for PXF transactions.
“As the authoritative voice of the syndicated loan market in Europe, the
Middle East and Africa (EMEA) the LMA works with lenders, law firms, borrowers and regulators to educate the market about the benefits of the syndicated loan product, and to remove barriers to entry for new participants,” he said.
He stated that the agreement assumes a traditional pre-export finance structure whereby a term loan facility is made available to a borrower who is the seller of specified products, to specified buyers, under sales contracts, with security taken
over those sales contracts, associated letters of credit, and certain bank accounts
into which payments under the sales contracts are made or swept.
“The document contains provisions specific to pre-export finance transactions in relation to those sales contracts and certain cover ratios by reference to which performance under those sales contracts is tested,” he said.
According to Leggott, promoting market efficiency has always been one of the key
objectives of the LMA.
“It seeks to encourage liquidity and transparency in the primary and secondary syndicated loan markets in EMEA. This is done by establishing sound, widely accepted market practice. It seeks to promote the syndicated loan as one of the key debt products available to borrowers across the region. It is increasingly looking to achieve this via various education initiatives,” he said.
He added that the LMA facility agreement for pre-export finance
transactions represents an additional move by the LMA into a different area of the
syndicated loan market, and demonstrates its desire to extend its suite of documentation to include more specific debt sectors.
“It is hoped that this will result in bringing about the same benefits to these markets which LMA documentation has already achieved so successfully in the corporate lending space. He hopes that it will be a useful starting point for drafting facility agreements for PXF transactions, and that it will lead to more efficient and productive negotiation of documentation,” he said.