There Is A New World Order -
We Need To Be Innovative With What Capital We Can Realise
White Paper, Australian Mining Congress, Sydney, 18th November
With a future of punishing commodity volatility, How Bad Can it Get
recession/depression and an extended credit crisis, mining
companies need to be innovative about their funding The old joke says that a recession is when your neighbour loses his
sources, rely on sustainable routes to market and job and a depression is when you lose yours, but the reality is that
responsibly watch the credit health of their trading partners. economists have no firm benchmark for what distinguishes one
from the other just how far can things go?
We need to face facts a significant change in the world’s financial
order is upon us. Businesses that do not change quickly, could fail. As mining firms we have to be careful and anticipate the amount
As miners do you have the depth of liquidity, capital and and timing of potential demand destruction, possibly of the order
opportunity to change your trading strategies to adapt? of 5%. In the coming years we may also need to be prepared for
further financial market insolvencies and smaller bank and
Financial Risks -“The World Survived counterpart failure.
Meltdown Monday”
There are obvious immediate consequences on our access to
By the time I present to you the credit crunch will have probably capital:
presented yet more shocking news.
• Lending - Access to capital is constrained and reserved for
As my paper deadline approaches, I consider the shocks from the only the most profitable relationship customers; limited
last 2 weeks. Two weeks ago, following the death of Tarp 1.0, the corporate and structured finance lending at much higher
next day saw Fortis being saved by the Benelux governments, margin & fees. Lending becomes short dated, smaller mining
Wachovia saved by Wells Fargo, and struggling mortgage UK companies find trading difficult, possible consolidation;
mortgage lender Bradford & Bingley nationalised. When the
House of Representatives voted against the Paulson plan, markets
around the world reacted as if it were the end of modern life as we
know it. It was a surprise we lasted that week at all and we feared
what would follow.
Last week the global financial system was described as being
“close to a fatal heart attack”. The defibrillators installed by
governments and central banks around the world now look like
they are at least partly working. Bank recapitalisations, massive
liquidity operations and co-ordinated interest rate cuts are taking
effect - there has been a drop in the overnight cost of interbank
lending, sterling overnight rates fell by almost half a percentage
point to 4.69 per cent and overnight Euros, 3.75 per cent. At
longer durations, however, distrust remains. The spread of three-
month Libor over anticipated central bank rates has not changed.
The three-month sterling spread, for example, actually rose
yesterday by 5bps to 209. Until this situation changes: the global
financial system will stay in intensive care. The latest phrase is that
“the patient is conscious but is in reality a long way from being
able to walk”.
The system provides suppliers with automatic discounts to cash
upon invoice and payment approval, while buyers realize higher
margins and a reduced need for working capital.
In our experience, almost two thirds of large firms are looking for
sustainable ways of extending their finance requirements to
counterparts in 2008 and beyond and are seeking to make use of
this type of system.
Also research points to a growing corporate demand for
collaborative financing tools with a 65% increase in live receivables
programs over the last 12 months. We are finding that this type of
financing program is growing more strongly than lines of credit
from relationship banks. The banking community also benefit and
has stressed that these types of new financing solutions offer a
valuable opportunity to consolidate and extend existing customer
relationships and remain willing to fund programs. At the end of
the day it’s easier for bank to take 90 payment risk on a counterpart
than offer large sums over many years.
With potentially large swings in supply and demand we could be
facing a future of punishing price volatility and credit risk insecurity.
Long term price volatility will be hard for any company to manage,
and due to the credit crunch access to capital will be short dated
or could be difficult. We have therefore also adapted this clever
• Trading – Hedge funds and speculative trading desks taking
financing structure to the task of managing credit risk on
positions out to 5 years much constrained; Corporates limit
counterparts.
bank trading, and commodity trading liquidity is much
reduced. Also bank credit “sleeving” activity also reduced
exposing lesser credits who trade much less or leave the
market.
• Shipping rates declines as shippers cancel contracts with ship
owners because of the mounting difficulty of obtaining trade
finance and dry bulk shipping – the movement of large
quantities of coal, iron ore, wheat and other bulk
commodities – has also seen its problems exacerbated by the
unwinding of speculative activity surrounding the sector.
There is a Better Way
Global Energy Finance is a business supported by Global Energy
Advisory and Orbian Corp of the USA. Between our firms we
promote innovative adoption of the proprietary financing and
settlement platform owned by Orbian, the World’s leading
independent supply chain financier (SCF). In 2008 the company
won Global Finance Award for best non-bank SCF provider and is
active in the aerospace, manufacturing, automotive,
pharmaceutical energy and retail sectors. Since 2001, $30bn has
been financed through the system, 100% error free. This is
impressive financial markets technology and Orbian is the only firm
with independent global financing reach. Orbian funds in 40
countries and has over 2,250 clients. Recently a large European
conglomerate chose Orbian for its global supply chain initiative as
funding needs are expected to increase to €10s of billions.
Center -
Credit Enhancement of Traded EneRgy
Credit capital can be sizeable and firms do not want to post any
more than is entirely necessary. Similarly if a company has an In the
Money (ITM) position they want to know they have it covered to
the best of their ability. With commodities exhibiting such volatility,
large credit events could become an endemic feature of the global
commodity markets.
Center is a credit risk product that makes use of the Orbian
proprietary platform for bilateral, multilateral collateral financing
and settlement. Center allows companies to
automatically/voluntarily monetize commodity contracts and
positions and hence clear credit lines.
The Center solution facilitates a collaborative effort between two
companies engaged in normal trading activity. One company/
Center is gaining international momentum. In early July there was
(Obligor) must enter an approved future dated payment
an industry gathering for the main UK and European energy
instruction/obligation into the system in favour of its counterpart.
companies in London. There is also interest from energy firms in
The counterpart can immediately discount the approved payment
Asia and the US. Center was also demonstrated to the specialist
at a cost of Libor, plus a margin, which is based on the credit
credit committee of the European Federation of Energy Traders
quality of the Obligor – a very competitive form of finance.
(EFET), who readily saw the benefits in reducing traditional 20 or
40 day settlement risk to just 2.
For example if Commodity Firm Trader A had a $100mn Out of The
Money(OTM)trading position, and the other counterpart asks
With banking credit lines constrained for the foreseeable future
Trader A to post for either $100mn in cash or an Letter of Credit
and the “sleeveing of deals” fast disappearing, the industry has
(LC) to cover the credit risk, then Trader A could avoid doing this
limited tools to manage their future credit exposure.
by entering a payment instruction into the Orbian system. The
counterpart can immediately discount the $100mn for cash and
The simple financial structure is shown below.
receive the proceeds in 2 days.
Program 1 Program 2
Accounts payable Accounts payable
Supplier Buyer No. 1
Suppliers for Buyer No. 1
Utility Co. Energy AN Other
Buyer No. 1 Utility Co. Energy
For Buyer No. 1 Company
Goods/Services Goods/Services
Receivables $ Receivables $
Sales Sales
$ = Payment due $ = Payment due
Purchaser on Trade Payable.
Purchaser on Trade Payable.
Orbian Financial Used to Repay
Orbian Financial Used to Repay
Services Notes if Supplier
Services Notes if Supplier
Receivable is sold Receivable is sold
Sold Sold
Receivables $ Receivables $
Secured Note Investors Secured Note Investors
Notes Program No. 1 Notes Program No. 1
Conclusion
We need to face facts a significant change in the world’s energy
and financial order is upon us. Recession/depression, cash crisis
and counterpart failure will be an endemic feature of the
commodity markets as we operate our businesses. Capital access
strategies will have to be innovative and Global Energy Finance is
leading the way in this regard. As an example, Center, although
simple in concept may make use of a sophisticated financial market
proprietary mechanism but it is available now for use by the energy
industry and can contribute to state of the art credit risk
management.
For more information contact
aily@globalenergyadvisory.com
Global Energy Advisory
Global Energy Advisory is a specialist energy-sector
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apply financial consequence to future energy market
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Aily Armour-Biggs
minimum of 20 years’ experience in related disciplines. We draw
Global Energy Advisory is led
on our team of senior advisors and consultants to complement
by Aily Armour-Biggs. With
and enhance our modelling scenarios, providing unrivalled
over 20 years’ global energy
clarity in an uncertain energy future.
and banking experience
including key senior industry
Enterprise Wide Risk and
positions, she is one of the
most respected figures in the System Development
industry. Previous roles have Our solutions company – Global
included both Head of Power Energy Solutions – works closely with Microgen plc, one of the
& Utilities UK and Europe for City’s leading business software companies, to offer clients a
The Royal Bank of Scotland and Executive Director UBS clean, efficient and fast track IT delivery. Microgen’s Aptitude
International Corporate Finance. She is a former business process management and business rules framework
Chairman of the Electricity Forward Agreement enables us to advise on best practice price risk management, as
Association in the UK and was a successful power and well as fast, comprehensive and controlled deployment of
energy trader. company-wide risk systems.
Global Energy Finance
Global Energy Finance is a GEA
working relationship with Orbian Corp.
The company has a proprietary finance structure evolved from a
Contact Us Supply Chain Finance (SCF) solution the concept of which was
T: +44 (0) 207 692 0888 initially developed by Citibank and SAP. This solution combines
F: +44 (0) 118 939 3385 trade financing provided by a financial institution, a third-party,
M. +44 (0) 7833 954 817 or internal funds; and a technology solution that unites the
W. www.globalenergyadvisory.com buyer, supplier and the trade financing source electronically. In
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financial markets with global financing capability.
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