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Earlypay Trade Receivables Trust

IAM Capital Markets View

  • Earlypay Trade Receivables Trust is looking to raise AUD30m via the issuance of AUD22.5m of Class A notes, AUD3.75m of Class B notes, and AUD3.75m of Class C notes.
  • All note classes will be unrated and fully drawn upon settlement with a scheduled maturity date of 8 April 2025.
  • Earlypay will assist in subscribing for the Class B and Class C notes up to AUD7.5m.
  • Earlypay will park excess cash raised from the AUD30m issue in a cash reserve facility to buy eligible receivables over the next three months.
  • The Class B notes will be pass-through notes and will rank subordinated to the Class A notes.
  • The Earlypay Trade Receivables Trust is the primary securitisation vehicle focused on trade finance. The trade finance vehicle has exhibited exceptional performance, with low arrears and zero losses over the last three years. The trade finance securitisation vehicle includes a large equity contribution from Earlypay and a buyback mechanism if there is ageing or bad-debts – which adds further protection for Class A and Class B notes.
  • Earlypay has a stringent credit policy when originating new loans (security and borrower) as well as an appropriate servicing policy for ongoing loan management. While brokers may be involved in the initial assessment of a new borrower, Earlypay retains ultimate ownership of the underwriting/credit decision.
  • The pool currently has some customer concentration risk which is largely offset by the exceptional performance as mentioned above. The pool parameters also restrict the top five customers to less than 75% of aggregate balance, providing comfort to noteholders. Post issue the top five customers will account for less than 75% of the pool.
  • The composition of receivables in the pool will vary during the term, but Earlypay is required to ensure new loans meet the eligibility criteria. Furthermore, Earlypay will need to meet an ongoing compliance of pool parameters (as discussed below).
  • The transaction benefits from several triggers which, if breached, would require the pool to be closed for new business, with all cashflows redirected to repayment of Class A notes first, and then Class B notes, and finally Class C notes. When there is a write-off, the order will be the opposite way around.
  • Based on our analysis, we believe the level of protection is sufficient to provide a good degree of conviction of a full repayment for the Class A and Class B notes in the event of a run-off.
  • When offered in conjunction, invoice and trade provide a complete supply chain solution to an SME.
  • When stock/finished goods are sold, the invoices pass through the Earlypay Invoice Finance facility. As trade loans become due, Earlypay builds a reserve in the Invoice Finance facility – either through a reduced advance rate against new invoices and/or by holding the residual balance on receipts from debtors.
  • Earlypay uses the reserve in the Invoice Finance facility to repay the trade loan and the remaining exposure in the Invoice Finance facility is extinguished upon receipt of payment of invoices from the end debtor. This is a continuing cycle.

Key Indicative Portfolio Characteristics (March 2022)

Total Receivables $24,410,998
No. of Customers 18
No. of Contracts 134
Avg. No. of Contracts 8
Max Customer Receivable $6,866,133
Average Receivables Size $1,356,167
WA Interest Rate* 14.68%
Arrears Rate** 0.0%
Loss Rate 0.0%

*Weighted according to outstanding principal balance.
**Arrears defined as overdue by 31+ days

Background

Earlypay (ASX: EPY) is an Australian non-bank finance company who provides secured finance to SMEs in the form of invoice and equipment finance. Invoice financing makes up almost two-thirds of Earlypay’s revenue. Noteholders should note this facility will include trade finance only. Trade finance is typically offered in conjunction with an existing or new invoice finance facility. Trade receivables provides cash flow to bridge the period between:

  • When stock is ordered and paid for;
  • When stock is received/landed and available for on-sale as inventory; and
  • When receipts from tax invoices issued to the end user/customer/purchaser are uploaded into Invoice Financing.

Trade Finance can apply to both domestic and international trade transactions. Earlypay’s trade finance product is an adjunct of invoice financing. Trade finance clients must have an invoice finance facility that operates in tandem with the trade finance facility. Together, the invoice and trade finance facilities provide a complete supply chain finance solution for importers/resellers, providing access to working capital from the time the orders are placed with suppliers until the time that payment is received from the importer’s customer.

Trade finance options range from AUD20k to AUD15m respectively. Earlypay provides a payment of the facility which will not represent more than 100% of the client’s eligible debtor ledger. The finance period is expected to match the trade terms of the underlying trade transactions but not exceed 365 days or 12 months.

In typical cases, the finance period is between 60-180 days. The facility period will match the terms of the invoice finance facility. Earlypay legally owns the receivables and the end debtor pays directly to Earlypay.

Earlypay is run by CEO Daniel Riley and has a market capitalisation of c.AUD132m (as at March 2022). Recent half year financial results can be accessed here: Announcements (asx.com.au).

Cash Flow Conversion Cycle

The clients in this pool have a corresponding Invoice Finance facility with Earlypay. This facilitates management of a client’s cashflow by Earlypay, with the Invoice Finance facility building a reserve for payment of trade loans as they fall due.

Trade and Invoice Finance is a complete supply chain funding solution for a client, meaning other funders (except for specific equipment) are not required and Earlypay will have first ranking General Security Agreement (GSA) over a client’s business (incorporating first ranking security over receivables) and often property security in addition – particularly for larger exposures.

The combination of controlled advance rate against invoices and first ranking GSA over a client’s business (i.e., Earlypay is in control of any receivership, including cash collections and asset sale and is the first ranking creditor) means risk mitigation measures are far more substantial for Earlypay than a stand-alone Trade Finance provider. Also, for perspective, Earlypay’s overall loan book is AUD300m – so while one customer may be a large exposure in the Trade Finance pool, it is modest as part of Earlypay’s overall portfolio.

Chart 1. Cash Flow Conversion Cycle

Source: IAM Capital Markets

All Earlypay lending is asset backed, i.e., in the event of customer failure, Earlypay would expect to recoup its exposure through invoice collections and a stock/asset sale.

Via: first ranking GSA over a client’s business (incorporating first ranking security over receivables) and often property security in addition.

Note: the GSA incorporates equity in a client’s business alongside first ranking security over receivables.

Cash Flow Waterfall

The pool is structured to only hold certain loans originated by Earlypay that meet the eligibility criteria. In addition to the type of loans that can be included in the pool, there will be certain pool parameters to ensure the overall quality of assets.

Allocations of cash flows received (i.e., interest and principal payments) will be allocated in accordance with pre-determined cash flow priorities. Consistent with other securitisations, interest and fees received from loans will be used to pay the securitisation costs as well as the interest of the Class A, Class B, and Class C notes.

Principal received from loans will be used exclusively to pay down the notes. Payments will be made in line with priority ranking (i.e., Class A notes first and then Class B notes and finally Class C notes) while losses will be allocated the opposite way around. As loans are repaid, new loans will be transferred into the pool which will need to meet the eligibility criteria and certain pool parameters.

Eligibility Criteria

Below is a summary (see IM for more comprehensive definitions):

  • Loans need to be for an acceptable purpose
  • Should not include any loan subject to COVID-19 hardship arrangements
  • Loans in arrears cannot be placed into the pool
  • Industry that is an acceptable industry
  • Goods which are acceptable goods
  • Countries which have an OECD Country Risk Grade of 4 or less
  • Has appropriate marine and business insurance
  • Maximum single facility limit of AUD15m
  • No facility to represent more than 100% of a client’s eligible debtor ledger
  • Funding period to match the trade terms of the underlying transactions (but less than 365 days or 12 months)
  • Facility period to match the terms of the invoice finance facility (typically 365 days or 12 months)
  • Ability to include 25% of a standalone trade finance product as long as trade finance loans in that standalone pool are similar to original pool
  • Ability to buyback trade finance loans (in arrears/not in arrears) to rectify or cure a condition/term

Pool Parameters

Below is a summary (see IM for more comprehensive definitions):

  • Industry Exposure (Construction: 30%, Manufacturing: 60%, Wholesale: 40%, any other industry: 30%)
    • Wholesale Industry cap to be higher of AUD12m or 40% for the first 12 months
    • Manufacturing Industry cap to be higher of AUD14m or 60% for the first 12 months
    • Other Industries cap to be higher of AUD8m or 30% for the first 12 months

If there are gaps in Industries cap, ability to rectify the issue through additional contribution on Class C or Equity notes.

  • The top five customers to be less than 75% of aggregate balance

The top 5 client concentration cap can be rectified by additional contribution on Equity notes. For example, if top 5 client book exceeds 75% cap by AUD1.5m, we’ll contribute AUD1.5m to the Trust through additional Class C or Equity notes.

  • An Arrears cap of 8%
  • A Net loss cap of 6%

The Arrears cap will be a soft cap while the Net loss cap will be a hard cap. The issuer has 30 days to cure the arrears cap – i.e., buyback receivables before it would result in a breach that would require an Amortisation Event. The Net loss cap is a hard cap and rapid amortisation occurs (across Class A, then Class B, then Class C) with no Equity pick allowed.

Source: Earlypay Pool Parameter Report

Details of the Indicative Pool

As at March 2022, the top five customers accounted for c.76% of the pool. However, post issue the top five customers will account for less than 75% of the pool. We note that these loans have exhibited exceptional performance with low arrears and losses over recent periods. The pool also consists of approximately 150 loans with an average loan size of c.AUD200k. Earlypay has a long operating history in trade finance which should translate into solid performance.

Note: Earlypay will park excess cash raised from the AUD30m issue in a cash reserve facility to buy eligible receivables over the next month.

Table 1. Details of the Indicative Pool (March 2022)

Client # Balance Outstanding (AUD) Average Annual % Rate Term $ of Contracts
A 503,230.72 18.96% 180 2
B 35,520.90 14.60% 90 1
C 1,992,842.37 13.00% 120 8
D 695,652.33 17.00% 180 21
E 6,866,133.14 10.95% 60 9
F 38,572.24 19.00% 90 2
G 67,982.22 19.00% 120 2
H 44,170.10 15.00% 120 1
I 4,565,250.50 19.00% 90 20
J 2,955,869.26 19.00% 90 11
K 171,607.82 19.00% 90 1
L 2,207,788.99 12.00% 120 7
M R765,116.54 12.00% 90 2
N 380,058.71 12.16% 90 4
O 723,686.40 10.00% 90 4
P 1,507,450.82 15.00% 90 13
Q 341,899.65 19.00% 120 2
R 548,165.71 18.00% 180 24
Total 24,410,998 Average Contract Size $182,172

 

Note: Client numbers removed for confidentiality reasons

Historical Arrears and Loss Performance

Arrears currently sit at zero (use 30+ day arrears in the calculation). Arrears is defined here as everything non-current (i.e., 30+ day, 60+ day, 90+ day arrears). What is noticeable is that 60+ and 90+ day arrears are zero compared to 1-30 and 30+ day arrears. This indicates borrowers may miss a payment but catch up very quickly. Consistent with the exceptional performance of this pool, there have been zero losses over the last three years.

Table 2. Arrears Composition (March 2022)

Balance Outstanding (AUD) Current Balance 1-30 Days 31-60 Days 61-90 Days 91+ Days Arrears Ratio
24,410,998 23,865,040 545,958 0.0%
% Balance Outstanding 100% 98% 2% 0% 0% 0%

Note: arrears here is defined as everything non-current (i.e., 30+ day, 60+ day, 90+ day arrears)

Chart 2. Balance by Sector (March 2022)

Source: IAM Capital Markets

Chart 3. Balance by Time Period (March 2022)

Source: IAM Capital Markets

Chart 4. Arrears Ratio (March 2022)

Source: IAM Capital Markets

Historical Arrears and Loss Performance

Arrears currently sit at zero (use 30+ day arrears in the calculation). Arrears is defined here as everything non-current (i.e., 30+ day, 60+ day, 90+ day arrears). What is noticeable is that 60+ and 90+ day arrears are zero compared to 1-30 and 30+ day arrears. This indicates borrowers may miss a payment but catch up very quickly. Consistent with the exceptional performance of this pool, there have been zero losses over the last three years.

Table 3. Historical Arrears Composition (March 2022)

Balance Outstanding (AUD) 1-30 Days 31-60 Days 61-90 Days 91+ Days
2021 148,647,930 8,149,254 3,199,164 1,466,948 1,416,268
Qtr 1 18,343,516 2,765,977 1,232,051 283,538 24,090
Feb 8,769,225 2,663,816 409,469 89,721
Mar 9,574,292 102,160 822,582 193,817 24,090
Qtr 2 32,260,634 3,040,481 1,251,767 967,972 1,352,941
Apr 9,024,281 885,991 134,561 765,289 54,340
May 10,300,191 1,618,419 384,276 54,877 714,017
Jun 12,936,163 536,071 732,930 147,806 584,583
Qtr 3 41,801,298 2,039,429 507,041 189,108 39,238
Jul 13,148,292 788,575 146,060 84,732
Aug 13,729,051 958,337 187,323 37,181 39,238
Sep 14,923,954 292,517 173,657 67,195
Qtr 4 56,242,482 303,368 208,304 26,330
Oct 15,902,951 140,198 139,032 26,330
Nov 18,765,461 69,272
Dec 21,574,071 163,170
2022 52,410,204 1,270,407 288,747
Qtr 1 52,410,204 1,270,407 288,747
Jan 23,622,472 166,315 200,915
Feb 28,787,732 1,104,093 87,832
Mar 24,410,998 545,958

Table 4. Details of the Receivable Pool (March 2022)

Pool Summary
Total Receivables Balance $24,410,998
Total no. of Clients 18
Total no. of Contracts 134
Avg. no. of Contracts 8
Max. Client Receivables Balance $6,866,133
Avg. Receivables Balance $1,356,167
Maximum Payment Term 180 days
Weighted Avg. Interest Rate 14.68%

Table 5. Outstanding Receivables Balance

Original Balance No. Clients % of Clients Receivables Balance % of Pool
$0 to $50,000 3 16.67% 118,263 0.48%
$50,001 to $100,000 1 5.56% 67,982 0.28%
$100,001 to $250,000 1 5.56% 171,608 0.70%
$250,001 to $500,000 2 11.11% 721,958 2.96%
$500,001 to $1,000,000 5 27.78% 3,235,852 13.26%
$1,000,001 to $2,000,000 2 11.11% 3,500,293 14.34%
$2,000,001 to $4,000,000 2 11.11% 5,163,658 21.15%
$4,000,001 to $7,000,000 2 11.11% 11,431,384 46.83%
$7,000,001 + 0 0.00% 0.00%
18 100% 24,410,998 100%

Table 6. Client's # of Contracts

# of Contracts No. Clients % of Clients Receivables Balance % of Pool
0 to 2 8 44.44% 1,968,100 8.06%
3 to 5 2 11.11% 1,103,745 4.52%
6 to 10 3 16.67% 11,066,765 45.34%
11 to 15 2 11.11% 4,463,320 18.28%
16 to 20 1 5.56% 4,565,251 18.70%
21 to 25 2 11.11% 1,243,818 5.10%
26 + 0 0.00% 0.00%
18 100% 24,410,998 100%

Table 7. Annual Interest Rate

Annual Interest Rate No. Clients % of Clients Receivables Balance % of Pool
10.00% to 11.00% 2 11.11% 7,589,820 31.09%
11.01% to 12.00% 2 11.11% 2,972,906 12.18%
12.01% to 13.00% 2 11.11% 2,372,901 9.72%
13.01% to 14.00% 0 0.00% 0.00%
14.01% to 15.00% 3 16.67% 1,587,142 6.50%
15.01% to 16.00% 0 0.00% 0.00%
16.01% to 17.00% 1 5.56% 695,652 2.85%
17.01% to 18.00% 1 5.56% 548,166 2.25%
18.01% + 7 38.89% 8,644,412 35.41%
18 100% 24,410,998 100%

Table 8. Client Payment Terms

Payment Term No. Clients % of Clients Receivables Balance % of Pool
0-60 1 5.56% 6,866,133 28.13%
61-90 9 50.00% 11,143,133 45.65%
91-120 5 27.78% 4,654,683 19.07%
121-180 3 16.67% 1,747,049 7.16%
18 100% 24,410,998 100%

Table 9. Client State

State No. Clients % of Clients Receivables Balance % of Pool
VIC 9 50.00% 11,509,599 47.15%
NSW 4 22.22% 8,283,378 33.93%
QLD 4 22.22% 3,110,570 12.74%
SA 1 5.56% 1,507,451 6.18%
WA 0 0.00% 0.00%
Tas 0 0.00% 0.00%
NT 0 0.00% 0.00%
18 100% 24,410,998 100%

Table 10. Client Industry

Industry No. Clients % of Clients Receivables Balance % of Pool
Manufacturing 6 33.33% 12,330,426 50.51%
Wholesale 9 50.00% 11,528,493 47.23%
Professional, Scientific, and Technical Services 1 5.56% 171,608 0.70%
Retail 0 0.00% 0.00%
Construction 1 5.56% 341,900 1.40%
Other Services 1 5.56% 38,572 0.16%
18 100% 24,410,998 100%

Table 11. Conditions of the Notes

Class A Notes Class B Notes Class C Notes
Issuer Earlypay Trade Receivables Trust
Trustee Perpetual Trustee Company Limited in its capacity as trustee of the Earlypay Trade Receivables Trust
Manager CF Management Services Pty Ltd
Frequency Monthly Monthly Monthly
Aggregate Amount AUD22.5m AUD3.75m AUD3.75m
Interest Rate 1m BBSW + 6-6.5% 1m BBSW + 8-8.5%
CE 25% 12.5% 0%
Notional CE AUD7.5m (Class B and Equity or Class C) AUD3.75m (Equity or Class C)
Scheduled Maturity Date 8 April 2025 8 April 2025 8 April 2025
Issuer Extension Option 1 year right to extend for a 2% step-up in principal 1 year right to extend for a 2% step-up in principal 1 year right to extend for a 2% step-up in principal
Issuer Call After year 1 at 101% at each coupon payment date. After year 2 at 100% at each coupon payment date. After year 1 at 101% at each coupon payment date. After year 2 at 100% at each coupon payment date. After year 1 at 101% at each coupon payment date. After year 2 at 100% at each coupon payment date.

Approach to Risk Assessment and Servicing

The credit policies of the originator and the way the business assesses its risk and servicing is described below. When assessing a client’s suitability for trade finance, the following may need to be considered:

General

For Credit assessment and risk rating purposes, TF facility limits are assessed as part of a Customer Group and will be subject to normal commercial lending assessments.

Review to ensure:

  • Country, Industry and Counter party risks are assessed and understood
  • Foreign currency risk is understood and where appropriate mitigated by using Currency risk
    management products
  • Customers’ business, trade finance operations and quality of debtors are understood
  • Term of the facility aligns with the trade terms and matches the trading cycle (the time it takes to purchase and self-inventory and convert sales to a Tax invoice)
  • Confirmation of PPSR lodgement (if applicable).
Commercial terms of Trade
  • Sets out the basis for the sale and purchase of goods and Incoterms rule.
  • Embodied in either the commercial contract, or buyer’s purchase order and contain the terms and conditions of sale and purchase.
Supplier

Review is required for all suppliers prior to TF funding. This may include a check on the supplier via Equifax’s International Reports or similar or payment history with the client.

The information generally received from this report includes but is not limited to:

  • Company Profile.
  • AML/CTF Issues.
  • Structure and Ownership.
  • Company Location and contact details.
  • Business type and Industry sector.
  • Business Activities.
  • Director details.
  • Key Facts.
  • Credit Rating and Risk Analysis.
  • Adverse data.
  • Financial Summary.
  • Trade activities.
  • Dishonour checks.
  • Litigation against company.
  • Financial and legal status.
  • Bank reference.
  • Trade references.
  • Competitors.
  • Related parties etc.

Historical analysis of buyer/seller relationship, whether the supplier is a related party or if there are any contra arrangements, issues, and length of relationship.

Payments will be made direct to the supplier.

Each approved supplier is reviewed to ensure an acceptable supplier profile.

Incoterms

Incoterms are a set of internationally recognised trade terms, published by the International
Chamber of Commerce.

Incoterms rules describe task, cost and risk involved in the delivery of goods from seller to buyer

There are 11 sets of Incoterms rules (2010 rules) which define the following trade transactions
between seller and buyer:

  • Responsibility for cost (i.e., freight, insurance and custom duties)
  • Customs clearance (export and import)
  • Point of risk transfer from seller to buyer
  • Place or point of delivery
  • Incoterms rules do not replace the need for a commercial agreement
  • They do not cover all possible legal practical issues arising from a trade transaction
  • One of the key areas not governed by Incoterms rules is the transfer of property or title to goods. This will need to be set out in the commercial agreement
  • The most common Incoterms for imports into Australia are
  • FOB – Free on Board
  • CFR – Cost and Freight
  • CIF – Cost, Insurance and Freight

FOB – Free on Board

“Free on Board” means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes to the buyer when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.

Credit Considerations

While the incoterm states that the Seller is to place the goods “Free on Board” the vessel in reality it is accepted that the Seller arranges for the goods to be delivered to the Port of Loading. The Buyer is responsible for arranging shipment and Marine Insurance from the port of loading.

Seller may arrange:

  • For the goods to be delivered alongside the vessel at the port of loading, and the

Buyer may arrange:

  • A shipping agent to load the goods on board and delivery to the buyer’s premises
  • Marine Insurance from the shipped-on board date on the vessel Therefore:
  • All shipping documents from the Buyer are to be supplied to EARLYPAY as a copy, and evidence of Marine Insurance (as set out in clause 7. Legal Requirements)

Risks and Mitigants

Risk: Goods not manufactured or shipped

Mitigant: Funding only made available upon receipt of a copy of documentation as set out in the commercial agreement (e.g., Bill of Lading, invoice, etc). This is a control point for each drawdown.

Risk: Deposit paid by EARLYPAY, however, goods not manufactured or shipped.

Mitigant: Deposit details would be outlined within the supply agreement or proforma invoice. Due diligence on the supplier in conjunction with Equifax International report (if required) would highlight any previous performance issues. Loan would also be payable from availability within the Invoice Finance facility.

Risk: Marine Transit Insurance not in place in terms of Incoterm.

Mitigant: Policy is to ensure a current Marine Transit Insurance, noting EARLYPAY’s interests, is held on file and cross referenced prior to drawdown of Trade loan.

Risk: Containers fall off the ship in transit to Australia.

Mitigant: A current Marine Transit Insurance, noting EARLYPAY’s interests, is held on file and cross referenced prior to drawdown of Trade loan. Any shortfall between insurance claim and Trade loan amount to be recovered from availability within the Invoice Finance facility.

Operational Requirements

Operations team to understand and adhere to approval condition and relevant shipping documents
required for each drawdown.

Discrepancies are to be raised with the National Manager Trade Finance

CFR – Cost and Freight

“Cost and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes to the buyer when the goods are on board the vessel the seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination

Credit Considerations

The seller arranges and pays for the freight from port of loading to the port of discharge and this cost is included in the commercial invoice (usually it’s not itemised).

Seller must arrange:

  • A shipping agent to organise for the goods to be loaded on board the vessel at the port of loading, and the

Buyer must arrange:

  • Marine Insurance from the shipped-on board date on the vessel

Therefore:

  • All shipping documents from the buyer are to be supplied to EARLYPAY as a copy, and evidence of Marine Insurance (as set out in clause 7. Legal Requirements)

Risks and Mitigants

Risk: Goods not manufactured or shipped

Mitigant: Funding only made available upon receipt of a copy of documentation as set out in the commercial agreement (e.g. Bill of Lading, invoice, etc). This is a control point for each drawdown.

Risk: Deposit paid by EARLYPAY, however, goods not manufactured or shipped.

Mitigant: Deposit details would be outlined within the supply agreement or proforma invoice. Due diligence on the supplier in conjunction with Equifax International report (if required) would highlight any previous performance issues. Loan would also be payable from availability within the Invoice Finance facility.

Risk: Marine Transit Insurance not in place in terms of Incoterm.

Mitigant: Policy is to ensure a current Marine Transit Insurance, noting EARLYPAY’s interests, is held on file and cross referenced prior to drawdown of Trade loan.

Risk: Containers fall off the ship in transit to Australia.

Mitigant: A current Marine Transit Insurance, noting EARLYPAY’s interests, is held on file and cross referenced prior to drawdown of Trade loan. Any shortfall between insurance claim and Trade loan amount to be recovered from availability within the Invoice Finance facility.

Operational Requirements

Operations team to understand and adhere to approval condition and relevant shipping documents required for each drawdown.

Discrepancies are to be raised with the National Manager Trade Finance

CIF – Cost, Insurance and Freight

“Cost, Insurance and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. However, the seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. Note, however that the seller is required to obtain insurance for only minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.

The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.

Credit Considerations

The Seller arranges and pays for the freight from port of loading to the port of discharge and Marine Transit insurance and this cost is included in the commercial invoice (usually it is not itemised).

Seller must arrange:

  • Arrange a shipping agent to organise for the goods to be loaded on board the vessel at the Port of Loading, and the
  • Marine Insurance from the shipped-on board date on the vessel

Therefore:

  • All shipping documents from the Buyer are to be supplied to EARLYPAY as a copy, and evidence of Marine Insurance is not required

Risks and Mitigants

Risk: Goods not manufactured or shipped

Mitigant: Funding only made available upon receipt of a copy of documentation as set out in the commercial agreement (e.g Bill of Lading, invoice, etc). This is a control point for each drawdown.

Risk: Deposit paid by EARLYPAY, however, goods not manufactured or shipped.

Mitigant: Deposit details would be outlined within the supply agreement or proforma invoice. Due diligence on the supplier in conjunction with Equifax International report (if required) would highlight any previous performance issues. Loan would also be payable from availability within the Invoice Finance facility.

Risk: Supplier does not insure the goods for transit.

Mitigant: A copy of the relevant shipping documents will include a copy of the Marine Transit Insurance from the Supplier as per Incoterm. The requested drawdown cannot occur until all documentation is checked by the Operations team.

Operational Requirements

Operations team to understand and adhere to approval condition and relevant shipping documents required for each drawdown. Discrepancies are to be raised with the National Manager Trade Finance

Credit History & Financial Underwriting Guideline

Satisfactory credit history of client, its associates, directors, and major shareholders & acceptable financial position with:

 

  • Legitimate trade transactions that relate to Customers Core business or are considered complementary to the business’s objectives and within the directors’ ability and experience levels
  • Finance period must match the trade terms of the underlying trade transactions but will not exceed 180 days
  • Acceptable Year End Financial Reports Incl. Profit & Loss, Balance Sheet, Cashflow Projections, Year to date management accounts. If the historical financial statements evidence losses, it is imperative that EARLYPAY understands the company’s turnaround story as part of the assessment. Forecasts/Projections for the next financial year are required to determine underlying funding requirements of the business. For weak financial profiles, additional security may be required as part of EARLYPAY security structure.
  • Acceptable Detailed aged receivables
  • Acceptable Detailed aged payables (these need to be separated out for the overseas suppliers)
  • Up to Date Full Stock Lists when/where required
  • At least one director is a Resident of Australia
  • Client/Director and Guarantors are not known to be insolvent or bankrupt
Double-dipping in funding It is critical to understand the client’s cash conversion cycle to ensure the appropriate term of the loan collates to the client’s cycle.  At the time goods are sold and an invoice is raised, the client is accessing funding via their IF facility. Once invoices are raised the TF loan will need to be repaid. This is to ensure the client does not double dip in funding.

 

Documentation/Settlements/Legal/Security Guideline

Documentation

All transaction documents for TF facilities (including the TF Facility Agreement and any supporting securities) are currently drafted by external lawyers.

Transaction documents are currently executed by “wet-signing” and execution is certified by external lawyers.

There is capability to electronically execute TF transaction documents and this may be explored in the future. Electronic execution of TF transaction documents would be via a secure and encrypted electronic signature platform with 2 factor identity verification and robust audit trail on signatories to ensure compliance with the State, Territory and Federal Electronic Transactions Acts.

Security
  • All facilities are to be secured by way of a General Security Deed over the borrower (ALLPAAP registered on the PPSR)
  • Priority Deed may be required if client has an existing financier
  • Director / related party guarantees may be required
  • Integrated Facility Deed to ensure cross-collateralised to IF facility.
  • Marine Transit Insurance (refer below) also needs to be assigned to EARLYPAY
  • The insurer has a rating of at least A-.

Marine Transit insurance must include:

  • Institute Cargo Clauses A
  • Strike clauses (Cargo)
  • War clauses (Cargo)
  • Be for an amount no less than 110% of the Cost, Insurance and Freight (CIF) value of the goods/equipment
  • Note the interests of EARLYPAY with all claims payable in Australia
  • Ongoing evidence of insurance is required to be held by EARLYPAY for the life of the facility
  • PSMI security interest registration on the PPSR for the imported inventory
  • For weaker credit profiles, additional security may be sought such as freehold property or tangible security or similar to support transaction
  • Any other documents as required by the Trade Finance Manager/Head of Risk/Chief Operating Officer/Head of Operations or Earlypay’s nominated advisers (Accountant or Legal)
AML/CTF An AML/CTF risk assessment of the Trade Finance product, how it is delivered and how it is transacted must be undertaken and recorded as per Earlypay’s AML/CTF Program.