Structuring Prepayment Transactions in the Commodities Markets

Key Issues in Documentation, Credit Support & Third-Party Financing for Purchase and Delivery of Oil & Gas, Metals, Other Commodities

Recording of a 90-minute premium CLE video webinar with Q&A


Conducted on Thursday, February 11, 2021

Recorded event now available

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Program Materials

This CLE webinar will analyze the structuring and documentation of prepayment transactions utilized in the commodities markets by purchasers and suppliers. The panel will discuss the benefits of prepayment structures and strategies for mitigating the associated risks.

Description

Prepayment transactions are utilized to provide working capital in connection with the purchase and delivery of oil and gas, metals, and other commodities. Prepayment transactions provide a working capital solution for suppliers who lack a large balance sheet or access to other capital sources, particularly in distressed markets. Counsel to the working capital provider must be prepared to structure and document the transaction to address credit (including collateral and intercreditor considerations) and other risks associated with the purchaser's advance of funds (or other credit support) to the supplier.

Typically, there are two documents central to the transaction, which sometimes are combined into one agreement. The commercial contract (or sale contract or offtake agreement) provides the quantity and specifications of the product to be supplied, pricing and terms of delivery, and provisions for insurance and transfer of title. The prepayment (or advance payment or collateral) agreement includes any security, credit support, or other conditions which must first be satisfied before payment is made, and how the advance of the prepayment is repaid (typically by delivery of the product).

Deal terms can be complicated by factors such as the supplier's perceived risk, issues inherent in the industry sector, and any political, currency, or other risks associated with the country where the supplier and product is located. Care must be taken to ensure that both pieces of the transaction work seamlessly together.

Listen as our authoritative panel, consisting of Scott Le Bouef, Alex Cota, and Brian Rogers, discusses the mechanics and documentation of prepayment transactions.

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Outline

  1. Advantages and risks associated with prepayment transactions
  2. Common structures
  3. Documenting the transaction
    1. Commercial contract (or sale contract or offtake agreement)
    2. Prepayment or advance payment agreement
    3. Transfer of title
  4. Mitigating risk
    1. Credit insurance
    2. Domestic bank guarantees or standby letters of credit
    3. Security interest in assets of the supplier
    4. Financial and other negative covenants
    5. Intercreditor Issues

Benefits

The panel will review these and other critical issues:

  • What are the advantages of prepayment transactions for a supplier or purchaser/working capital provider?
  • What are the key terms of the principal agreements?
  • How is the prepayment by the purchaser documented, and what are the primary concerns?
  • What are the most common forms of collateral and other credit support?

Faculty

Cota, Alex
Alex Cota

Partner
Stroock & Stroock & Lavan

Mr. Cota is a debt finance partner practicing in the firm’s Financial Restructuring Group and serves as the...  |  Read More

Le Bouef, Scott
Scott Le Bouef

Partner
Stroock & Stroock & Lavan

Mr. Le Bouef is a member of the firm's Commodities and Derivatives Group. He represents clients in a wide variety...  |  Read More

Rogers, Brian
Brian R. Rogers

Attorney
Stroock & Stroock & Lavan

Mr. Rogers advises hedge funds, private equity funds, financial institutions, and private companies in a variety of...  |  Read More

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