Structuring Prepayment Transactions in the Commodities Markets

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.