Trade finance advice from the experts
• Firm caters to new and existing players with an eye on cross-border trade in Africa
Opportunities are opening up for local and offshore institutions to participate in trade and commodity finance on the continent; this is in the wake of more onerous capital and liquidity requirements for banks following the implementation of Basel 3 as well as other considerations such as falling commodity prices and it has led to the withdrawal of some banks from the African trade and commodity finance market.
International banks in particular have gone through a process of re-examining their lines of business and the geographic areas in which they operate and, in some cases, this has meant withdrawing from markets, leaving a vacuum that nonbanking financial players are beginning to address as they do not have the same constraints.
In the face of changing conditions Hogan Lovells SA finds itself well positioned to cater to both new and existing trade and commodity players.
Coming from a banking background, Lodewyk Meyer, partner at Hogan Lovells SA, says when he initially started focusing on cross-border Africa trade and commodity finance, it was with a view to serving the banking and finance community across Africa, with a particular focus on trade and commodity finance transactions. “At the time few law firms or practitioners in SA saw the opportunity presented by advising clients across borders and most tended to be inwardly focused and South African-centric,” Meyer says.
“I saw a gap in the market to establish an Africa practice.”
Initially, the focus was on cross-border banking transactions and trade and commodity finance deals.
“The work flowing from SA to Africa was quite limited and there was more work to be done out of London, the Middle East and Asia into Africa.
“This was mainly from financial institutions that made facilities available to traders trading commodities on the African continent and also to other financial institutions, development institutions, governments and emerging African corporations.”
The practice also offers advice on English law and one of the partners in the South African team is dual qualified as both an English solicitor and as a South African lawyer.
“We teamed up to offer high quality, cost-effective advice and product and the combination proved an attractive proposition for clients, particularly with those organisations keeping a sharp eye on their costs.
“As a result, we started winning work from developed market competitors and continued to build our practice into Africa from SA,” Meyer says.
In 2015 the team joined Hogan Lovells to become its sub-Saharan regional practice and this sparked another major growth phase from a transactional perspective.
Looking at the African market as a whole, Meyer says it is interesting to see how the market dynamics have played out on the continent.
“A couple of years ago about 80% of our client base was banks. The balance of our clients was made up of international traders who made finance available to their suppliers. For example, a trader procuring agricultural commodities from a Zambian entity would make credit facilities available so the Zambian organisation could fund the growth of a harvest and supply into a contract with the trader.
“This scenario has evolved with the emergence of nonbanking financiers. Many banks have pulled back from trade and commodity finance for a variety of reasons, such as Basel 3 or falling commodity prices eroding the value of the assets underpinning transactions and transactional volumes, and issues around currency and the convertibility of local currencies.
“The financing of trade has become expensive and difficult. The African Development Bank estimates intra-Africa trade at between $330bn and $350bn annually and the trade finance funding shortfall at around $120bn each year.
“As a practitioner, working for banks is rewarding but a few years ago we took a view that the banks would not be as active in the African trade and commodity finance arena as this market was impacted by Basel 3 and a massive slump in commodity prices.
“US, UK and European investors in capital are all on the lookout for yield and we have seen the development of the alternative financing market as these players have entered the market to take advantage of the vacuum,” Meyer says.
He says the firm is doing a considerable amount of work with institutions operating in the alternative financing market and the funds operating in this market are at least as professional as banks when it comes to doing business.
“The funds that are providers of credit products in the trade finance space are as diligent as banks in assessing the credit, the counterparty, and the sovereign risks.
“However, they are able to make decisions in a week or two and this has improved turnaround times significantly. They are doing transactions that banks are no longer willing to take on and they are slowly filling the massive gap between trade finance demand and supply in Africa.
“The funds are playing a really important role in providing liquidity,” Meyer says.
At this stage, he says most of the funds operating in the market are offshore entities but participation by South African institutions is growing steadily.
US, UK AND EUROPEAN INVESTORS IN CAPITAL ARE ON THE LOOKOUT FOR YIELD AND WE HAVE SEEN THE DEVELOPMENT OF THE ALTERNATIVE FINANCING MARKET