Trade Finance
Potential to access uncorrelated alpha with limited reliance on traditional return drivers.
Reasons to invest
Overview
Trade finance is basically a sub-set of the loan market. It is relatively short-term loans used to finance the physical flow of goods, using those goods as the primary source of collateral within the loan.
Why Trade Finance?
Trade finance can potentially provide an opportunity for investors to access uncorrelated alpha with limited reliance on traditional return drivers.
Short-term loans to facilitate physical cross-border transactions can reconcile the divergent needs of an exporter and importer.
Trade finance has a critical role to play in addressing snags in global supply chains and ensuring that vital commodities continue to flow.
Investment philosophy
Federated Hermes’ Trade Finance Strategy offers investors the potential for a source of uncorrelated return, with low volatility and high return that adjusts with inflation. Trade Finance is an asset class that requires specialised experience including intensive legal and operational due diligence, a deep understanding of risk and how to mitigate it, and relationships with the largest global banks. We believe that as the worldwide demand for trade continues to grow, a diversified pool of trade transactions will consistently deliver the ‘pure alpha’ that investors seek.
Investment process
Trade Finance refers to loans that are made to finance a specific trade transaction. The loans are collateralised by the goods being financed and are self-amortising from the proceeds of the transaction. The loan rates float at a spread over a short duration index, allowing for adjustment to inflation and the lenders build risk mitigants into the deals to reduce the chance of loss.
The Strategy has a highly selective investment process and invests primarily in structured transactions which seek to offer the most attractive risk-adjusted return profile. The portfolio contains a range of loan structures including supply-chain finance, trade loans, corporate term loans, and project finance.
Deals are typically sourced through global banks, specialised insurance companies or traders. Federated Hermes‘ initial due diligence includes an analysis based on the following investment criteria: type of financing structure, reputation of arranger, strength of obligor/guarantor, pricing, risks, and compliance with investment guidelines and the current portfolio.
An initial screening document is produced and circulated to Federated Hermes‘ Trade Finance investment committee members; interest to move forward is assessed.
Once the decision to move forward is made, detailed due diligence is performed based on five quantitative and three qualitative factors:
Quantitative factors
Origination: Assess quality and track record of originator, define originator’s role in the transaction and define originator’s relationship with the borrower
Obligor: A thorough review of obligor including but not limited to credit analysis, shareholders, market position, access to capital markets and quality of audit/accounting firm
Country: A country’s credit rating, historic treatment of trade flows, the importance of the sector to this country and currency convertibility
Sector: Evaluated for: Strategic priority, critical imports, FX earner, macro sector themes, and liquidity and tax/tariff issues
Mitigants: The proposed deal is also evaluated for: production, operational and payment issues in addition to commodity, price, environmental, country and legal/documentation considerations
Qualitative factors
The structure and pricing of the deal are closely analysed with consideration of the portfolio’s yield target, concentration, and tenor.
Deal structure: Tenor, grace period, amortisation schedule, drawing conditions and financing structure
Deal pricing: Relative value of spreads to market, value for risk and return projections
Portfolio: The tenor, yield target and concentration of the Trade Finance portfolio: Concentration analysis includes region, country, sector and obligor structure.
Team
Kazaur Rahman
Portfolio Manager, Senior Investment Analyst
Maarten Offeringa
Portfolio Manager, Senior Investment Analyst
Chris McGinley
Head of Trade Finance Team, Senior Portfolio Manager
Ihab Salib
Senior Portfolio Manager, Head of International Fixed Income Group, Federated Hermes
Product information
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