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In Today's Low Yield Environment - Where Can You Find an 8% per Annum Return?

LONDON, June 8, 2015 /PRNewswire/ --

The answer is trade finance. One of the world's oldest and largest financial activities - helping to support and facilitate an estimated $18 trillion dollars worth of global exports of merchandise annually.

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Bank-intermediated trade finance (or trade finance, in short) performs two vital roles: providing working capital tied to and in support of international trade/transactions, and/or providing means to reduce payment risk. The principal alternative to bank-intermediated products is inter-firm trade credit.[1]

[1]Bank for International Settlements' (BIS) - Trade finance: developments and issues. January 2014.

Banks providing trade finance are witnessing an increasing misalignment between economic and regulatory capital requirements. This presents an opportunity for an investment which could serve both as a transfer of trade finance risk and as a means for a bank to increase its trade finance return on equity.

Markham Rae's trade finance strategy provides the full benefits of the superior risk adjusted returns of trade finance without the connected operational and scalability problem. The returns are paid in the form of a quarterly payment and are therefore a valuable and predictable source of income for pension funds which require income.

Markham Rae has a dedicated trade finance team who have a proven track record of success with the strategy. The investment structure addresses concerns for all stakeholders: investors, banks and regulators.

A 60 second interview with Luigi La Ferla, Senior Portfolio Manager, Markham Rae who has a 30-year trade finance track record. 

Can you start by explaining what Trade Finance is? 

Yes, of course - trade finance is one of the world's oldest financial activities and forms a large percentage of the commercial banking business. Banks use Letters of Credit, short term loans, guarantees and other instruments to support around $7 trillion a year to businesses shipping goods and providing services between countries. The loans are on average less than one year to maturity, retain title (at a minimum) to the item being traded, and tend to be small and repeating. Over the years banks have become highly adapted to sourcing and managing these assets and as a result they intermediate the vast majority of the Small to Medium Enterprises (SMEs), Emerging Market financial institutions and South to South international trade finance flow.

"In 2008-9, a sharp reduction in trade and investment flows, exacerbated by a fall in aggregate demand and the drying up of trade finance, helped transmit the economic shocks to producers and traders in developing economies…"  Roberto Azevêdo, WTO Director-General.  

What are the key benefits for Local Authority investors? 

There are some key benefits for local authorities to include the Markham Rae trade finance strategy into their portfolios, which are:

  • Capital repayment and returns. The returns will be paid in the form of a quarterly and predictable payment.
  • Diversification and Granularity.
  • Low correlation to the economic cycle.
  • Socially responsible - global trade is reliant on this method of financing, supporting grass roots trade
  • No exposure to rising interest rates.
  • No legal exposure or liability to the underlying transaction.
  • Alignment of interest between the manager, the investor, the banks and the regulators.

Why is now a good time to invest? 

The banks' international trade finance business is now going through a period of substantial reorganisation with some players exiting the market and others expanding. With increased regulatory capital requirements across all businesses, major banks now allocate dedicated teams to portfolio capital management and risk-weighted asset optimisation. Regulatory capital requirements for typical bank trade finance portfolios are much higher under the current Basel II regulations than they were previously, and will increase yet further as Basel III regulation is phased in over the coming years until full implementation in 2019.

If you are interested in Markham Rae's trade finance strategy, please visit our website at http://www.markhamrae.com


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