Photo of Lum Yin Fong, DBS and Shen Xiaobo, Wanxiang Resources.
Holding inventory can be expensive, as this metal and energy trading company will testify. This e-warrant finance solution has enabled the company to increase its tenor from 90 days for account payables financing to 180 days.
Xu Ping
Treasury Supervisor
Wanxiang Resources was incorporated in 2004, acting as the group’s commodity trading and investment vehicle. It is the major participant of commodity trading flow in China and Asia, and is also involved in the energy area. In addition, it owns and operates upstream and midstream assets which can better serve its customers and mitigate risks within the value chain.
in partnership with
The challenge
The company continuously faced the problem of short-term liquidity constraints and comparatively high financing costs. They would typically stock up on certain commodities through the purchase of Standard Warehouse Receipt (SWR1) based on their business requirement, which resulted in the issue of liquidity constraints in certain period of time.
Xu Ping, Treasury Supervisor explains, “In such an economic environment, our inventory is usually volatile and as a result it’s not easy to maintain a fairly stable cost of funding to hold these assets. The cash conversion cycle is comparatively longer due to the market fluctuating, so there is a pressing requirement for flexible working capital support. Traditional short-term loan and account payable financing is not so flexible to drawdown and repay from time to time and the financing cost is hard to negotiate because it is a pure credit line with no security or pledge.”
The solution
In partnership with DBS, Wanxiang Resource Co. Ltd. explored an e-warrant finance solution which has enhanced their working capital cycle. This solution relates to a financing arrangement against the SWR, in the form of an electronic warrant and pledged/mortgaged to the banking partner as acceptable collateral.
Best practice and innovation
This solution is successful in terms of freeing up the company’s funds into their working capital cycle to meet their business needs. DBS has supported Wanxiang to increase the asset turnaround of their business and provide financing against their SHFE2 e-warrant at competitive rates with superior service levels.
DBS added the e-warrant line to the existing Account Payable Financing (APF) line to support their trading cycle.
Ping comments, “When we first purchased commodity from SHFE, we paid for it with our free cash and after the SWR was issued, we can pledge it to the bank in order to drawdown the e-warrant line to finance our inventory. With e-warrant, DBS have helped us reduce the funding cost and also increase the financing tenor from 90 days to 180 days as the e-warrant line is secured by the SWR by comparing to a clean APF.”
As we know, there are many big names from every corner of Asia Pacific participating and competing in the Adam Smith Awards Asia. Being named a winner is such an important industry recognition for our company, which enables us to win more market attention and hold a better reputation in the region. Meanwhile, our business challenge and solution can be shared to those companies who are also facing such problems, and show that it is possible to move the treasury management forward by implementing those diversified value-added solutions.
Xu Ping, Treasury Supervisor, Wanxiang Resources Co Ltd
This structure is also acceptable to the bank’s credit function as a SWR is generated through the SWR System which is developed by the exchange house and is only available to approved participants. Subject to the rules of exchange houses, SWR can be viewed, transferred, delivered and pledged to the bank. With this, the risk of fraud and forgery has been minimised.
This e-warrant finance solution was designed and implemented by DBS Bank (China) which has raised the bank’s profile in the commodity trading industry.
As Ping concludes, “We were looking for a solution to benefit both our liquidity requirement and cost of funding. By implementing DBS’ e-warrant finance solution, our working capital cycle has been significantly enhanced. This is also a win-win solution.”
- A warehouse receipt is a document that provides proof of ownership of commodities (eg bars of copper) that are stored in a warehouse, vault, or depository for safekeeping. Rather than delivering the actual commodity, negotiable warehouse receipts are used to settle expiring futures contracts.
- SHFE is the Shanghai Futures Exchange.
Key benefits
- “Freed up” funds in inventory/working capital.
- Saved financing cost substantially.
- Improved operational efficiency and communication.
- Enabled business expansion and improved bargaining power in the company’s supply chain.
- Mitigated the risk of fraud and forgery.
Key learning points
Never stop exploring the potential of tailor-made product structure and communicate closely with market partners. An innovative solution comes from working with those professionals.
