Three musketeers of structured commodity trade finance reflect on how trade gets paid

Clarissa Dann Good afternoon and welcome to Trade Finance TV on location, I’m Clarissa Dann, your presenter, and here we have in the studio today the ‘three musketeers of commodity trade finance’.

And none of them really need any introduction, do they? So I’m actually going to ask them to introduce themselves. And I shall start first with Geoff.

Geoff Wynne Hi Clarissa, Hi, other two. I’m Geoff Wynne, I am a trade finance lawyer, I head the trade finance practice for SUllican & Worcester, soon to be Sullivan, and I have been doing trade finance probably for more years than I care to remember, and almost before these two came in on the scene.

Clarissa Dann is that true, Jean-Francois?

Jean-Francois Lambert It is true. Hi Clarissa. Hello, guys. I’ve been doing trade finance for many years, but much less than these guys.

Clarissa Dann Oh, it’s getting competitive now.

Jean-Francois Lambert Yes, I was a banker and not a banker anymore, now I’m advising. If anybody wants to follow my advice, be careful. But I was a banker for who trade structure trade finance.

Clarissa Dann Right, Mac, can you top that?

John (Mac) MacNamara My name is (John) MacNamara. I started in a trading company in 1982, which is to say, I’m the youngest one of the three of us. I’m the baby of the Three Amigos. My first structured deal was, I would say was Russian trolley busses,  I boarded the Serrato on the Volga going to the city of Bogota in Colombia, paid for in Colombian coffee and financed islamically. And my job as a junior on the team was I did the Islamic bit and that was 1983. And I thought this is much more interesting than trading or anything else. And so from the beginning, I specialized in structured trade.

Clarissa Dann And for you Jean-Francois? Where did it all start?

Jean-Francois Lambert It all started in Africa. This is in Khartoum, in Western Africa. And then I realized that financing the supply chain, financing and helping farmers was something much more attractive than just merely doing banking.

Clarissa Dann So the real economy, real stuff, moving it from one country to another and helping economies. Is that what attracted you to it, Geoff?

Geoff Wynne Oh no.

John (Mac) MacNamara The money?

Geoff Wynne What attracted me was the structuring transactions. So I would structure a transaction and we’re going back probably 30 years or more. Suddenly I was doing transactions that had some security and some structure around it, and lo and behold, somebody started saying, ‘oh! That’s structured trade finance!’ And I suppose in many ways we never looked back.

Clarissa Dann What is your hairiest moment in your illustrious career? So are we talking three decades, four decades?

John (Mac) MacNamara I got a death threat in Brazil.

Clarissa Dann Did you?

John (Mac) MacNamara It was quite upsetting, actually. We were pursuing a third party guarantor, and it was worth quite a of money. It was under one of these CPRs and we were in a hotel, not an expensive hotel, one of these type of American places with the pale pastel colors and the Muzak music. And it was at the breakfast bar. The representative of this guy starts delivering the message and he says, ‘MacNamara, you realize people who’ve been up against us, some of them disappear. They don’t come back.’

And I was quite shocked because, you know, I spent a lot of time in Russia and Ukraine, so I thought, is meant to be a threat, you amateur? I was, professionally, I was ashamed of him. That’s not how you deliver a threat. He waits until I’ve come out of some bar at 3:00 in the morning. You get me out in a side alley with fifteen guys, hand on the cajones, knife in the throat. That’s a threat! Here, I’m having my breakfast. As a professional, I’m ashamed of you. Come back when you can do it better.

In the end, he paid up.

Clarissa Dann For wCome on, what was yours?

Jean-Francois Lambert Well, I mean, no, no life-threatening. Nothing. But probably one of the very first deals went sour. And it was quite embarrassing because I convinced the bank to finance this type of thing and convinced people.

Clarissa Dann What was it then?

It was a very simple transaction for export finance in Russia. But then we didn’t realize that it was important to pay taxes in Russia. Suddenly the producer could not deliver the goods, and I was in quite a situation, you had to explain. And fortunately, I didn’t explain it because we solved it eventually. Which means the strength of this, just this inherent strength is the relationship between the producer and the buyer and you in between. If you don’t make too many mistakes in assisting that relationship, then you have a better chance.

Clarissa Dann Geoff, what stands out in your mind in terms of some of the more memorable moments?

Geoff Wynne There’s always this horrible moment. Very few trade deals go wrong, but there is this horrible moment when somebody phoned you up and tells you this beautifully structured deal has gone wrong. And I think one deal sticks in my mind because I had used it for two or three years as an example of how resilient my structure on a transaction had been.

It was pre-export, it had some tolling and then it had a sell and it went wrong. And I said, but it can’t go wrong, because we had all this monitary that we put it. And they said, ‘that’s where it went wrong. We didn’t monitor it.’

And I said, ‘I wrote all this stuff. So you’re telling me that you didn’t monitor the fact that you didn’t have any raw materials coming, and then you want to ask me why there is nothing in the collection account on which to enforce?’ So it’s now my best example of what happens when the deal goes well.

John (Mac) MacNamara I think that’s a good point, though, because people forget structuring is not a science, it’s an art. But it’s a bit like cards. The structure gives you certain cards, but it’s also important how you play them, and it only really works if it’s properly installed, correctly maintained, but also that you play those cards correctly when the time comes. You have seen restructurings where some banks recover and full of others don’t, simply because they’ve played their cards differently.

So it’s not black and white. It’s quite an item for discussion. And then the hard part with regulators you have is they tend to talk about default, when you tend to talk about of loss. Two different things. Quite easy to have a default. And anything that goes in the boat can be late and may trigger a technical default. Loss is rare. Delay is quite common in shipping. Default is rare, losses is extremely rare. And then you should still have cards that get you recovery.

Jean-Francois Lambert The problem with the regulators is that they want a track record. If you tell them we don’t have defaults for seven years then they say, ‘Ok, so you don’t have a track record.’ No, we just don’t have real losses.

John (Mac) MacNamara That’s a very valid point, but it’s worse than that because if they were looking at track records, I’ve got 20 years of data at Deutsche Bank, and I can tell you what my track record is. The hard part now is we’re obsessed by modeling. And modeling in the commodities is fascinating because what’s the first rule of modeling? Well, how much are they going to sell next year? And when I was first taught this back in the day, I was the only quality guy in the room. And I said, well, to know that I’ve got to know the commodity price next year, but by definition, I don’t know that. So the first line of the model is wrong. And that’s before you get to costs which would be in a different currency; I don’t know the foreign exchange rate either. And you build error upon error, but now we submit models with 40000 lines of data and 15 tabs for different scenarios, and that’s what regulators demand.

Clarissa Dann So would you say, that the climate in which you’re structuring deals these days is very different from how you all started three, four decades ago? What’s changed? Apart from the modelling, I’d be interested in your perspective Jean-Francois? Is it different? You’ve been consulting a couple of years now, having had a long career in HSBC, what have you seen that’s been different?

Jean-Francois Lambert I think that the madness of the whole thing is that this structure has never worked that well that strongly. And banks probably put more capital in the structure that sometimes they put in sort of a revolving credit facility, which is absolute madness.

Now, what has changed, I think, is that the perception of the whole market is different. Trade was very safe. Now, suddenly you have situations where after the crisis, like Qingdao, but before that, you had Kazakhstan with the trade of the letters of credit, are they trade or not? And then suddenly you have a restructuring whereby a country decides, ‘oh, we don’t like this deal anymore and we should get advice by a bank in order to renegotiate the whole thing,’ whereas the structure, the balance of the deal was safe. That is new. I think that you no longer have this, providing you know, your business, you are safe. Now, you want administation where the walls are very, very thin.

John (Mac) MacNamara There are a lot of extraneous factors, but there’s another big difference, I think, from when we were young. When we were young, we were some of the very first graduates in the business, and you could count the graduates on one hand. And today I look at my London – 20% of them are phD’s. And my global team, 86% have got at least a masters degree. One of my colleagues has got two masters and a PhD. There’s a tremendous upgrade in the educational standard. And I see on the one hand that reflected in the quality of the work, but on the other hand, my concern is you lose that the fingerspitz and gef├╝hl, as the Germans say.

Geoff Wynne But you don’t have to be clever to do this, but you have to know what you are doing.

John (Mac) MacNamara But what I’m what I want to come back to with this whole thing about the academitization, I still think you gotta have a travel budget and a pair of boots and be prepared to use them and go down the ground. Go to Africa, go to Brazil, go to China. Look at the plans on the ground, the boots on the ground. Ask questions on the ground. The answers you get on the on the docks in Port Pirie is maybe not quite the same as the answer you got from the smooth talking bastard in the West End hotel room during London Metals week.

Clarissa Dann And visit the stocks when you have a problem, you smell something is wrong. When you send a young chap on the ground and say, ‘Ok, now have a look at the stock, make sure these stocks are shipped and make sure that our name is on the stocks etc.,’ and that’s how you get repaid. It’s really, it’s real business. It’s not theoretical.

Geoff Wynne If you didn’t have to satisfy an internal requirement of track record, you don’t want to lend to new businesses and that’s the real frustration. There may only be hundreds at the moment, but there are thousands of companies, who, if you explain to them how you structure transactions, would do it, but you don’t give them the chance, or at least the big banks don’t give you the chance.

Jean-Francois Lambert It’s not that banks have become obsessed by  compliance. I think that when we didn’t have a compliance, banks didn’t have, but we had our ways, but then suddenly after the crisis, compliance became a big thing. Money laundering became a big thing. And now we are in this process where we have to digest. Banks are digesting and are getting more efficient, so compliance may be in five years will be with artificial intelligence, meaning smart rather than just people checking documents and checking transactions without actually understanding the data.

Geoff Wynne And someone has got to put pay to this wretched statement that trade finance is inherently risky because it’s not.

Jean-Francois Lambert What’s very striking is that we started our business by knowing that white was white and black was black, OK? And then suddenly we moved into a world where we said no, but this is white. It said, define white.

Clarissa Dann It’s been very entertaining and I’m sorry we haven’t got anymore time. But thank you so much for coming in and giving us your quite unique perspectives on what’s been a very exciting week so far.

Published on July 12, 2019