The GTLP is a unique collaborative crisis response effort by DFIs and donor governments (collectively the “Participants”) to quickly mobilize funding to support trade finance for the developing world in general and Africa in particular. Over the next few months, the GTLP aims to create a pool of USD 5 billion that will catalyze a total of USD 50 billion, of which up to USD 15 billion is expected to go to Africa. These resources will be used to address the funding constraints currently gripping the global trade finance markets. The GTLP is a temporary instrument and will be wound up when the crisis abates and trade finance markets sufficiently return to normal (possibly 3 years’ time).
The general structure of the GTLP is illustrated in the figure below. The Coinvestment and Administration Agreement (CIAA) is the core agreement signed by all the Participants and jointly they contribute resources to the GTLP account, with the IFC acting as the Program Agent. GTLP resources are channeled through a number of qualifying international banks or regional banks in developing countries, which are active in the trade finance sector in the target markets (“Utilization Banks” or “UBs”).
Schematic Overview of the GTLP
These resources are then on-lent to:
- Issuing Banks (IBs) in developing countries that are originating trade finance transactions, or
- Directly to the real sector in developing countries. Although the GTLP has a global mandate, through the CIAA each participant will be able to specify the regional distribution of its own resources. In the event that the Allocation Requirements are not satisfied, the Utilization Bank will be required under the related Transaction Agreement to cease funding additional participated Funding Trade Investment Instruments (FTIIs) and thereafter remit all proceeds to the IFC.
In order to ensure maximum reach and leveraging of resources two complementary investment structures are envisioned under GTLP:
- Risk-sharing structure,
- Direct line of credit (LOC) structure. In the risk-sharing structure, the GTLP will channel funding to the local IBs through 8-10 large international UBs, where funding and risk will be shared on a 40:60 basis (40% Participants; 60% UBs).
This risk-sharing instrument will be GTLP’s primary investment structure because it will leverage the capacity of the UBs to generate a large volume of high-quality trade receivables from IBs for the GTLP. The risk of default by the IBs and their underlying trade finance transactions will be borne pro-rata between the UBs and the Participants in the GTLP. The UBs and Participants will also share pro-rata the portfolio returns.
In the risk-sharing structure, the UBs will be required to invest AfDB funds in Africa-only transactions. This means that the Bank’s return will only be affected by the performance of assets inside of Africa. Each UB will be required to monitor the amounts disbursed to ensure that the allocation requirements of the Participants are satisfied, otherwise the UB will be required to cease funding new FTIIs and the reafter remit all proceeds (including principal and interest) to the IFC for allocation to the Participants.
In the second structure, the GTLP will provide dedicated short-term lines of credit (LOCs) for trade directly to smaller regional UBs without a risk-sharing scheme. This second instrument complements the risk-sharing structure by extending the Program’s reach, using Africa’s larger regional banks to enhance access to smaller local banks and other players involved in trade finance. The tenor of these LOCs will
typically be 2 years, with the possibility of multiple 1-year extensions based on performance and the duration of the crisis. For each qualifying UB under the direct short-term LOC scheme, the Participants will share pro-rata the risk of default of the UB but will not be directly exposed to the underlying trade transactions originated by the UB.
The GTLP structure is designed to benefit stakeholders in low-income as well as middle-income countries at all levels of the trade finance value chain. For the SMEs, traders, and IBs in developing markets, the compelling benefit is increased access to liquidity at a reasonable cost to support trade finance operations during the crisis. For the UBs, the major advantages are enhanced access to stable funding and origination fees, coupled with the lower operational cost of directly dealing with one single agent institution. For the Participants, the numerous benefits of the GTLP include:
- Increased deal flow through expanded origination capacity,
- Access to IFC’s duediligence, structuring skills, and global presence,
- Efficiency in terms of time andcosts; and
- Diversification through risk-sharing among the Participants.