April 8th, 2010 | 
Author: About Warehouse Receipts Finance
Warehouse receipts are a crucial element for risk mitigation enabling a financier to lend to a borrower who wants to finance the shipment of commodities for sale or purchase. Using warehouse receipt finance a bank or trader relies on goods in an independently controlled warehouse to secure financing. Usually providing among many things there is an offtaker and that there are other forms of recourse the borrower?s balance sheet for example banks will lend against commodities stored in a reliable warehouse and which have been properly pledged to them in a sound legislative environment. So warehouse receipts provide for a degree of physical risk mitigation and in support of an exchangebased trading system they are important for underpinning futures.
Accordingly warehouse operators can act as key influencers of risk management. If they are able to issue warehouse receipts which can be used as collateral by banks they may use this as a way of encouraging deliverers of commodities to move stocks into their facilities. Warehouse operators receive goods into the warehouse and issue ?receipts? showing the goods have been received into the store. Among other things the receipts themselves contain information about the quality and type of the commodity taken into store. The receipts are for the information of the depositor of the goods or if he is a borrower for his bank. However these receipts are not negotiable documents of title i.e. the title to the goods themselves may not transfer from one to another person via the passing of the related warehouse receipt.
Herein lies the potential for some degree of confusion. The term ?warehouse receipt? means different things to different groups of people around the planet. For example in the United States the term ?warehouse receipt? is used for a document evidencing storage of a commodity in a warehouse. Unlike elsewhere it is a document of title supported by legislation; in this case the US Warehouse Receipts Act of 2000 which replaced a piece of legislation enacted in the US in 1916. By contrast in the United Kingdom a warehouse receipt is a nonnegotiable instrument simply notifying that at a certain moment in time a certain amount and quality of a commodity was delivered into a warehouse. In the UK a negotiable form is represented by a warehouse ?warrant? of the type issued by London Metal Exchangenominated warehouses.
The main advantages of warehouse receipt financing from a risk management perspective are:
The identity of the collateral is less contestable and the intention of the borrower to pledge it is clear avoiding ownership disputes and competing claims.
The collateral can be auctioned or sold promptly and at low cost if there is a loan default
A lender holding a warehouse receipt can claim against the issuer the warehouse company as well as the borrower in the event that the collateral goes missing
In a bankruptcy scenario a document of title can cut off the claims of competing creditors.
Warehouse receipts can be negotiable or nonnegotiable. A nonnegotiable warehouse receipt is made out to a specific party a person or an institution. Only this party may authorize release of goods from the warehouse. He may also transfer or assign the goods to another party for example a bank. The warehouse company must be so notified by the transferor before the transfer or assignment becomes effective.
The nonnegotiable warehouse receipt in itself does not convey title and if it is in the name of for example a trading firm it needs to be issued in the name of or transferred to the bank in order for the bank to obtain more than just a security interest. A security interest is much less attractive to a bank than if it has what is called possessory collateral i.e. it has direct recourse to the warehouse where the goods are stored and in the event of a default or similar it is easy for the bank to sell the commodities in a shorter time frame.
Issuers of nonnegotiable warehouse receipts include collateral managers. They are becoming increasingly important with companies like ACE Cotecna Control Union Drum and SGS rolling out collateral management products to serve a growing international market. Notwithstanding the fact that most bankers borrowers and warehousemen say they find collateral management ?just too expensive? their desire to use the services of collateral management companies is increasing. In the absence of totally secure physical commodity storage facilities and resulting from the risks in moving commodities about banks are obliged to find other structures for protection against physical risks. The collateral management agreement or CMA offered by a number of global firms offers one such solution.
About the writer:nbsp;nbsp;Dan Day Robinson a postgraduate of London University in 1984 is the founder
of Day Robinson International which is a global consulting conference
organizer and training provider. The company focuses on International banking with a
bent on trade finance and structured trade
finance used in the flow of international
commodities.
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