Commodities such as crude oil, cocoa and solid minerals are emerging as powerful collateral assets, enabling businesses to secure credit facilities, issue bonds and access derivatives markets. Our latest newsletter explains how commodity-backed instruments are reshaping financing structures and why emerging economies stand to benefit.
Read the full article to see how commodity-linked finance is opening new doors for capital formation across Africa.
How commodities are used in financing arrangements
Commodities are storable and measurable assets, which is what allows them to be used to raise finance as well as to trade. They fall into two broad groups. Soft commodities are agricultural products that are grown or harvested, such as corn, wheat, sugar, soybeans, cocoa, coffee and cotton. Livestock also falls within this category. Hard commodities are natural resources extracted from the earth. These include metals such as gold, silver and platinum, energy commodities such as crude oil, natural gas and electricity, and industrial products such as chemicals and plastics.
In many developing economies, and across Africa in particular, access to financing is constrained by the absence of acceptable collateral. The difficulty is most acute for micro, small and medium-sized enterprises in the agricultural sector. These businesses often lack both collateral strength and the credit rating needed to secure loans. They are, however, actively engaged in producing, exploring and trading commodities, and that activity opens an alternative route to credit.
Commodities as security
Commodities can be used as collateral for loan facilities from banks and other financial institutions. Security over commodities may be created by way of a charge, or through a pledge in favour of the lender.
The effectiveness of that charge or pledge typically depends on depositing the commodities with a third party, such as a warehouse operator or collateral manager. That party holds possession of the commodities, acknowledges the lender’s interest, and issues a warehouse receipt as evidence of it.
Commodity-backed instruments in the capital market
In the capital market, commodities are traded directly on exchanges through spot trading. They are also traded indirectly as derivatives, which market participants use to hedge against risk and manage price volatility.
Commodity-backed bonds are debt instruments linked to the price movements of underlying commodities, with principal and coupon payments tied to those movements. Used well, these structures can deepen financial markets, widen access to credit and support economic growth.
Our full article examines each of these routes and their potential in more detail. Click the button below to read the publication.
