Contents - AL-Tax

11.1 Summary of Key Facts 149predilection for lending to European-based borrowers is explained by physicalproximity, more effective means of legal recourse, and a generally higher comfortlevel with European entities.Certain multinational groups or individual group members can only borrow ona transactions-specific basis. Loans are made to particular legal entities in manycases, although banks may also extend “swing lines” on which more than one groupmember may draw. Individual transactions are almost always financed entirely byone lending institution, despite the fact that they can be quite large, because thisarrangement affords lenders greater legal protections in the event of default. Indetermining which lender to approach on an individual transaction, a trading firmgenerally considers the bank’s flexibility on transactions financing in general, itsproclivity to finance the specific type of transaction at issue, the complexity of thetransaction, the need to keep unused capacity available at specific institutions andthe need to provide each lender with a certain volume of business to preserve therelationship. Transactions-specific loans are administratively burdensome, in thattrading firms are required to submit extensive information on the subject transactionto the lending institution.Other trading groups or individual group members are able to negotiate moreflexible borrowing arrangements, and can borrow against inventories and receivables.Such loans are generally secured by these assets. The borrower provides aLetter of Pledge to lenders on each borrowing, which stipulates the specific commoditiesand receivables that it is pledging as collateral, and provides the requisitesupporting documentation.11.1.3.2 Access to ProductIn order to trade commodities, one obviously must have access to commodities. Assuggested above, such access may take the form of long-term offtake arrangementsand may be dependent on providing financing of various kinds to producers. Tradersalso source product in the spot market.In the physicals markets, an extensive knowledge of individual suppliers, theircurrent and projected output, future expansion plans, technologies and alternativedistribution channels are key to ensuring reliable supplies of product. Relationshipswith suppliers (and customers) are often developed and maintained by marketers.Marketers (or “originators”) may be part of trading firms’ staff or independentagents. The latter are typically compensated by commission or on a fixed fee-per-tonbasis.While pre-financing was often necessary to ensure access to supplies of aluminumin the 1990s, investment in hard assets (ownership interests in mines andsmelters) is increasingly viewed as the only truly effective strategy currently. Aluminaand aluminum producers do not currently have the same financial constraintsthat they previously did (and addressed by means of pre-financing), for the reasonsdiscussed below. Moreover, trading firms’ customers themselves are reluctantto purchase essential raw materials from intermediaries with no direct sources ofsupply.