Reed Smith Client Alerts

In this alert we focus on five issues that financiers of the commodity sector should be aware of when entering transactions under which they take title to goods.

Authors: Omar Al-Ali Richard G. Swinburn Nick Moon

Background

In contracts for the sale of goods, the transfer of title marks the point at which ownership of the goods passes from the seller to the buyer.  Those financing the sector traditionally lend and take security from the borrower.  If utilising the borrower’s commodity inventory to provide security (for instance by way of a pledge over inventory), the premise has to be that ownership of or title to the commodity remains with the borrower.  But an increasingly common way in which finance can be provided against inventory is for the financier to buy the commodity from its customer, taking title to it and in return providing the customer with funds in the form of the purchase price for the commodity.  These arrangements frequently take the form of sales and repurchases (known as ‘repos’) by which the financier purchases commodities from its customer under a purchase contract and sells them back to the customer for delivery at a later date under a separate resale contract.  Sometimes the transactions take the form of more bespoke inventory monetisation arrangements.

From the financier’s point of view, acquiring good title to the commodity is a fundamental requirement of these structures because with good title the financier has the best possible interest in the commodity and the best possible protection against a default by or the insolvency of its customer.  Faced with such a scenario, the legal owner can sell the commodity to a third party purchaser and retain the price recovered.  However, if these title arrangements are not properly due diligenced and documented, a financier may expose itself to legal risk and unintended consequences at exactly the time it needs to move quickly and decisively to liquidate his exposure.