CCFD Financial Model

You can view a basic financial model for a CCFD over here.




I'll explain the calculations as well as certain limitations

This is based largely from Exhibit 6 off the Goldman Sachs paper entitled, with minor tweaks: "Copper curve ball – Chinese financing deals likely to end".

To note, the calculations are done based on a 6 month time frame, starting with a single tonne of bonded copper. From this single tonne, 10 to 30 LCs will be issued in favour of party A.

For Party A, the payoff is quite straight forward. 

Remember, Party A is induced to enter into the transaction because Party C, the offshore subsidiary of Party B, sells a warehouse receipt on a tonne of bonded copper  at a discount of $10 - $15 the spot price.  The pay-off then is just

Payoff to Party A = Discount* Number of Circulations , depending on the Discount and # of circulations

In the example, this could be between $100 to $450.

For Party B, the payoff needs to account for the following

• Interest income received from investing the proceeds of the sale to Party C on-shore

Less

• Interest cost on the facility
• FX Hedging cost - Because of the interest rate differentials, RMB will trade at a forward discount to USD. Assuming that the points is around 300, this translates to a loss of 0.5% when hedging CNY

Using the current CNY 6 Month interbank rate of 2.85% as the proxy for the returns invested onshore, the net payoff for party B is between $100 to $200.

However, this figure changes dramatically if party B is willing to invest the proceeds in Wealth Management Products or enter into a reverse repo. The yield could then be between 4% to 8% depending on riskiness. This increases returns to $1,000 to $4,000.

So how could this have taken place?

The key transformation of risks here is that the Onshore Bank is lending at USD LC terms of 1.9%, but basically on an unsecured basis. Whilst each LC issued in favour of party A, the key question is the documentation risk involving the warehouse receipts.