Abstract:
Embodiments of the present invention are directed to methods related to a transaction structure for financing the sale of a commodity. According to one embodiment, the method includes establishing a forward contract between a company and a first business entity. The method may also include the first business entity offering debt securities to investors. Further, the method may include establishing a purchase agreement between the first business entity and a purchaser, wherein the purchase agreement obligates the purchaser to purchase the volumes of the commodity from the first business entity. Also, the method may include establishing a swap agreement between the purchaser and a party, wherein the swap agreement obligates the purchaser to pay the party an amount equal to the price at which the purchase sells the volumes of the commodity in the open market and obligates the party to pay the purchaser a fixed price.

Description:
BACKGROUND OF THE INVENTION  
       [0001]     The present invention is directed generally and in various embodiments to financial transactions and, more particularly, to structures and methods related to transaction structures concerning the forward sale of a commodity.  
         [0002]     Commodity producers, such as oil and gas producing companies with developing fields, often wish to raise proceeds that are secured by its reserves. One way to do this is to enter into a forward sale agreement whereby the producing company agrees to sell specified quantities of the commodity at a fixed price, and offer debt securities secured by the future payments due from the forward sale agreement.  
         [0003]      FIG. 1  is a diagram of a known transaction structure in which the commodity producing company  10  (such as an oil and gas producing company) enters into a pre-paid physical forward sale agreement with a special purpose vehicle (SPV)  12 . An SPV is a legal entity formed solely in order to accomplish some specific task or tasks. The pre-paid physical forward sale agreement between the company  10  and the SPV  12  obligates the company  10  to deliver fixed volumes of the commodity to the SPV  12  according to a predetermined schedule in exchange for a one-time, upfront payment from the SPV  12 . The SPV  12  pays the upfront payment with the proceeds from a debt security (e.g., notes or bonds) offering to investors  14 . In addition, as shown in  FIG. 1 , the SPV  12  enters into a forward purchase agreement with a purchaser  16  of the commodity, which obligates the purchaser  16  to buy the scheduled fixed volume deliveries of the commodity from the SPV  12  at fixed prices. The purchaser  16  may then sell the commodity on the open market at market (floating) prices. In this scenario, the risk to the investor  14  includes the risk that the company  10  will not deliver to the SPV  12  the fixed volumes as specified in the pre-paid physical forward sale agreement and the risk that the purchaser  16  will not be able to pay for the commodity as required by the forward purchase agreement. Further, the purchaser  16  in this scenario faces the risk that the market (floating) price for the commodity may be less than the price specified in the forward purchase agreement.  
       SUMMARY OF THE INVENTION  
       [0004]     In one general respect, embodiments of the present invention are directed to methods related to transaction structures concerning the forward sale of a commodity. According to one embodiment, the method includes establishing a forward contract between a company and a first business entity. The first business entity may be a SPV owned by the company and the forward contract may obligate the company to deliver volumes of the commodity to the first business entity. In addition, the method may include the first business entity offering debt securities (e.g., notes or bonds) to investors. Further, the method may include establishing a forward purchase agreement between the first business entity and a purchaser, wherein the forward purchase agreement obligates the purchaser to purchase the volumes of the commodity from the first business entity according to a fixed schedule. Also, the method may include establishing a swap agreement between the purchaser and a party, wherein the swap agreement obligates the purchaser to pay the party an amount equal to the price at which the purchaser sells the volumes of the commodity in the open (floating) market and obligates the party to pay the purchaser a fixed price.  
         [0005]     Various implementations of the method may include that the fixed price that the party is obligated to pay the purchaser pursuant to the swap agreement equals the price at which the purchaser is obligated to pay the first business entity (SPV) pursuant to the forward purchase agreement. In addition, the party with whom the purchaser enters the swap agreement may be the company or, in the alternative, a third party unrelated to the company.  
         [0006]     Further, according to various embodiments, the method may include establishing a contingent supply agreement between the first business entity (SPV) and a second business entity. The contingent supply agreement may obligate the second business entity to supply volumes of the commodity to the first business entity if the company fails to deliver the necessary volumes of the commodity under the forward sale contract to meet the required deliveries to the purchaser under the forward purchase contract. The second business entity may be a parent of the company. In that case, the forward purchase agreement between the purchaser and the first business entity (SPV) may permit the purchaser to terminate the forward purchase agreement when the company defaults on the swap agreement, such as when the default of the company under the swap agreement exceeds a threshold amount specified in the contingent supply agreement. According to other embodiments, the second business entity may be unrelated to the company.  
         [0007]     Embodiments of the present invention may reduce the risk exposure of the purchaser. Indeed, with certain embodiments described below, the risk to the purchaser may be reduced to the credit-worthiness of a single business entity in the transaction structure.  
     
    
     DESCRIPTION OF THE FIGURES  
       [0008]     Embodiments of the present invention will be described by way of example in conjunction with the following figures, wherein:  
         [0009]      FIG. 1  is a diagram of a prior art transaction structure;  
         [0010]      FIGS. 2-5  are diagrams of transaction structures according to various embodiments of the present invention; and  
         [0011]      FIG. 6  is a diagram of a system according to various embodiments of the present invention. 
     
    
     DETAILED DESCRIPTION OF THE INVENTION  
       [0012]      FIG. 2  is a diagram of a transaction structure according to various embodiments of the present invention. As shown in  FIG. 2 , a company  20  and an SPV  22  establish a pre-paid physical forward contract that requires the company  20  to deliver fixed volumes of a commodity to the SPV  22  according to a schedule for the term of the forward contract in exchange for an upfront, one-time payment from the SPV  22 . The forward contract may be established between the two parties, for example, by the two parties negotiating and entering into the pre-paid physical forward contract, or by a third party (not shown) assigning and delegating its rights and/or obligations under an existing pre-paid physical forward contract to the SPV  22 . The commodity may be any type of commodity such as, for example, crude oil, natural gas, ferrous or precious metals, soybeans, cottonseeds, etc.  
         [0013]     Also as shown in  FIG. 2 , the SPV  22  may offer debt securities (e.g., notes or bonds) to investors  24 . The SPV  22  may use the proceeds from the debt offering to make the upfront, one-time payment to the company  20  pursuant to the pre-paid physical forward contract. According to another embodiment, where, for example, an existing pre-paid physical forward contract is assigned and/or delegated to the SPV  22  by a third party, the SPV  22  may pay the third party for the assignment of the forward contract with proceeds from the debt security offering.  
         [0014]     In addition, as shown in  FIG. 2 , the SPV  22  may enter into a purchase agreement, such as a forward purchase agreement, with a purchaser  26 . The forward purchase agreement may obligate the purchaser  26  to purchase some or all of the fixed volumes of the commodity delivered by the company  20  to the SPV  22  pursuant to the pre-paid physical forward contract. According to another embodiment, the forward purchase agreement may be assigned and delegated to the SPV  22  by a third party (which may or may not be the third party that assigned an existing pre-paid physical forward contract to the SPV  22 ). The purchaser  26  may sell the quantities of the commodity purchased from the SPV  22  pursuant to the forward purchase agreement on the open market for market (or floating) prices.  
         [0015]     Additionally, the SPV  22  may enter into a contingent supply agreement with a parent company  28  of the company  20 . The contingent supply agreement may obligate the parent  28  to supply sufficient volumes of the commodity to the SPV  22  in the event that the company  20  is unable to perform, partially or completely, its obligations under the pre-paid physical forward contract. The contingent supply agreement may also, in the alternative, provide the parent  28  with the option of paying a financial settlement to the SPV  22  in the event that the company  20  is unable to perform. In such situations, the SPV  22  may use the financial settlement either (a) to procure replacement volumes to meet the delivery requirements to the purchaser  26  under the forward purchase agreement or (b) to pay any liquidated damages required to be paid under the terms of the forward purchase agreement to the purchaser  26 .  
         [0016]     In addition, the purchaser  26  may enter into a swap agreement with the company  20  through which the purchaser  26  may effectively fix the price at which it sells the commodity at a predetermined amount (the “swap price”). For example, according to one embodiment, under the swap agreement the purchaser  26  pays the company  20  an amount equal to the price at which the purchaser  26  sells the commodity in the open (floating) market (the “market price”) and in exchange the company  20  agrees to pay the purchaser  26  a fixed price. The fixed price specified in the swap agreement may be the same fixed price specified in the forward purchase agreement (i.e., the price at which the purchaser  26  buys the commodity from the SPV  22  pursuant to the forward purchase agreement). Thus, in effect, if the market (floating) price of the commodity is below the swap (fixed) price, the company  20  pays the purchaser  26  the difference between the market and swap prices. On the other hand, if the market price is above the swap price, the purchaser  26  may pay the company  20  the excess amount between the market and swap prices. In that way, the market risks to the purchaser  26  are reduced.  
         [0017]     Further, according to various embodiments, the forward purchase agreement between the purchaser  26  and the SPV  22  may allow the purchaser  26  to terminate the forward purchase agreement if the contingent supply agreement between the parent  28  and the SPV  22  is terminated. In that connection, the contingent supply agreement may require the SPV  22  to terminate the contingent supply agreement when the company  20  (as a subsidiary of the parent  28 ) defaults on one of its contractual obligations, including the obligation of the company  20  under the swap agreement to pay the purchaser  26  the price at which the purchaser  26  sells the commodity in the open market. Thus, in effect, the contingent supply agreement may contain a so-called “cross-default” provision that stipulates that a default of the swap agreement by the company  20  results in default by the parent  28  of the contingent supply agreement, thereby requiring the SPV  22  to terminate the contingent supply agreement, hence allowing the purchaser  26  to terminate the forward purchase agreement. The contingent supply agreement may contain language, for example, that states that a default by the company  20  (or any of its subsidiaries) in an amount greater that a specified threshold amount causes a cross-default by the parent  28 . Such arrangements further reduce the risk to the purchaser  26  to essentially the credit-worthiness of the parent  28 .  
         [0018]     The SPV  22  may be, for example, a subsidiary of the company  20  and may be incorporated in a country with favorable tax laws, such as the Cayman Islands, British Virgin Islands, etc. The business of the SPV  22  may be limited to (1) establishing and performing its obligations under the pre-paid physical forward contract, the forward purchase agreement, and the contingent supply agreement, (2) issuing the debt securities, (3) entering into the necessary transaction documents, as applicable, and (4) engaging in other activities in connection with the foregoing. In that connection, according to the indenture of the debt securities offered by the SPV  22 , the SPV  22  may be subject to covenants that otherwise restrict its practices and abilities in order to safeguard the investors  24 . For example, there may be restrictions on the SPV  22  with respect to incurring more debt.  
         [0019]     In addition, the SPV  22  may be administered by a trust  29  that is independent from the purchaser  26 , the company  20  and the parent  28 . The trust  29  may maintain a collections account for the benefit of the SPV  22 . All money that the purchaser  26  pays to the SPV  22  in accordance with the forward purchase agreement may be deposited in the collections account. The deposits may be done electronically, as described further below. Further, the trust  29  may pay the investors  24  the debt service (principal and interest payments) on the debt securities from the collections account. Any excess in the collections account may be used to pay administrative expenses of the SPV  22 , such as the fees for the trust  29 . Any further remaining excess may be transferred to the company  20 . The excess cash in the collections account may also provide some measure of protection for the investors  24  should, for example, the company  20  or the purchaser  26  delay in some of their respective delivery or payment obligations.  
         [0020]     Further, a reserve account may be established for the SPV  22 . The reserve account may be funded, for example, with proceeds from the debt security offering with sufficient funds to cover the debt service on the debt securities for a certain time period, such as six months. Thus, the reserve account may further protect the investors  24  should either the company  20  or the purchaser  26  delay in some of their respective delivery or payment obligations.  
         [0021]     According to other embodiments, the contingent supply agreement may contain no such cross-default provision, thus not permitting the purchaser  26  to terminate the forward purchase agreement with the SPV  22  if the company  20  fails to pay under the swap agreement. The purchaser  26  may prefer this variation if it is comfortable with the elevated risk associated therewith.  
         [0022]     According to other embodiments, instead of entering into the swap agreement with the company  20 , the purchaser  26  may enter into a swap agreement with a third party  30 , as illustrated in  FIG. 3 . In this transaction structure, default by the third party  30  of its obligations under the swap agreement may not permit the purchaser  26  to terminate the forward purchase agreement. The purchaser  26  may prefer this variation where the third party  30  has a better credit rating than the company  20  and/or the parent  28 .  
         [0023]     According to other embodiments, there may be no contingent supply agreement between the parent  28  and the SPV  22 . For such embodiments, the purchaser  26  may enter into the swap agreement with the company  20 , as illustrated in  FIG. 4 , but without a contingent supply agreement, the purchaser  26  may not be permitted to terminate the forward purchase agreement if the company  20  defaults under the swap agreement. According to alternative embodiments, the purchaser  26  may enter into the swap agreement with a third party (like in the structure of  FIG. 3 ) without the existence of a contingent supply agreement between the parent  28  and the SPV  22 .  
         [0024]     According to other embodiments, as illustrated in  FIG. 5 , as opposed to the parent  28  of the company  20  entering into the contingent supply agreement with the SPV  22 , an ancillary party  32  may enter into the contingent supply agreement with the SPV. In such a structure, the ancillary party  32  may have no ownership relationship with the company  20 . As such, the contingent supply agreement may contain no cross-default provisions whereby the purchaser  26  may terminate the forward purchase agreement if the company  20  defaults under the swap agreement. Alternatively, as mentioned before, the purchaser may enter into the swap agreement with a third party  30 , as shown in  FIG. 3 .  
         [0025]      FIG. 6  is a diagram of a system  58  according to various embodiments of the present invention. As illustrated in  FIG. 6 , the system  58  may include a computer system  60 . The computer system  60  may be used, for example, to electronically transfer funds between the collections account  62  of the SPV  56 , an account  64  of the purchaser  26 , and an account  66  of the company  20 . Similar systems may be utilized for other types of transactions structures, such as those described in conjunction with  FIGS. 3-5 .  
         [0026]     In  FIG. 6 , the computer device  60  is shown as a single unit for purposes of convenience, but it should be recognized that the computer device  60  may comprise a number of distributed or networked computing devices, inside and/or outside the same administrative domain. In order to electronically deposit funds in the various accounts, the computer device  60  may execute a series of instructions. The instructions may be software code to be executed by the computer device  60 . The software code may be stored as a series of instructions or commands on a computer readable medium, such as a random access memory (RAM), a read only memory (ROM), a magnetic medium such as a hard-drive or a floppy disk, or an optical medium such as a CD-ROM, and may be written in any suitable computer language such as, for example, Java, C, or C++ using, for example, conventional or object-oriented techniques.  
         [0027]     The above-described transaction structures have been described in the context of agreements requiring physical delivery. According to other embodiments, some of all of the agreements requiring physical delivery may instead be cash-settled transactions. In such embodiments, the system  58  of  FIG. 6  may also be used to transact the cash-settled transactions.  
         [0028]     While several embodiments of the invention have been described, it should be apparent, however, that various modifications, alterations and adaptations to those embodiments may occur to persons skilled in the art with the attainment of some or all of the advantages of the present invention. For example, the steps described above in connection with the various transaction structures may be performed in various orders. It is therefore intended to cover all such modifications, alterations and adaptations without departing from the scope and spirit of the present invention as defined by the appended claims.