Forward Sales Funding definition:
A mine owner, lessee of mineral rights, or oil field owner, wanting immediate funds may agree to sell certain minerals in the future (a forward sale) to an independent purchaser in exchange for immediate cash. This applies whether you have an end user, or don’t have an end user, funding can go to 100% of proven in-ground assets, from 2 years up to 6 years.
Since this is a form of ABL or asset-based funding; time to close based on industry standards is under 30 days. This type of funding is applicable in any industry where there are purchase orders (P/O’s) or forward sales.
Investment banker/attorney procedural summary:
A forward sale of a client’s assets can be quickly arranged and funded if the client with in-ground assets or other commodities has an >investment grade buyer< that will contract to purchase the asset and guarantee repayment for the purchase. This is perhaps the quickest and least expensive method of financing of in-ground assets or commodities. Due Diligence review of in-ground assets geology report which are NI 43-101 or JORC compliant prepared by recognized geological firms and demonstrating proven or measured reserves are essential.
A client enters into a sales agreement with a purchasers of it’s assets. A bank then discounts the agreement, generally at a rate of about 5% per year (sometimes as low as about 3% or as high as 7% depending on the strength of the buyer’s credit) FORWARD SALES FUNDING and PURCHASE ORDER FINANCE are essentially the same thing. The client receives the contract price less the discount immediately from the funding bank. The client’s sole obligation is to deliver the product over the term of the contract for which it has already been paid. The buyer has an obligation to guarantee repayment to the bank at the end of the contract term, which generally can be from 1 to 5 years.
The buyers obligation to repay must, however, be unconditional, even if for any reason at all the contract has not been fulfilled by the client. The benefit to the buyer is that it begins to receive the product at the beginning of the contract and does not have to pay anything until a certain date and the end – in effect an INTEREST-FREE LINE OF CREDIT. The buyer can protect itself by taking a security interest or lien position in the client’s company.
Because the lending bank relies (entirely) on the credit strength of the buyer, there is nominal due diligence on the client and the transaction by the bank. Transactions can be generally completed in 30 DAYS, with the actual funding portion taking no more then THREE days. The buyer must, however, have an investment grade credit rating for the lending bank to agree to fund. A 3% success fee is charged at funding, and a transaction fee of 25,000 Pounds Sterling is charged by the transaction facilitator
The investment banking source described above works in the alternative finance market and arranges debt and equity financing for qualified clients. It’s options include structured funding of (a) equity project finance, (b) corporate bond funding and (c) forward sale funding. Due to the cost of doing business their preference is for in-ground assets, commercial/industrial & energy finance requests be minimums of $100,000,000.
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