Cevital is an important family-run corporation in Algeria.  It is heavily involved in the food-processing and mass distribution industry, including electronics and domestic appliances, the iron and steel industry, the flat glass industry, industrial construction, the automobile industry, services, and the media, etc.  Cevital has 18,000 employees. 

 

Cevital deals with Banque de l’Agriculture et du Développement Rural (“BADR”), one of six state owned banks that control 95% of Algeria’s banking business.  BADR is supervised by the Central Bank of Algeria, Banque d’Algerie.  The central bank is expected to have reserves at the end of this year of $33.8 billion, down from $48.8 billion in 2020.

 

Cevital is in the process of buying $US 5 million of farming equipment from Caterpillar, an Illinois-based manufacturer.  The equipment will support Cevital’s agriculture business, some of the products will be  exported to Europe.  The equipment is to ship from Illinois by October 1, 2021.

 

Caterpillar is expected to have sales of about $41 billion in 2021, it’s a huge multinational company with a market capitalization of $115.6 billion.  In 2020, Caterpillar had a net income of nearly $3 billion.

 

Caterpillar has approached Citibank N.A., New York to advise the structure and price of the transaction.  Citibank, N.A. has a credit rating of Aaa3 from Moody’s.  Caterpillar would also like to see if Eximbank, the U.S. Export Credit Agency will support the transaction.  According to the July 1, 2021 Country Limitation Schedule, EXIM is open to well-structured transactions in Algeria.

 

A summary of political and economic conditions in Algeria – as of July 2021, is appended to this exam.  Answer all the questions below.

1. How might you go about structuring a trade finance transaction in this case?  Assume Citibank, N.A. can not sell the accepted draft – they must hold it on their balance sheet until maturity.  Prepare a generic diagram of how one might structure the transaction using prudent risk management techniques.