POF Importance

Proof of Funds Importance

Parties in the deal.

• Seller = NNPC
• Consignee = NNPC approved reseller
• Buyer = the entity signing the purchase agreement
• End Buyer = Refinery

Now when we get approval for the price and procedure we want to try and get the buyer pre-qualified prior to signing a letter of intent to purchase.
At that point we send out the verbiage for the MT799 (it contains blocked funds verbiage).
This is important at this stage for two reasons; one, we want a signed contract to be able to close and two, we want the buyers to keep their integrity.
We have learned that some buyers will sign a contract and either not read the language in the addendum or not check with their bank for approval or sign the contract knowing full well that they can not block funds (because they do not have enough funds to do so). Most buyers are intermediary buyer/sellers, which means they are buying to resell to a refinery. When a buyer like that is looking at 3-4% profit they can not rent an SBLC for 5%. Then the buyer and his bank has to go back and forth with the banking verbiage to get it approved with their bank and the seller’s bank. We are fortunate to have a NNPC Approved Fiduciary (Consignee) that has three different banks and has some flexibility but it is painful. How can the buyer hold up his head when he has signed a contract and does not have the money to purchase. We want everybody to feel good about the deal.

You might say,

It is just a POF, whats the big deal?

If the NNPC is going to allow its vessel and cargo to go half way around the world with just a notice that the buyer has the money, they want to make sure the money is still there when the vessel arrives.
So the NNPC requires the Consignee to guarantee payment by putting up their own SBLC or BG.

That means the Consignee’s bank has to get involved in providing a corporate instrument to the NNPC based on the strength of the buyers POF. Since the Consignee’s bank can not lien or draw on a POF they want the language to be pretty strong and they want the buyer’s bank to be responsible to hold funds and be willing to pay once the cargo arrives.

Without the Consignee’s bank approving the verbiage and issuing an instrument with the NNPC the vessel can not get loaded.

Most buyers in the market today are actually not end buyers, they are intermediaries.
That means most buyers do not have money.
If they had done their job correctly they would have done a contract with the end buyer but most do not tie up that end FIRST and therefore can not show the end buyers banking strength in their account and then may have a problem providing blocked funds.

That is when they start to hedge and say instead the will provide a DLC. But a DLC is not any better because it is just like a POF but weaker because it requires the buyers approval in order to be drawn on. Then they start to squirm and raise the trust issue. They conveniently forget they signed a contract stating that they had the funds.

Things get ugly.

We don’t want that, so we get the buyer to pass the MT799 verbiage through their bank so they can enter a contract with their head held high.

Below is the preferred MT799 verbiage:

WE, xxxxxxxxxxx, ON BEHALF OF AND AS PER ORDER OF OUR CLIENT, XXXXXXXXXXXXX HEREBY CONFIRM WITH FULL BANK RESPONSIBILITY AND LIABILITY THAT OUR CLIENT HAS ON DEPOSIT WITH OUR BANK UNDER THEIR SOLE SIGNATURE CASH FUNDS VALUED IN THE AMOUNT OF USD $XXX, 000,000.00 (USD $XXX HUNDRED MILLION DOLLARS) AS OF DATE OF THIS TRANSMISSION.

THESE CASH FUNDS ARE CLEAN, CLEARED, AND ARE FREE OF ANY LIENS AND ENCUMBRANCES AND ARE AVAILABLE TO THE BENEFICIARY: NIGERIAN NATIONAL PETROLEUM CORPORATION (SELLER), WITHOUT ANY RESTRICTIONS.

WE FURTHER CONFIRM THAT WE HAVE IRREVOCABLY AND UNCONDITIONALLY BLOCKED AND RESERVED THESE FUNDS IN FAVOUR OF NIGERIAN NATIONAL PETROLEUM CORPORATION (SELLER) FOR THE BENEFIT OF CONTRACT REF: XXXXXXXX (AND ITS JOINT VENTURE EQUITY PARTNER) FOR A PERIOD OF 60 DAYS. THE FUNDS WILL REMAIN UNENCUMBERED DURING THIS PERIOD. THIS INSTRUMENT IS ASSIGNABLE, DIVISIBLE, FULLY CONFIRMED BY US WITH FULL BANK RESPONSIBILITY AND IS VERIFIABLE & CONFIRMABLE BY RESPONSIBLE BANK INQUIRY. THIS IS AN OPERATIVE BANK INSTRUMENT AND IS SUBJECT TO THE UNIFORM COMMERCIAL CODE AS IT PERTAINS TO SUCH CREDITS.

THIS PROCEDURE IS NO LONGER AVAILABLE

Jeff Scott – Author – CFO Google
Nigerian Oil Services LLC (USA)