Funding Cotton in Benin

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In January 2026, law firm Watson Farley Williams (WFW) announced that it had advised a syndicate of European and international banks on a €100m pre-export financing granted to the Benin-based Société pour le Développement du Coton (“SODECO”), a subsidiary of the SFP Group (Société de Financement et de Participation).

This article breaks down the structure of the transaction, and offers a whistlestop tour of the basic mechanics and risks of export finance.

WFW’s work

WFW’s clients were an international consortium of banks. Terms of the loan indicated that SODECO would use the money for:

1. A prepayment made to Benin’s Interprofessional Cotton Association (AIC) to confirm export quotas;
2. The purchase, processing, storage and transit of cotton lint for the 2025-26 season

This loan is an example of pre-export financing (PXF): where money is given to a company before goods are exported, and repayment is secured against the future export sales of those goods.

Let’s break down the two purposes of the loan.

Prepayment to AIC

Benin’s cotton industry is organised entirely by the AIC. It is the center of collaboration and regulation between the professional families of cotton producers, importers, distributors and exporters.

The AIC manages all the critical functions of the cotton sub-sector, including hosting negotiations which determine prices for inputs and cotton grain, research, supervision of farmers, provision of inputs, quality control, and allocating export quotas.

As regards SODECO, the AIC determines how much raw cotton SODECO gets, what it pays for it, and how much it can export. The AIC requires 40% payment upfront to confirm that allocation, which is what the prepayment is for.

Advantages of a centralised market for lenders

The highly centralised nature of Benin’s cotton industry brings key benefits to international lenders by replacing market uncertainty with process certainty.

The AIC plans and allocates the entire season’s cotton before it begins, so lenders know with a high degree of precision exactly how much cotton SODECO will receive, how much it is entitled to process and export, and therefore when they will be repaid. In a free market, a ginner might face competition for cotton supply, price wars, or simply fail to source enough, casting doubt on if and when lenders may be repaid.

This procedural certainty allows lenders to model repayment accurately. This is important in calculating loan sizing (how much money banks can loan with certainty it will be repaid), determining competitive interest rates (lower risk makes lower interest rates viable), and satisfying lenders’ internal treasury management (banks need to know when capital will be returned so they can safely and legally redeploy it to other loans).

The essential point is that certainty is attractive for lenders. According to WFW, this was reflected in the fact that “This strategic funding was arranged by a syndicate of international banks, reflecting strong investor confidence in Benin’s cotton industry and SODECO’s major role in its continued growth.”

Centralised frameworks are common amongst Africa’s commodity industries like cocoa, coffee or tea in nations like Ghana (COCOBOD) or Nigeria (Cocoa Marketing Board), offering protections against global price volatility for farmers whilst bridging critical funding gaps for small-scale producers by offering certainty to international investors.

The purchase, processing, storage and transit of cotton lint

Imagine that you are a Beninese cotton ginner. Through years of toil you have accumulated enough machinery to process decent amounts of cotton seed, but otherwise your savings are thin.

To turn a profitable business, you have to be able to fork up money for constraining costs, amongst others:

1. Prepayment to the AIC
   • An upfront payment of 40% is required to actually trade (i.e. secure input material and be assigned an export quota)
2. Seed cotton
   • Sodeco has a processing capacity of 672,000 tonnes of seed cotton. At ~300 West African CFA francs per kilogram, this equates to USD$336 million for raw materials alone
3. Transport
   • Collecting seed cotton from hundreds of village markets and transporting it to the factories involves significant, ongoing logistics costs throughout the harvest season, especially with poor road conditions and hiking fuel costs
4. Energy, labour, machinery maintenance
   • In remote locations with poor grid connections, diesel-run generators are capital-intensive and are exposed to global oil fluctuations
5. Storage of completed cotton lint
   • Cotton lint is easily prone to deterioration through exposure to moisture or pests. Procuring high quality storage at scale is essential.

In the US, these operational costs amount to ~$20.95 per bale (excluding cost of cotton seed). SODECO, who can produce around 1.25 million bales per year, would have to find at least US$20 million to meet operational capacity (when discounted to account for cheaper labour costs).

For small-scale producers, these upfront hurdles are often insurmountable. One way to bridge this gap is private market funding.

Building a pre-export finance agreement

Following our thought experiment, let’s say you approach an international development bank. What would the terms of the loan be? How would the negotiation look like?

Lenders are unlikely to give a small-scale ginner cash on the strength of their promise to pay it back, given the risk of default in developing economies like Benin. Lenders generally require security: a legal right granted by a borrower to a lender over specific assets, cashflows, or contractual rights if the borrower fails to repay the loan.

Ginner assets are confined mostly to heavy machinery, which is difficult to liquidate and whose resale market is limited, making them largely unsuitable for security. Furthermore, if the cost recouped by selling machinery doesn’t cover the loan’s outstanding amount, the ginner is left without the physical means to continue generating revenue to pay off the bank.

After tasking a team of analysts, the lenders’ eyes light up when they outline the way ginners receive income:

• Commodities exporters generate cashflows made in foreign currencies (often USD), mostly by international purchasers
• These payments are predictable and are often contracted under long-term purchase agreements (i.e. a buyer agrees to buy a certain amount over the next 10 years)
• These international purchasers are shielded from internal political and financial risk (i.e. payments would still be made even if there is domestic currency volatility, banking disruption, or regulatory intervention in Benin)

So, we devise a new structure of security. Instead of security enforcement being contingent on the non-payment of a loan, we make security the core method of repayment through securitising the sale agreements the borrower enters with third party purchasers.

Pre-export finance security package

Under a pre-export finance loan facility agreement, the lender takes security over the borrower’s export contracts and the cash receivables generated under them. Specifically, the borrower grants the lender a:

1. A first-priority¹ security interest over the export contracts; and
2. A first-priority fixed charge over the collection account where export proceeds must be credited.

The loan is therefore repaid directly from the cashflow produced by future cotton sales, with purchasers paying export proceeds in foreign currencies into lender-controlled collection accounts. Any amount left in the lender-controlled collection account after the loan instalment is paid is returned to the borrower.

Although repayment under a PXF is designed to occur primarily through export receivables, the borrower ordinarily remains contractually liable under the loan facility agreement if those cashflows fail. In other words, if insufficient export revenues are being generated, lenders may still accelerate the loan and pursue repayment directly against the borrower and any additional secured assets or guarantees forming part of the wider security package.

In SODECO’s case, prior financings have utilised collateral security agreements governed by the local OHADA (Organization for the Harmonization of African Business Law) Uniform Act on the creation of security interests.

Lenders ordinarily seek to avoid pursuing the exporter directly, however, because litigation and enforcement proceedings in emerging markets can be lengthy, costly and uncertain, particularly where the borrower is already insolvent or where the borrower’s principal assets consist of operational machinery with limited resale value and whose enforcement could undermine future revenues.

Security interest over the export contract

Under English law, a security interest over the export contracts will be created by way of assignment. Assignment means the borrower legally transfers its rights under the export contract, including to receive cash from the buyer, to the lender.

Resultantly, the export contracts must be acceptable to the lender (i.e. concerning the quantity of goods purchased, the duration of the export contract or the identity of the buyer). Furthermore, there are some features of the export contract which are generally necessary for the lender to be satisfied that they are taking effective security:

1. Unfettered ability to create security over the export contracts: the borrower must have an unfettered ability to create security over its rights under the export contracts.
   • Many export contracts contain express restrictions on assignments and transfers, given that parties often need certainty as to the party with whom they are dealing, so prior written consent from the buyer to the creation of a security interest should be obtained
2. Notice and acknowledgement: many jurisdictions require notice to be delivered to the buyer in order to perfect (i.e. make enforceable) the security over the export contracts, and an acknowledgement from the buyer that the receivables under the export contract will be credited to the lender’s collection account
3. Free of set-off or counterclaim: the export contracts should provide that payments are made without set-off or counterclaim – i.e. payments into the collection account cannot be withheld if the borrower owes money to the buyer under a separate dispute
   • This ensures the lender receives all sums due and payable under the export contract

If the lender objects to parts of the export contract, they may expect the borrower to renegotiate terms of the export contract with the buyer, or to require the buyer and/or borrower to provide additional credit support, which become part of the security package.² Otherwise, they may refuse to provide funding.

Fixed charge over the collection account

A fixed charge attaches to a specific, identifiable asset and prevents a borrower from accessing and altering the asset in question. Here, the lender gains a first-priority fixed charge over the collection account where receivables under the export contract are credited.

The security document creating the fixed charge is registered by lawyers in the same jurisdiction that the collection account is deemed to exist. This is often in England, France or the Netherlands, as these jurisdictions recognise enforcement of security over bank accounts.

Holding it offshore, away from Benin’s domestic legal system, removes the risk of local courts, tax authorities, or government action interfering with the account in an enforcement scenario.

Debt service reserve account

Lenders may also require the creation of a debt service reserve account (DSRA) under the PXF.

This is a cash buffer account which protects lenders if supply-chain disruptions prevent the borrower from fulfilling terms of the export contract with the buyer, which leads to buyer withholding payments into the lender’s collection account, thus preventing the lender from receiving repayments under the PXF.

The DSRA’s ‘reserve’ of cash is produced by the following process:

1. Export proceeds are paid into the secured collection account;
2. Scheduled debt service is taken by the lender to satisfy an instalment repayment;
3. Amounts required to top up the DSRA to a stipulated ‘minimum reserve’ amount are taken out next;
4. Only after those obligations are satisfied can excess cash usually be released to the borrower.

Mitigating PXF risks

The PXF structure is exposed to a range of interconnected risks because lenders are relying on the future generation and export of commodities, rather than simply the borrower’s balance sheet.

For SODECO, the central concern is whether Benin’s cotton export chain will continue operating and producing reliable cashflows. Resultantly, lenders involved in a PXF facility must consider and mitigate against multiple risks.

Production risk

The repayment of SODECO’s €100m loan depends on substantial amounts of cotton being sourced, processed and exported during the harvest cycle. In Benin, this creates significant vulnerability because the cotton industry relies on thousands of individual farmers, large-scale logistics coordination, and stable weather conditions.

According to the World Bank, increased heat, erratic rainfall, and higher seas in Benin’s geography are threatening planting, growth, and harvest cycles. Furthermore, crop disease, fertiliser shortages or disruptions in rural transport networks threaten to materially reduce the quantity of seed cotton reaching the ginning facilities and therefore cash returning to bankers’ pockets.

As mentioned, the centralised structure of Benin’s cotton industry and pre-allocation of input materials partially mitigates this risk. Nevertheless, even with a centrally organised system, external contingencies like nation-wide drought may pose insurmountable blockades to repayment.

Aside from establishing a DSRA to provide a liquidity buffer against revenue shortfall, best practice is enhanced due diligence prior to dispersing loans. Analysing the buyer’s track-record and reputation, credit rating, supply chain reliability, and the general industry can help account for, and price in, unexpected contingencies ocurring later on.

For example, rather than lending against maximum theoretical production capacity, lenders typically allocate adequate headroom through debt service cover ratios³ and borrowing-base mechanics⁴ to tolerate a reduction in production volumes without immediately entering distress.

Alternatively, lawyers could incorporate contractual prioritization into PXF arrangements. This means goods produced by the borrower are obligated to be delivered under contracts that the lender has security over, mitigating the risk that if production levels drop, goods are delivered to another purchaser under a competing and unsecured contract.

Commodity price risk

Commodity price risk refers to the danger of global commodity prices falling, materially reducing the value of export revenues and therefore the ability to service debt, even if production remains stable. Methods to mitigate this risk include conservative structuring, hedging and export-contract structuring.

• Conservative structuring refers to aforementioned mechanisms like borrowing-base lending, where lenders advance only a percentage of the forecast export value rather than against maximum theoretical production capacity. This creates headroom so that export values can decline without immediately threatening repayment. Similarly, lenders require strong debt service cover ratios (DSCRs), ensuring projected export cashflows materially exceed scheduled debt obligations.

• Hedging refers to the use of financial contracts, such as futures, swaps or options, to reduce exposure to adverse fluctuations in commodity prices, interest rates or currencies. PXF facilities may require that borrowers enter into these arrangements under long-term contracts to lock in minimum sale prices for future exports, reducing exposure to falling commodity prices.

• Export-contract structuring refers to the use of value-based delivery obligations (as opposed to volume-based obligations) in export contracts subject to PXF securitisation. Under this approach, the borrower is required to deliver enough commodity to generate a specified repayment value rather than satisfy a fixed physical volume. Resultantly, if cotton prices decline, risk shifts to the borrower to produce additional quantities of cotton to satisfy the same amount of repayment value under their export contract.

Offtaker risk

Offtaker risk (or buyer payment risk) refers to the danger that international buyers under secured export agreements fail to pay for exported goods due to insolvency, disputes over goods delivered, or outright refusal.

This highlights the salient fact that lenders entering a PXF arrangement effectively underwrite (i.e. take on the risk of) both the borrower’s ability to source and export finished products, as well as the financial reliability of international purchasers in paying for those products, who are often separated by geography, legal and commercial systems.

In response, lenders often take the following protocols to mitigate offtaker risk:

• Credit analysis: lenders take extensive due diligence of purchasers under secured export agreements. Agreements with internationally established purchasers who possess ample liquidity, positive credit ratings and stable track records are preferred. If purchasers raise concerns, additional credit support is often required.

• ‘Take or pay’ agreements: these are long-term export agreements structured to require buyers to pay for an agreed quantity of goods regardless of whether it ultimately takes delivery, guaranteeing a baseline level of receivables. Without a take-or-pay obligation, a buyer could reduce purchases during a market downturn, reducing the cashflows available to service the facility.

• Set-off or counterclaim: As mentioned, clauses which prevent payments being withheld due to separate disputes with the producer are often negotiated into secured export agreements, ensuring that receivables continue flowing into the secured structure notwithstanding unrelated disputes.

Nevertheless, offtaker risk can never be entirely eliminated. Commodity purchasers remain exposed to liquidity pressures, and disputes over shipment quality, timing or documentary compliance remain common within international commodity trading.

Resultantly, lenders in PXF transactions must continuously monitor both the borrower’s operational performance and the financial condition of the underlying purchasers throughout the life of the facility.

Political and sovereign risk

Political and sovereign risk refers to the danger that government action or broader political instability interferes with the generation, export or enforcement of the export receivables underpinning a PXF transaction. This is particularly relevant for producers in emerging markets with nascent regulatory frameworks or banking infrastucture, as well as export-led economies who may be incentivised to impose greater industry control to mount fiscal pressure.

For example, states may impose exchange-control restrictions preventing export proceeds from being transferred offshore, increase taxes on exports, restrict foreign-currency payments, or intervene on secured accounts or enforcement rights.

Structural elements of the PXF framework, as well as additional measures, combat this risk facing lenders:

• Offshore transaction structuring: the PXF framework allows lenders to be paid by international purchasers into lender-controlled accounts based in stable jurisdictions like England, France or the Netherlands. Separating cashflows from producer-based jurisdictions obviates the risk the risk of local government interference or domestic enforcement uncertainty.

• Political risk insurance: lenders may obtain PRI coverage from private insurers, export credit agencies (ECAs), or multilateral institutions such as the World Bank’s MIGA. These policies typically cover currency inconvertibility, transfer restrictions, expropriation, political violence, embargoes, and government contract frustration.

• Stabilisation clauses: these are terms in PXF facilities which seek to preserve the economic, legal and political assumptions in place at time of signing, protecting lenders against unexpected measures. Some clauses attempt to “freeze” the legal regime applicable to the transaction, while others require the state to compensate the borrower and/or lenders so that their economic position remains substantially unchanged if the law changes.
  • The effectiveness of stabilisation clauses are reinforced by pairing them with English-law governed contracts and international arbitration provisions, allowing disputes to be resolved outside domestic courts.

Looking forward

The SODECO financing illustrates how pre-export finance converts future commodity exports into a bankable, structured repayment stream by shifting risk away from balance-sheet lending towards secured offshore cashflows. Through a combination of receivables assignment, controlled collection accounts, reserve liquidity, and carefully negotiated export contracts, legal teams transform volatile agricultural production into predictable investments, increasing the bankability and scope for international developmentwithin agrarian economies.

However, PXF remains a risk-reallocation technique rather than a risk-elimination tool. Production shocks, price volatility, counterparty failure, and sovereign intervention continue to occupy the structure. Lawyers must layer contractual, financial and jurisdictional protections so that repayment is supported by multiple independent value sources even where disruption occurs.

A further characteristic illustrated by SODECO’s financing history is its cyclical nature: facilities are typically renewed each cotton campaign as rolling seasonal PXFs, often involving different international bank syndicates over time. Each structure is repaid from the preceding harvest’s receivables before being refinanced for the next, making the model inherently self-liquidating and closely aligned with agricultural production cycles.

1. First-priority means the lender’s claims over those specific assets are legally recognised as senior to any other creditor’s claim, i.e. the lender would receive repayment first in the event of default. ↩︎
2. Additional credit support is extra financial protection the lender demands on top of the core security package when it is not fully comfortable with either the buyer or the borrower.
   
   From the buyer: if the lender doubts the buyer’s creditworthiness, it can require the buyer to provide a letter of credit or performance bond. These are guarantees issued by the buyer’s bank promising to pay if the buyer itself fails to. The borrower’s rights in these instruments should also be assigned to the lender, making them part of the security package.
   
   From the borrower: if the lender is uncomfortable with SODECO’s own financial position, it can require a parent company guarantee, or additional security over shares, plant and machinery, insurance policies or material contracts , giving it further assets to enforce against beyond just the export receivables. ↩︎
3. A debt service cover ratio (DSCR) is a financial metric measuring whether projected export cashflows are sufficient to meet scheduled debt repayments, usually with an additional buffer above the minimum amount required. ↩︎
4. A borrowing base mechanism is a lending structure where the maximum amount available under the facility is determined by the forecast value of the underlying exportable commodities or receivables, rather than by the borrower’s theoretical production capacity alone. ↩︎