Trafigura finds creative trade finance solutions: Fuel for Thought

A tough financing environment and the pressures of a highly competitive and low-margin business have forced commodity traders to tap new, and often unusual, avenues for raising cash.

In November, one of the world’s largest commodity traders Trafigura issued $470 million of bonds, through a newly incorporated Singapore subsidiary Trafigura Commodities Funding Pte Ltd, to six banks—DBS Bank, Mizuho Bank, Natixis, Oversea-Chinese Banking Corp, The Bank of Tokyo-Mitsubishi UFJ and Westpac Banking Corp.

But this was no ordinary corporate bond.

The loans are backed by inventories of crude oil and refined metals, instead of fixed company assets.

“The proceeds of the notes, as well as a subordinated loan from Trafigura, will enable TCF to purchase crude oil and refined metal inventories sold by Trafigura across twelve jurisdictions in Europe, the Middle East and Asia-Pacific,” the company said in a statement.

It said the commodities have been sold under an agreement, granting TCF the right to sell them back to Trafigura when the underlying contracts expire and Trafigura also has the flexibility to repurchase the commodities earlier.

While it is not unusual for a business to use inventories as collateral for a bank loan, it is uncommon to issue bonds backed by commodity inventories, which are usually fluid for trading companies.

Trafigura’s rather creative solution comes at a time when banks have been scaling back from trade financing for several years now—first as a fallout of the financial crisis of 2008-2009, then the pulling-out of European banks like BNP Paribas that was fined for violating US sanctions and most recently the crash in oil prices and commodity markets as China’s growth decelerated.

TAPPING NEW SOURCES

Trafigura has had a penchant for unusual borrowing sources.

In mid-2017 Trafigura signed up with a Chinese leasing bank for a large order of crude oil and product tankers worth $1.35 billion.

This deal also happened in the backdrop of western banks curtailing their exposure to the shipping business due to overcapacity in the industry that ravaged the German banking sector and the likes of DVB Bank, Deutsche Bank,  Commerzbank and HSH Nordbank who were stuck with billions of dollars in bad shipping loans.

Traders like Trafigura thrive on optionality, and having access to proprietary trading assets like ships can give them an edge over competitors. When shipping markets hit bottom, it was instinctive for the trader to take a position in shipping assets on the cheap.

But even large commodity traders with access to captive cargos and a solid credit rating are hard pressed to find a shipping loan from a western bank on good terms.

ENTER THE CHINESE LEASING BANKS

Dealing with Chinese leasing banks is by no means cheap, and shipowners say that repayment costs are actually higher than conventional bank loans as the leasing banks themselves borrow at high rates, not to mention the risks of exposure to the Chinese shadow banking system.

But the loans also provide a high loan-to-value ratio. Where conventional banks will only meet 60% or 70% of the funds needed, Chinese lessors are willing to meet 100% of the requirement. The vessels are also ordered at Chinese shipyards, which can be considerably cheaper.

Trafigura’s deal with Chinese leasing banks was one of the largest of its kind in recent years, and paved the way for more commodity traders to follow suit.

Another recent deal stands out.

Earlier this year, Trafigura teamed up with Russia’s UCP Investment Group, and along with Rosneft purchased a 98.26% stake in India’s second-largest private oil refiner Essar Oil for a sum of $12.9 billion, billed as the largest foreign investment in the country till date.

UCP is headed by Ilya Sherbovich, a Russian billionaire with links at the highest rungs of Russian national oil companies and Moscow’s political circles.

The move was in line with Trafigura becoming one of the largest exporters of Russian crude through a series of oil-for-loans arrangements with Rosneft. In 2013, Rosneft had agreed to supply up to 10.1 million mt of crude and products over five years in exchange for a pre-payment of up to $1.5 billion.

While deals with Russian billionaires in the midst of US sanctions raised several eyebrows, any cash-for-crude agreement raises the question of whether large commodity traders are becoming lenders in their own right.

And if commodity traders are becoming lenders, should banks be exposed to their high-risk ventures in geopolitically unstable or commercially risky ventures.

At least for Trafigura, one distinct advantage of its latest inventory-backed bond offering is that it doesn’t need to justify the loan to a bank, and it will not even affect its debt-equity ratio like a normal corporate bond would.

Trafigura confirmed the transaction is neutral from a debt-to-equity ratio perspective and enables banks to increase their lending capacity to the group without breaching their lending limit on Trafigura itself. It however declined to reveal the yield on the bond saying it was a private transaction.

At least one banker described the bond offering as “ingenious” saying that not many trading houses are financially savvy enough for such a maneuver as they don’t possess the financial expertise of a banking operation.

It’s no small coincidence that Trafigura’s chief executive for Asia Pacific Tan Chin Hwee, who was appointed in January 2016, has several years of private equity experience under his belt.

In any case, given the state of trade finance today, commodity majors are only likely to get more adventurous in their hunt for cash.