French banks are stepping back into funding commodities trades, after pulling back on lending last year due to a dollar liquidity shortage.
But this time, it’s securitised. As the FT reports:
Commodities bankers and industry executives said the securitisation would allow the industry to access fresh credit.
“We have no choice,” said Jacques-Olivier Thomann, head of commodity trade finance at BNP Paribas. “Our balance sheet cannot move up at the same pace as commodities prices continue to increase.”
But investors have been cautious about the new products, which the French banks including BNP and Societe Generale want to launch by the end of the year.
From the FT again:
Pierre Lorinet, chief financial officer at metals and oil trader Trafigura, said that commodity trade finance loans were always backed by physical commodities. “There is hardly any default, and when there is one, the loss is very small,” he said.
Interestingly, though, securitised collateralised commodities financing is not completely new. This from a Freshfields newsletter, back in 2003:
The European securitisation market has seen a significant development recently with the completion of the first base metals inventory securitisation. Through this innovative transaction Glencore International AG (Glencore) will securitise certain of its base metal inventory holdings which are located in eight jurisdictions.
The asset class is new and challenging, namely physical holdings of aluminium, copper, nickel, zinc and lead and holdings of those base metals represented by LME warrants (warrants issued by warehouses that are approved by the London Metal Exchange (LME) and represent standard lot sizes of base metals traded on the LME), located in eligible third party warehouses in Belgium, Germany, Italy, the Netherlands, Singapore, Spain, Sweden and the UK. These holdings will be sold to Base Metal Finance Company Limited (BMFC), a Jersey SPV. Physical holdings will be automatically sold upon delivery to Glencore at eligible warehouses and warranted metal will be sold upon acceptance from time to time of a standing offer to purchase made by the Jersey SPV.
An innovative feature of the deal is that external liquidity support, in this case provided by a syndicate of liquidity banks, is limited to an amount (US$450m) which represents only part of the maximum discounted amount of commercial paper that may be issued, with the transaction being structured so that the balance of its liquidity requirement is provided principally through the inherent liquidity and deliverability of the LME warrants.
Glencore may offer to purchase metal from BMFC from time to time to fulfill short positions arising from ongoing sales to third party customers in its trading business. Otherwise BMFC will liquidate its holdings in the open market in prescribed circumstances.
Is this new French initiative going to be some kind of collateralised commodity obligation? And how exactly are they going to make the cashflows attractive enough too woo over investors seeking commodity-style exposure?
One thing we know for sure is that funding deals backed by inventories or commodity related receivables are becoming increasingly common place in the market. As are other forms of off-balance sheet funding for commodity players.
-Kate Mackenzie and Izabella Kaminska
Collateral crunch, commodities financing edition – FT Alphaville
Just like a giant secured loan to commodity producers – FT Alphaville
Collateralised commodity borrowing, BP edition – FT Alphaville
The Saudi oil sales enigma – FT Alphaville