Trafigura takes first dip in inventory ABS funding pool

With bank regulatory capital constraints tightening, serial ABS issuer Trafigura has launched its first inventory-backed securitisation in a bid to boost its non-bank lending pool. Given the competitive margin on the deal – other major commodity traders may well follow the template.

Trafigura’s recent launch of a new $470 million securitisation platform is not just another ABS deal. The typical reasoning for the issue – leveraging existing assets, diversification of the funding pool and introducing the issuer to a new investor base – still applies. But this deal is as much about size and competitiveness in the global commodity market as it is funding diversification.

Trafigura is no stranger to the ABS market. In June it priced $500 million of three-year paper via its special purpose vehicle Trafigura Securitisation Finance (TSF) – the trader’s fourth public ABS transaction since inception in November 2004 (TSF has since become the largest triple-A publicly rated securitisation programme of trade receivables in the world).

But unlike its past ABS deals, which were all backed by trade receiveables, the new programme leverages Trafigura’s inventory – crude oil and refined metals.

The addition of inventory ABS into Trafigura’s financial toolbox is significant – a pre-emptive strike at any future liquidity problems in a commodity trading market where financial clout and competitiveness increasingly go hand-in-hand, where the volume of funding requirement is ballooning as commodity prices rise, and where capital controls on bank lending look set to get tougher and push traditional borrowing bases out of the funding equation.

The new platform took over two years to develop (although a source close to the deal claims the appointment of a lead bank would have cut the timeline) and is structured via Singapore-based special purpose vehicle Trafigura Commodities Funding (TCF). The issue comprises $470 million of senior variable funding notes sold to six banks: Natixis, Bank of Tokyo-Mitsubishi UFJ, Westpac, DBS Bank, Mizuho, and OCBC (the banks have relatively equal allocations of around $78 million each). White & Case provided counsel to Trafigura and Allen & Overy advised the noteholders.

The programme is structured to an 'A'-equivalent level and is backed by Trafigura's crude oil and refined metals inventories across 12 jurisdictions in Europe, the Middle East and Asia-Pacific. The securitisation has a revolving structure with no finite expiry date. The variable funding notes have a 364-day tenor and it is expected that noteholders will roll their commitment at maturity of the notes.

According to Laurent Christophe, global head of corporate finance at Trafigura, “the main reason for setting up this platform was to tap additional liquidity – and by that I mean going beyond the banking world, as there are limits to growing our exposure with banks. There is an untapped pool in the fixed income market and for us it is about building a product which appeals to fixed income investors, particularly those that don’t have a natural bent for commodities.”

Trafigura already has credit lines with dozens of international banks on a syndicated and bilateral basis across the world, but as commodities markets grow ever more competitive, size and scale has become key to profitability. A recent report by consultancy Oliver Wyman points out that the gross margin attributable to all but the largest traders has narrowed in the last few years, making access to commodities volume, and therefore financing, more imperative.

Although bridging the gap between the commodities industry and the fixed income market was a key focus for Trafigura, other factors were also important – primarily angst over the future viability of traditional borrowing base deals given oncoming changes to the Capital Requirements Directive (CRD) and Basel IV.

“The borrowing base was all the rage five years ago and banks loved taking security agent roles. But now there is growing discomfort with the product. The structure is expensive for banks because of compliance checks – and banks want to have full security over the underlying asset, and monitor the goods and have the comfort of a third party. So you’re shifting from a relatively flexible product to one which is not anymore. And because it doesn’t benefit from effective security you don’t get very high regulatory capital treatment,” says Christophe.

The security afforded by borrowing base lending has been dogged by high-profile failures in recent years: warehousing scandals at Qingdao in China and issues related to a borrowing base facility taken out by US agricultural trader Transmar.

The new TCF structure is said to mitigate the main risk of existing inventory-backed financings, in particular those relating to documentation forgery, liquidity, and theft. A collateral agent will verify each sale and the entire portfolio will be physically verified by independent inspectors (getting participants comfortable with the various jurisdictions and third party physical commodity ownership is cited as a reason for the platform’s two-year gestation). TCF has also been designed to withstand the default of Trafigura via collateral and liquidation agency agreements contracted with Natixis.

For Trafigura, there are further attractions to the new platform. First, the deal has a ‘true sale’ structure meaning the company can report its sale as cash, and importantly the debt is off balance sheet. Second, the transaction was ‘competitively priced’ compared with the trader’s other financings.

As Christophe adds: “We benchmarked our product against our other financings – borrowing bases, repos or unsecured facilities – and the margin we offered to participants is very competitive compared to traditional financing instruments available in the commodity trading sector. There is a slight structuring premium which we paid to our banks/noteholders, as they worked very hard on this innovative transaction – but you always have to spend more the first time.”

Pricing is in the ballpark of Trafigura’s recent bank financings, according to Christophe: The trader recently closed a refinancing of its $1.95 billion one-year refined metals borrowing base at a margin of around 90bp over Libor, and its most recent Asian revolver is priced at 70bp. Given those numbers, Trafigura has secured a very competitive margin for a debut product in the ABS space.

“We have experience in securitisation, are repeat issuers in the global ABS markets and have a good reputation in the US market where the liquidity is,” says Christophe. “We hope to leverage our good reputation with ABS investors for this new product again in the future, and although I don’t expect it to be super cheap it will enable us to achieve term financing, for example three years, at an overall competitive level.” Christophe predicts the structure will become a more regular feature of the commodities funding market once bank capital controls begin to bite harder – he may well be right.

Trafigura Commodities Funding Pte
Deal type: Inventory-backed ABS
Amount: $470 million
Tenor: 364-day revolving
Launched: 20 November 2017
Noteholders:Natixis, Bank of Tokyo-Mitsubishi UFJ, Westpac, DBS Bank, Mizuho, and OCBC
Issuer counsel: White & Case
Noteholder counsel: Allen & Overy

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