TXF weekly: Convergence of commodity traders with ECAs and DFIs is a sign of the times
The convergence of the commodity finance sector with that of ECAs and DFI support has been a growing theme of the latter part of this year and is one that is set to stay.
The convergence of commodity trader financings with support from export credit agencies (ECAs) and/or development banks (DFIs) has been a significant trend of the latter part of 2022. As one might expect, traders are largely keeping some of these deals pretty quiet – at least in the initial stages. Trafigura is one of the largest trading companies involved with such agencies and one that has so far closed sizeable and high-profile transactions in the last couple of months – and we will look at those deals more closely below.
Ultimately, it was arguably always going to be just a matter of time or something of a natural progression before commodity trading companies would ride with the ECAs and DFIs for select deals, sectors and markets.
As we all know, ECAs are increasingly looking to protect and help their domestic industries and exporters. This is a factor which has always been in place to a certain extent, but it took on another dimension and intensity with the onslaught of the Covid pandemic where supply chain/supply-demand issues severely disrupted industrial capacity and outlook. Consequently, ECAs were compelled to come in with significant working capital support, other programmes and schemes to varying degrees, particularly within Europe.
As for the DFIs - they are, in a more limited sense, being called upon to take on some of the underlying risks in primarily certain emerging markets where their support – in one way or another – can provide the confidence for other providers of finance to come on board.
Some of these deals with traders have also been further pushed and pulled along by the overall energy transition, and the need for the secure supply of critical minerals and materials. In addition, we are also seeing the emergency supply of energy in specific sectors of the European market struggling with the fallout of Russia’s horrific onslaught on Ukraine and the huge disruption to commodity supply chains globally that has occurred following the Russian invasion of Ukraine.
It is known that several leading traders are currently discussing so-called ‘untied’ deals with ECAs, and more is likely to come to light sometime within the new year. However, it is worth looking at the recent activity of Trafigura which has been particularly active and is very much showing the way for the other traders discussing or considering such transactions with agencies of one description or another. It has to be said though that while these high-profile deals have garnered considerable headlines, relatively little real detail has been released on these transactions either by the agencies or the traders themselves.
Trafigura leads the charge
In a forerunner to the most recent activity, back in December 2021, South Korea’s ECA Kexim closed a $150 million bullet loan with Trafigura in exchange for a secure supply of base metals to Korean corporates. More on ECA support for domestic industries can be found in the October TXF feature article ‘Untied commodity lending: A critical ECA space’.
And it was in late October this year when Trafigura signed a landmark ECA-backed $800 million five-year loan underwritten and arranged by Societe Generale (SG) and syndicated to seven participating banks. That loan was guaranteed by the government of the Federal Republic of Germany acting through the German ECA Euler Hermes. The guarantee is provided under the agency’s untied loan programme to support the commitment by Trafigura to deliver, under a five-year supply agreement, up to 500,000 tonnes of non-ferrous metals into Germany.
Not much more was said by Trafigura or Euler Hermes at the time, apart from general aspects, such as: “The untied loan programme is a tool to secure the long-term delivery of strategic commodities to Germany. In exchange for offering cover on the financing, Trafigura has committed to a new long-term agreement to supply strategic commodities. The agreement included a review of Trafigura’s environmental, social and governance (ESG) policies and performance.
Non-ferrous metals are used by Europe’s renewable energy, electronics and chemical industries, as well as suppliers to the construction and car industries.”
The initial announcement did importantly mention that SG syndicated the loan to seven banks. Poking around the market I did eventually discover the syndicate members and that can be found here in a news item I filed in late October.
The other aspect that Trafigura would not be drawn on was further detail of the non-ferrous metals – although they did inform TXF that these metals would mainly come from Africa and Latin America! Well, its hardly a big-kept secret as to what the company produces and trades from these regions – but to fair to Trafi there is the possibility that at this stage it doesn’t know exactly what volumes of what metal it will supply over the next five years to German industry under this deal. Certainly, copper and cobalt will be supplied in significant volumes.
A month later Trafigura signed a significant loan with The Eastern and Southern African Trade and Development Bank (TDB) for a $600 million copper and cobalt development financing facility in the Democratic republic of Congo (DRC). TDB was the mandated lead arranger on the syndicated transaction and also took on an advisory role in the structuring of the debt facility. Neither TDB nor Trafigura are naming the members of that syndicate.
The facility will enable the completion of Chemaf’s new mechanised Mutoshi mine and processing plant in Kolwezi and the expansion of the Etoile mine and processing plant in Lubumbashi. The Mutoshi mine, which will become the third largest cobalt mine globally, is expected to start production by the fourth quarter of 2023, with a production capacity of 16,000 tonnes of cobalt hydroxide and 48,000 tonnes of copper cathodes per year.
Linked to this TDB arranged package, back January this year, Trafigura concluded an initial $600 million financing and marketing agreement with Chemaf Resources and Chemaf SA, a leading vertically integrated copper and cobalt producer in the DRC.
A key component of the agreement of this DRC deal involves the enhancement of ESG compliance and responsible sourcing awareness and implementation, in line with IFC performance standards and OECD guidelines.
TXF’s sister publication Uxolo, focusing on development bank financing, spoke with TDB about the deal and Michael Awori, CEO of TDB, told Uxolo that its leadership as a development bank offered “comfort to the other institutions coming in”. Syndicate members are a mix of traditional international commodity banks and some new players interested in becoming more involved in the DRC. TXF understands that TDB is providing a sizeable portion of the loan, and is overall guarantor. And it doesn’t take a genius to link some of the resultant product coming out of this mining development to possibly end up being supplied to German industries.
When asked about the importance of agency financing getting involved in commodities, Awori told Uxolo: “it’s part of our mandate and DNA to work with our member states to achieve their developmental goals and they are often blessed with a significant amount of natural resources that could contribute significantly to these”. Extracting these responsibly was important, he continued, and development banks are well-placed to ensure that “the value retained within the country is maximised” when structuring transactions. See here.
And in its latest agency-supported deal, in early December Trafigura signed a $3 billion ECA-backed European gas supply loan – again backed by Germany’s Euler Hermes untied loan programme.
In a statement Trafigura said: “The loan will support a new commitment by Trafigura to deliver substantial volumes of gas into the European gas grid, and ultimately into Germany, over the next four years. Trafigura will supply the gas to Securing Energy for Europe (SEFE), which was recently recapitalised by the German government.”
Under this deal, the first gas delivery took place on 1 November, 2022 and Trafigura will primarily use existing quantities from its global gas and LNG portfolio to help secure gas supplies to SEFE. The agreement included a review of Trafigura’s environmental, social and governance policies and performance.
The four-year financing was jointly arranged and underwritten by Deutsche Bank and SMBC. The syndication comprised of over 25 banks according to Trafigura, but it declined to name them. It was obviously a popular syndication as it was 1.6 times oversubscribed. It just goes to show that where there is ECA-backing and a first-class borrower the banks and other financiers will come in properly tooled up. The fact that this is a fossil fuel deal though probably deters some institutions from being named. Nevertheless, expect more such deals emerging in 2023.
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