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27 October 2023

Weathering the storm: Trafigura returns for upsized Asia RCFs

Metals and Mining, Oil & gas
Asia-Pacific, Europe
Trafigura has successfully returned to the market for its annual Asia refinancing. The deal’s fundamentals are strong despite a tricky year for the company so far and a period of turmoil for the CTF markets.

The news that Trafigura has returned to the market for its annual Asia financing will come as a shock to no one. By all accounts the trader does not struggle to attract new partners in the banking community and its flagship facilities are tendered out on a yearly basis like clockwork.

This year, the syndication was once again heavily oversubscribed and Trafigura was able to upsize from an initial volume of $2 billion-equivalent to $2.7 billion-equivalent across three tranches.

The new deals comprise a one-year $620 million revolving credit facility, a one-year CNH term loan facility totalling $1.177 billion-equivalent, and a three-year $930 million term loan facility. Together they will be used to refinance a maturing three-year term loan tranche from 2020, maturing one-year USD and one-year CNH tranches from 2022 and for general corporate purposes.

Four new lenders were added to the syndication. The Export-Import Bank of China acted as an MLA on the renminbi portion, suggesting strong relationships with the Chinese markets. Trafigura has even added a new sustainability key performance indicator relating to its lost time incidence rate. In total five KPIs will now be linked to penalties or discounts on the margin depending on performance.

All of these are interesting elements that reflect the strength of Trafigura’s position in the commodity trade finance markets. For a final flourish, a Trafigura spokesperson confirmed to TXF that pricing on the deal had been tightened in comparison with 2022.

The full picture

Does the rest of the industry share Trafigura’s rosy outlook? A cynic might suggest that this deal is hardly representative of a market that is grappling with liquidity issues and rising costs.

TXF Intelligence’s H1 2023 Commodity Finance Data Report revealed a notable fall in volume and number of deals compared with H1 2022, from $69.3 billion across 77 deals to $58.3 billion across 53 deals. This year’s data follows a broader pattern that has emerged in recent years. Fewer lenders are doing commodity trade finance, and the remaining pots of funding are increasingly difficult to access.

Commodity prices may be in a lull compared with the spikes seen in the wake of Russia’s invasion of Ukraine but traders are not insulated from inflation, the cost of energy and other associated costs of business. Banks are dealing with their own internal costs thanks to onerous compliance checks. With commodity fraud in the media spotlight, CTF departments are under greater pressure to complete due diligence on all their trading partners. In a high interest rate environment these costs are, in theory, passed on to borrowers.

Trafigura is no stranger to turmoil, having this year written down a $590 million loss related to an alleged nickel fraud. Further details around this saga have slowly reached the public eye since it was first announced in February that a number of nickel cargoes purchased by the trader did not contain the promised material. This week Bloomberg reported that Trafigura has denied allegations that it was aware of the fake shipments, and that this arrangement was designed to artificially boost its trading volume.

Sources say that it was Citigroup’s decision to end financing for this particular trade in November 2022 that encouraged Trafigura’s senior management to take a closer look. At the time it would have been reasonable to speculate that the company’s cost of debt would suffer in the medium term as lenders reassessed their appetites for Trafigura’s business.

One year on, it is safe to say that nothing of the sort has taken place. Trafigura has weathered fraud, interest rates and rising costs to secure several new facilities at competitive pricing, including two new ECA-backed deals.

On-lending raises eyebrows

The flight to quality is a well-established phenomenon in the commodity finance markets. It seems likely that Trafigura’s reputation, its banking relationships and its balance sheet have protected it from the worst of the market’s troubles. If anything, the liquidity issues faced by smaller traders have helped Trafigura to consolidate. The biggest commodity banks arguably have an oversupply of finance for an increasingly small pool of major traders, creating downward pressure on the cost of debt.

For the rest of the industry, access to liquidity remains a contentious issue. As the hole left by bank finance grows, major traders like Trafigura have been able to mobilise their unused capital through on-lending facilities to smaller players.

On-lending is often the unavoidable reality in an industry that is now dominated by huge corporations with immense financial reach. A related development is the investment traders can provide to support new sources of commodity production. Financing for junior mining companies is increasingly dependent upon streaming deals, where a trader secures a mine’s future output in exchange for investment.

However, an ecosystem that allows Trafigura to secure cheap financing that it can use to lend to others at higher rates should raise eyebrows. Over the summer, Vedanta Resources, the Indian mining firm, secured facilities from Trafigura and Glencore totalling $450 million. TXF reporting revealed that pricing on the deal sat at SOFR +5.5%.

There are mitigating circumstances in this case; Vedanta is struggling under a large debt pile that is up for refinancing.  It has so far failed to source alternative forms of investment that would push away a debt crisis. Nonetheless, the pricing on this facility reveals the consequences of a rapidly shrinking pool of finance.

Consolidation is the new normal for commodity trading and Trafigura is leveraging its position as one of the most dominant players in the market. This comes in a year when Trafigura nearly doubled its half-yearly profits to $5.5 billion off the back of turbulent trading conditions.

Trafigura will celebrate its ability to attract new financing at attractive prices. As the end of a challenging year for the trader approaches, these facilities reflect the underlying strength of its position. However, outside of the top tier of trading, companies are in the heart of a financial storm. It is an unfortunate symbol of the direction of travel in commodity finance.

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