Noble’s fall from grace

The Singaporean commodity trader’s troubles have put a spotlight on trade finance and its possible applications. Adalla Kim investigates

Singapore-listed Noble Group, once Asia’s largest commodity trader, has recently found itself embroiled in a $3.5 billion debt restructuring. Since chairman Paul Brough announced the debt-to-equity restructuring process on 25 April, the group has won shareholder agreement on the deal and moved towards the implementation of a scheme of arrangement through courts in Bermuda and England.

Since the restructuring news broke, Noble’s board of directors announced a binding commitment for a $100 million three-year committed trade finance facility backed by a creditor group that includes hedge funds and private equity firms such as Value Partners and Pinpoint Investment Partners, according to a company statement on 22 June.

It is understood the company recently obtained another binding commitment for a $500 million three-year facility with a consortium of investors led by Deutsche Bank as part of the same process. A Deutsche Bank spokesperson confirmed  involvement in Noble’s restructuring process but declined to comment further.

The nature of Noble’s business means that it relies heavily on trade finance facilities, according to an industry source familiar with a creditor group holding perpetual junior bonds worth over $500 million issued by the commodity trader.

Two roads

On 14 August, Noble reported a loss arising from the restructuring of expenses during the second quarter of this year. “The performance was impacted by ongoing constraints on liquidity and availability of competitive trade finance to support operations,” its statement says.

“The company could not survive if it didn’t restructure the debt holding, so everybody has been incentivised to make some sort of deal,” says the source, adding that shareholder groups kept their lawyers busy during the summer break. Noble’s situation is being closely watched by structured finance and trade finance lawyers who work with hedge fund and private equity clients.

There are two types of financing structures within the segment, according to Matthew Cox, a Singapore-based partner at Simmons & Simmons – a law firm. He acts for banks, commodity producers and traders and has worked on transactions involving oil and copper businesses, among others.

According to Cox, ‘advanced payment financing’ is one structure that traders use to finance the buying and selling of commodities. Within this mechanism, commodity trading companies do not have to use cash for their trading businesses.

In addition, the advanced payment finance facility has a self-liquidating characteristic, as opposed to balance sheet lending or issuing a loan to a business made against future cashflow expected from its current asset accounts. The other structure is called ‘pre-export financing’, which commodity producers mainly use for working capital. Lenders might take the credit risk of borrowers or of fronting banks that tend to have stronger creditworthiness.

Historically, trade finance has been a bank-dominated segment. However, there have been regulatory changes in the market since the global financial crisis that have impacted financial institutions and opened opportunities for those offering alternative funding.

“The mining industry, alongside the larger commodity sector overall, has been through a rough patch for the last couple of years,” Oskar Lewnowski, Orion Resource Partners’ chief executive, told PDI earlier this year. His observation is that most of the large banks stopped ‘project lending’ for the mining space as the capital adequacy ratio required for such activity has been toughened.

Orion Resource Partners is a New York-headquartered metals and mining sector specialist lender that provides alternative financing to commodity producers via its production-linked investments based on royalties, stream contracts and off-take agreements.

Its second global mine finance fund, Orion Mine Finance Fund II, held a final close on $2.1 billion on 9 February having completed six investments, according to a company statement. Transactions from Fund I include Osisko Gold Royalties, a Quebec-based intermediate mining royalty and streaming company, and a mine site called Sasa located in Macedonia. The mine financier exited both transactions in 2017.

“It remains true that there are still numerous companies with tight cashflows,” Lewnowski adds. “This has led to a lot of talk in the industry about consolidation, although transaction volume has not borne this out.”

Orion finances producers via production-linked or streamline-based structures along with convertible equity investments. The firm also finances commodity producers prior to the production phase by funding the building cost. It additionally offers to buy all or a large part of the production from commodity producers and helps them to sell the materials.

For many investors, the fact that a huge commodity trading company like Noble could suffer such a drastic decline has raised concerns about how vulnerable smaller companies and private commodity trading businesses are.

In Noble’s case, as a consequence of the debt-to-equity restructuring process, its share price had dropped to S$0.12 ($0.09; €0.07) as of mid-September – down from S$7.18 at the same time in 2013.

Investors point to the business model of commodity traders, with some suggesting they need to rebrand themselves with better value propositions. “It’s harder for commodity traders to arbitrage price risk due to increased transparency in the commodities markets,” says Cox. “This is leading commodity traders to look for value-add services which they can offer to their counterparties, such as financing services or logistics services.”

OPAQUE market

Still, the entry barrier for alternative lenders in trade financing is seen as high. “It is a very opaque market,” says Cox. “You don’t have the same level of historical default data set that you might have in other segments.”

Trading companies conduct a lot of cross-border transactions as they operate across various jurisdictions, and this can make due diligence complicated. In addition, many of these traders have exposure to emerging markets. “The traders feed off the risks,” Cox notes. “They can make more money if they do a successful emerging market trade than they can in one of the developed markets.”

Another barrier that alternative lenders are facing is the ability to generate a level of return that will entice investors, given the risks. According to Tod Trabocco, a Boston-based managing director at Cambridge Associates, returns for speciality finance-type funds – including trade finance – tend to be in the low-teens range.

“They need to be comfortable with the level of the aggregate return that they would get from their investment, whether that is by way of providing equity, direct debt or hedging – or a combination of these products,” says Dan Marjanovic, a partner and colleague of Cox at Simmons & Simmons.