Growing fears of a potential shortfall in liquidity in commodities as banks cut physical trading is forcing companies to look at new ways to access funding – including securitization.
In June, a new European securitization platform completed its first deal, helping a large German utility to finance its natural gas inventory. Swiss investment boutique Vicenda Asset Management arranged the issuance of short-term collateralized notes to institutional investors, bypassing the banks.
Vicenda, which launched Luxembourg-incorporated Thalos Investment Platform in 2014, says it is working on similar deals in crude oil and emissions trading, helped by what it sees as strong supply from commodities issuers and strong demand from yield-starved institutional investors.
Micha Blattmann, Vicenda’s co-chief executive in charge of compliance and formerly senior adviser to the equity and commodity risk management team for institutional clients at UBS, says Vicenda set up the securitization platform “to issue debt and asset-backed securitizations, outside the banking system.
“More and more investment banks are exiting the physical commodities business, and more and more corporates and trading houses are struggling to get financing from the banks,” says Blattmann. “The deal underlines the trend for commodities-related corporates and trading houses to find alternative ways to finance their business.”
Ringfence
Thalos issued the notes via a special ring-fenced entity, governed by Luxembourg law. The notes have a tenor of eight months and an annual yield of 0.85%, well above prevailing yields for blue-chip corporate debt in Europe. Investors are protected against counterparty risk through a title over the inventory, but are hedged against falls in the gas price as the gas is sold to the utility via a forward contract, according to Vicenda.
The deal allows the utility to free up capital that would otherwise be tied up during the summer, when the firm stores gas while demand is low, ready for use in the European winter, when demand is higher – helping the firm satisfy longer-term contracts for the delivery of natural gas to wholesale distributors in Germany.
Previously, similar companies found it easier to gain secured credit facilities from banks to fund the purchase and storage of gas. But Blattmann says this is now harder to obtain, as banks have slimmed down their physical commodities trading businesses, due to tighter capital regulations.
Elmar Diener, co-chief executive responsible for risk management and structuring at Vicenda, says there is concern among market participants that illiquidity in the secondary bond markets could spread to commodities trading, as firms such as Barclays, Deutsche Bank, UBS and others trim their exposure to the physical commodities business.
“It is important that there are liquidity providers for these markets,” says Diener. “Commodities companies still need financing, and there are attractive sources of liquidity. Securitization has a use here.”
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Diener points to purchases in the deal from pension funds, insurance companies and from banks. He says the due diligence involved would make purchasing the deal less worthwhile for investors likely to take smaller tranches, such as family offices. But he says yields on these kinds of securitization of more than 40 basis points over Libor, compared to total unsecured corporate bond yields in the region of 20 bps, will be a big draw for other investors too.
“These deals are appealing for pension funds and for corporate treasurers, who need a positive and safe yield,” he says. “European corporates have truck loads of cash; they can put it into the banking system but they might have a negative yield. Here, they have full recourse to the collateral.”
Vicenda’s deal comes as securitization deals in Europe slowly begin to return after a long period out of favour with regulators, following the US sub-prime lending crisis.
Pent-up demand
Diener says Vicenda has a strong pipeline and he expects to issue another similar deal before the end of July. The firm is most likely to replicate the deal in the future in energy and base metals, according to Diener. “It’s only at the beginning,” he says. While the February-to-April season for structuring natural gas deals has passed, he says the financial mechanics of taking legal title over oil and base metal assets and selling them forward will be similar in future transactions for these commodities.
Diener gives a timeframe of between six weeks and three months for the entire process in such deals for negotiations with clients and investors, structuring, documentation and investor due diligence. The headaches involved in storing agricultural commodities and precious metals would make securitizations of those assets more complicated, he says, while issuing notes backed by assets in other jurisdictions, especially outside Europe and the US, could necessitate different structures and a longer timeframe for the deal to come to market.
