Growing assets Jean Craven, head of corporate finance at agribusiness Export Trading Group, speaks to GTR’s Shannon Manders about the evolving financing needs for agricultural commodities.
Banks operating in Africa may be feeling the pinch in terms of dollar liquidity, but there are some borrowers out there who are making sure that their exact funding requirements are being met.
Agricultural supply chain manager Export Trading Group (ETG) continues to attract financing from investors who are becoming more aware of the long-term growth opportunities linked to the demand for agricultural commodities.
ETG’s operations involve the production, procurement, processing and distribution of agricultural commodities in Sub-Saharan Africa, India and China.
At a time when demand for soft commodities is ever-increasing, flexible financing has become key, says Jean Craven, ETG’s head of corporate finance.
The company has raised nearly US$500mn via trade finance and private equity transactions in the last year alone, and has plans to secure more funds in the coming months.
A large portion of the company’s accumulated loans has been financed by FBN Bank (UK). The bank has just increased to US$200mn a US$140mn revolving multicommodity, multi-jurisdictional facility that it arranged in March last year. The facility finances 18 different commodity lines in 26 different countries.
John Vowell, director, structured trade and commodity finance at FBN Bank (UK), comments on the flexibility that the facility allows the borrower: “It covers a multitude of commodities – not just exchange-trading commodities. Everybody wants a bit of the wheat, the maize and the sugar business.
We look at doing a number of their nonexchange trading commodities as well, including pulses, beans and sesame seeds.” In the past, ETG relied on collateral management agreements (CMAs) to fund its commodities, but gone are the days when a CMA was able solve all of the company’s financing needs, says Craven.
“We’re hoping to see more borrowing base and term-type structures. We’re pushing for banks to provide more flexibility.” Craven explains that with commodities moving faster than ever through the supply chain, CMAs have become less ideal and more of a “burden” for companies such as ETG that have a strong balance sheet and are keen to move away from commodity risk to balance sheet risk. The ETG facility sees FBN “moving towards a borrowing base” says Vowell.
“We’ve not gone the full-blown borrowing base because of the various commodities we are financing and various characteristics of the facility which ETG would like to keep.”
The deal is set up as a limited CMA facility whereby the requirement for a CMA is scrapped unless the goods in a particular country go beyond a pre-agreed limit. “Because of some of ETG’s locations, especially in West Africa, which is quite new for them and where they are gaining market share, a full blown CMA would not be cost efficient.
By giving them certain fl exibility around the CMA we have also signifi cantly reduced the transaction administration in many of the jurisdictions,” Vowell explains. Another big funder for ETG is Standard Bank, which in June acted as mandated lead arranger on a US$250mn one-year secured syndicated loan for the company.
The loan is spilt into a US$150mn CMA and a US$100mn borrowing base facility. Although the bank has a long-standing relationship with ETG, the facility is a new mandate for the bank, and will cover the expansion of ETG’s business into new commodities and countries.
“The new facility covers 15 commodities in 35 countries. It also covers fertiliser, which was not funded under any of the Standard Bank facilities in the past,” says Megan McDonald, director, head of structured trade and commodity finance at Standard Bank in South Africa. At the time of going to press, the names of the local and international banks that had confi rmed their participation in the deal had not yet been publicised.
The facility was closed just six months after Standard Bank funded a US$100mn borrowing base facility for the company. In addition to these facilities, ETG is potentially seeking private equity to shore up its balance sheet, catering for future growth opportunities.
Private equity and infrastructure are expected to overtake commodities as the most favoured asset classes in Africa over the next few years. In line with this trend, Standard Chartered’s Africa private equity division invested US$74mn to acquire a minority stake in ETG in January this year in a deal that values the company at over US$500mn.
“ETG has predominantly funded its growth from internal sources for the last 30 years. This capital investment enables us to take our business to the next level,” says ETG director, Ketan Patel, commenting on the investment. A second private equity placement is planned for Q4 of this year or Q1 next year.
According to Craven, this tranche will be valued at between US$100mn and US$150mn, representing roughly 15% of the group.
To further cater for its capital needs, ETG last year appointed JP Morgan and Standard Bank as bookrunners of the company’s first issuance of a Eurobond listed on the London Stock Exchange.
The US$300mn bond will have a maturity of five years. Craven says the issuing of the bond will be subject to international market conditions at the time of issuance.
The company is also looking to raise its first IPO in 2015, subject to market conditions. As the company pushes forward with its bid to increase its portfolio of banks, it has also attracted interest from a number of African and Dutch institutions. The company is also seeking interest from Asian banks, which, according to Craven, have been slower to move, given that ETG is still a relative newcomer to Southeast Asia and China.
There are not many African companies of a similar size and that service as many markets as ETG, says Craven, which makes the company all the more attractive to potential investors.
He believes that as ETG is keeping an eye on the evolution of the soft commodities market; the most prevalent of which Craven believes is the shift from starches, such as maize to proteins, such as pulses and soy.
Indicative of this trend is the fact that the export of pulses from Malawi to India has tripled in the last few years. Malawian farmers are reportedly shifting from their traditional crops to meet the increasing demand.
“Emerging market household incomes have prompted this move,” says Craven. India is ETG’s largest export destination for African soft commodities, followed by China. Craven believes that a pick-up in processing capabilities and the capacity to provide goods “on the shelf” will open up new markets for Africa’s commodities – particularly in Europe. A number of African countries are set to experience a pick-up in trade, and Craven highlights Mozambique and Tanzania as nations that are likely to see an increase in exports.
“These countries have favourable regulatory conditions and low political risk; the potential is being realised,” he says. Ethiopia too, the continent’s biggest country in terms of arable land, has also benefited from government reform, and is expected to grow its agricultural exports. Emerging trends much as Africa lacks capital, it also lacks companies with strong, audited financials.
As such, ETG has been actively looking to improve its corporate governance. Expanding operations ETG’s funding will primarily be used to finance its procurement of agricultural commodities and help it expand further, particularly within West Africa, which ETG has identifi ed as a growth area. Historically, the company’s revenue base has been in East Africa, but the last few years have seen it expand to West Africa, and set up operations in the US, Asia and Europe.
ETG expects the opening of its new offices in Tianjin, supported by its Singapore business unit, together with a pulses distribution centre in the UK, and a coffee merchandising unit in Geneva to positively impact in the current financially ear.
“Our expansion has been driven by the company’s ability to replicate its successful business model in numerous countries,” says Craven. More than 60% of commodities purchased by ETG are bought directly from small holder farmers, who are paid cash on delivery at local field warehouses.
The commodities are then transported to small buying centres, where they are graded, processed and standardised before being transferred to the larger ETG warehouses.
From these, the majority of produce is repackaged and distributed locally or exported internationally, while a small portion is processed further at the company’s various processing plants.
ETG has a network of more than 300 warehouses in agricultural-producing areas. The company also plans to invest its raised capital in storage and logistical infrastructure, including warehouses and ports, as well as processing capabilities. GTR