Africa’s trade finance funds sprang up to fill the gap created by banks derisking after the financial crisis, but the demand for financing far outstrips the size of even the largest funds – and this is unlikely to change anytime soon. Michael Turner reports.


Banks have increasingly come under the cosh from regulators for almost a decade as their capital reserves get held up to ever-more strenuous scrutiny. Financing trade in Africa has, for many, fallen by the wayside.

“There’s definitely very little fresh money from banks for trade finance,” says Nicolas Clavel, chief investment officer at commodity finance fund Scipion Capital, which has more than US$150mn of assets under management. “There are a lot of people that want to deploy money in Africa, but because the banks have slashed staff over the last 10 years, there is far less specialist knowledge within the banks and less resources to train new staff.”

African bank-intermediated trade is big business. Precise numbers are hard to come by, but the African Development Bank estimated it to be between US$320bn and US$350bn in 2011-2012.

But even at the top end of estimates, the funding gap for the same timeframe was thought by the development bank to be much as US$120bn.

“These figures suggest that the market is significantly underserved,” the supranational lender said in a 2014 report – and increased regulatory treatment of capital means the deficit has likely only grown larger since then. As well as leaving a market underserved, banks are missing out on the cross-sell opportunities that come with financing trade. Analytical firm East & Partners estimates that US$1 in trade finance fees can bring a bank another US$1.70 in foreign exchange and cross-border payment fees and another US$2.25 in other transactional banking revenue.

“Regulatory regimes, and in particular capital requirements within banks, has been one of the primary reasons for the lack of facilitation of trade,” says Lisa Majmin, a fund strategist at Barak Fund Management, which had more than US$250mn of assets under management (AUM) as of the end of 2015.


Bug out

There have been some high-profile moves away from Africa by banks that were once synonymous with trade finance across the continent – the clearest of which comes from Barclays. Although the UK bank is not the only lender cutting its exposure, it is the one that has made the biggest U-turn after touting the region as a major business opportunity when it ramped up its stake in South Africa’s Absa in a US$2.2bn deal in 2013.

Barclays is now reducing its stake in its African business from 62.3% to around 20% over the coming years, as it seeks to cut its regulatory capital allocation costs.

And even those banks not doing an about-turn on their African aspirations have drastically reduced lending on the continent. Again, it is tricky to record accurate data on volumes because of the private nature of the loan market, but the African Export-Import Bank (Afreximbank) reckons that trade-related bank lending and syndicated lending to developing economies plunged by 33% and 35%, respectively, between 2011 and 2012. The cost of loans also ballooned with their rarity, while available maturities shrank.

Borrowers that were able to secure a loan in 2012 could expect to pay up to 250 basis points (bps) more than they would have done for the same deal a year earlier, with bilateral bank loans and syndicated lending costing an average of 250bps to 350bps – well up from the 100bps to 150bps borrowers could expect to pay pre-financial crisis, according to Afreximbank. Lengthy maturities also vanished, with tenors becoming “mostly less than six months”, Afreximbank said.

In mid-October, the Ba1/NR/NR-rated Eastern and Southern African Trade and Development Bank – known as PTA Bank – signed a US$400mn dual-tranche syndicated loan that pays 230bps over Libor for a two-year tranche and 250bps over Libor for the three-year portion, so prices for deals are still roughly at 2012 levels, though maturities have significantly lengthened.


Out of the loop

The ever-diminishing bank finance market has led to Africa’s smaller exporters being cut out of the funding loop, as banks feel increasingly and exclusively comfortable financing larger corporates.

“There is a mismatch between what smaller traders want and what banks are prepared to provide,” says Clavel at Scipion.

The average loan provided by Scipion is around US$3mn to US$5mn, while at Barak, average amounts run smaller at US$600,000 to US$700,000.

The borrowers that need deals of this size make up a demographic of exporters that is easy to overlook for banks, according to trade finance funds, as they are generally small-scale operations that have net asset values and revenues that are below what banks are happy – or even able – to consider.

This is where trade finance funds step in. The funds interviewed for this article insists that they have strong on-the-ground presence, which includes vigorous know-your-customer (KYC) procedures for every recipient of funding, with repeat clients making up significant portions of the funds’ borrower base.

Trade finance funds are also able to finance small parts of a wider export chain that banks will not touch. One example might be goods being exported from the Democratic Republic of Congo (DRC) to South Africa. Banks might be willing to provide commodity finance once the goods enter a country where they have an on-the-ground presence such as Zambia and fund their transport all the way to their final destination, but that is of limited help to a commodities trader if they cannot get their goods out of the DRC in the first place.

“If you have to have a custodian to hold an asset domestically [because you do not have a presence in a country], it can be really expensive,” says one source who did not want to be named for this article. “Typically, the big custodians are nervous about Africa.”

The higher risk profile of the deals means that exporters have to pay more than they would if they were able to take the traditional bank route.

“Borrowers pay slightly higher rates than they would at a bank,” says Majmin at Barak, adding: “Barak has the ability to process deal flow far quicker, and focuses more on the trade and collateral, as opposed to the traditional banking balance sheet metrics – these borrowers cannot get a bank loan [in a reasonable time] or, in some cases, at all.”


Commodity crunch

There is some disagreement among those operating in Africa about the impact of the commodity price crash on the viability of trade finance funds on the continent.

“There has been a huge impact from the commodity price movements,” says the source, who works at a company that provides clerical services to funds operating in Africa, and therefore likely has a wider view of the fund market than individual portfolio managers. “Oil, coffee and cocoa have all affected deals.”

Oil has seen some of the most pronounced falls of any commodity in recent years, with the price of Brent crude plunging from US$114.81 a barrel in June 2014 down to US$27.88 in January this year. The price has since recovered slightly following numerous headlines from OPEC and other major oil exporters about the possibility of cutting production, and Brent was trading at US$52.78 on October 11.

“Remarks from Saudi Arabia’s energy minister Al-Falih and Russian President Putin suggested that both nations were ready to co-operate and implement an oil production freeze or cut,” says Trieu Pham, a strategist at Mitsubishi UFG Securities.

The Saudi energy minister even went so far as to say in the second week of October that “it is not unthinkable that we could see US$60 [a barrel] by year-end”.

This would be an enormous boon to Africa, as even the non-oil-based economies would benefit from the increased capital expenditure and trade needs of their oil-producing neighbours that would come with higher oil prices.

The funds spoken to for this article insist that the price crashes in oil and other commodities have not hurt their businesses, and looking at the returns each fund has provided, it’s hard to disagree. Barak expects a return of around 12% for 2016. The fund has made returns to within around 15bps of that level since inception, suggesting that the forecast looks likely.

This also means that investors in the fund have benefited from lower volatility and higher returns than equivalent high-yielding emerging market bonds, which would be the more obvious choice for yield-hungry African-focused investors to allocate capital.

Telecoms infrastructure company Helios Towers Nigeria, for example, was deep in high-yield territory with single B ratings from both Standard & Poor’s and Fitch when it printed a US$250mn five-year non-call 3 bond in 2014 at a coupon of 8.375%.

Holders of those notes have faced a torrid time, with the yield leaping into the 20%s in March this year – equal to a cash loss of almost 30 cents on the dollar if they bought and held from the beginning – before settling at 8.65% in early October, according to bond traders. Compared to that enormous swing in yield – and the stomach-churning nose dive in the bond’s price during the period – a 15bps range on 12% is far easier to stomach.

Meanwhile, Scipion targets a more modest 5%-plus return.

“If you can produce returns north of 5%, then you will be happy,” says Clavel at the fund. “In today’s climate, 5% is the new 10%.”

Furthermore, liquidity in emerging market bonds can be patchy, particularly in times of strife. Barak says it can liquidate any investors’ assets within a 90-day turnaround period. Just under US$22mn had been redeemed by Barak’s investors as of December 31, 2015, according to the company.


Gear up

The difference in returns between the two funds comes down to a variety of factors, with leverage being a major influence. Scipion does not use leverage in its funds, while Barak’s new Mikopo structured credit development fund is geared up by 2.5 times and is hoping to hit eye-popping returns of 12% to 16%.

Despite the difference in returns, the funds both purport to attract similar investor bases – institutional investors and high net-worth families based out of Switzerland and the Middle East both feature – though the small size and number of African trade finance funds are probably what drive similar investors into funds with such different investment strategies.

And trade finance funds will likely keep it that way. “I do not see any individual fund being more than US$5bn three years from now,” says Clavel at Scipion.

There are multiple elements holding funds back from extraneous growth. The first is that there are simply not enough deals to finance, or finance fast enough, if money begins pouring into the funds at a rapid rate.

“There is a correlation in the amount of assets under management you have and the amount of people you need to run a credit fund,” says Clavel, alluding to the extra manpower it takes to put ever-larger swathes of money to work.

And in an industry that promises up to low double-digit returns, sitting on cash can be disastrous with central bank interest rates as low as they are.

So what is a trade finance fund to do to ensure they can find deals to finance and keep those returns high? One option is to follow the demands of the rapidly growing middle class, away from raw commodities and towards high-value items.

“As the consumer evolves, so will the funds,” says Majmin at Barak. “We do not see the demand for trade finance changing dramatically because banks are unlikely to provide the credit, however, the type of products being funded will change.

“We are funding more fast-moving consumer goods now, for example, which also serves to diversify our portfolio.”