GTR caught up with four European bankers to discuss the key trends and developments in the commodity trade finance space in 2017 – and what to expect for the year ahead.
Karin Kersten, global head of trade and commodity finance, ABN Amro
What was the best commodity-related deal your bank closed in 2017?
Our best deal is one that is small in size but large in impact. Within our trade and commodity finance business we have a dedicated team called Impact Banking that teams up with clients and uses our deep sector knowledge in order to have a positive social and environmental impact on the value chains we finance. In this light, we are proud to mention that we did two transformative transactions where, together with industry leaders, we financed thousands of coffee farmers in Central America and East Africa.
In terms of financing, what were the main trends for 2017?
The main trends for 2017 were the further development of medium-term pre-export finance business in China and the further opening up of certain Latin American markets.
How did regulation and compliance impacted commodity trade financing in 2017?
Both Basel IV and MiFID II are approaching, and these pose considerable challenges for the commodity finance business. We engage with our clients about the extra regulatory requirements and what this means for them.
What emerging technologies and processes are disrupting the commodity trade finance space?
We at ABN Amro believe that technology and innovation are a welcome addition to our business and we have decided to invest considerable resources to support innovative solutions that will shorten time to market. A good example is that we have invested as a founding member in a post-trade platform using blockchain technology. We did this together with two other banks and leading oil majors and oil traders. We believe in working together with these companies and see it as an opportunity instead of a threat.
What is your outlook for the commodity finance sector for 2018?
2018 will be a steady year with decent prices, but in a low-margin environment where the true function of a market participant is key to generate accretive margins. Further consolidation will bring event-driven opportunities.
John MacNamara, global head structured commodity trade finance, Deutsche Bank
What was the best commodity-related deal your bank closed in 2017?
Our Chinese clients continue to attract oversubscription in syndication. The US mid-stream has also been good to us, the traditional client base in Europe has been very steady, and the Commonwealth of Independent States is finally picking up.
In terms of financing, what were the main trends for 2017?
The recovery of commodity prices is a tide that has lifted many ships but the year did get off to a slow start. On the other hand, LME Metals Week in London in November was very up-beat, and oil is at three-year highs. There is a lot going on right now.
How did regulation and compliance impacted commodity trade financing in 2017?
I think banks have over-reacted to the new regulatory environment, and the self-imposed millstones have really slowed everything down. In the old days, you would reckon on two weeks for a syndication, three weeks if you were generous, and today that is simply unachievable. It takes months. It’s not even a question of ‘high-risk’ clients – it’s the know your customer (KYC) you have to do on every bank in every syndicate that’s the challenge. KYC for financial institutions is a major theme. The issue is not emerging market risk, rather that the stuff that takes the time is what happens when you do a syndication: your African client wants African banks, your Russian client wants Russian banks, your American bank wants to use its London branch, and so on, and everyone has reduced adoptions of bank branches and adopts only the head office. In other words, it’s the environment around higher KYC standards for financial institutions – this is also a natural consequence of FATCA (Foreign Account Tax Compliance Act) – that has really slowed syndications down, which we ask clients to understand.
What emerging technologies and processes are disrupting the commodity trade finance space?
There’s a lot more heat than light around blockchain and I will believe it when I see it. More constructively, there are developments in electronic warehouse receipts to help avert fraud. Digital platforms are becoming the smartphones of the day. Everybody is using these, whether for collateral management or client interface. This is the new norm.
What is your outlook for the commodity finance sector for 2018?
It looks good and the upswell in commodity prices is helping. Commodity trade finance has the potential for good responses to the regulatory requirements around knowledge and monitoring of transactions. For example, it is much easier to track a VLCC of crude oil (which you have to do when that oil is your security for your financing) than a truckload of widgets, plus you have a much smaller universe of clients at both ends of the transaction with the financial wherewithal and logistical muscle to handle these sorts of high-value cargoes – when we talk KYC, not only do we really genuinely know all our clients, but we’ve probably known them for a very long time.
The slight cloud on the horizon will be the latest suggestions for Supervisory Slotting Criteria for Commodities Finance (published in June 2016 by the European Banking Authority), where the current draft can only increase costs for everyone.
Jacques Levet, head of transaction banking, Emea, BNP Paribas
What was the best commodity-related deal your bank closed in 2017?
Sucafina Group mandated BNP Paribas to arrange its first syndicated borrowing base financing. The financing – up to US$300mn – enables the financing of Sucafina’s coffee trading activity on three continents, all possible seas, in 80 warehouses in 20 countries, with securities taken in 14 of those countries. The innovative and sophisticated structure relies on three tranches – one committed for US$115mn – and includes two co-borrowers, one based in the US. The partly committed structure ensures a reliable supply of liquidity.
The amount leaves headroom for the client to grow its business, particularly in North America. The syndicated financing is intended to accompany Sucafina for a number of years, adapting and evolving with the development of its activity. BNP Paribas (Suisse) acted as sole bookrunner and mandated lead arranger, sole documentation bank, security agent, joint account bank and sole hedging brokers. This financing involved 11 lenders, with four new banks to Sucafina banking pool – and it has been hugely oversubscribed (+43%).
What emerging technologies and processes are disrupting the commodity trade finance space?
At BNP Paribas we believe strongly that blockchain, big data and AI are disrupting commodity trade finance. These technologies are behind numerous BNP Paribas digital initiatives. Concretely, blockchain allows real-time monitoring of goods used as collaterals, for instance. All parties to a contract can have access to the same verified transaction record, available through a distributed database. It enables faster processing of transactions by reducing labour-intensive tasks such as manual reconciliations and redundant data capture.
Jasper van Schaik, global head of trade and commodity finance, Rabobank
What emerging technologies and processes are disrupting the commodity trade finance space?
At Rabobank, we obviously see blockchain as the main disruptor in our future world.
Where the internet is the global system of interconnected computer networks for information sharing, the blockchain is the global system of distributed ledgers ensuring a secure and confirmable transfer of digital assets across expansive networks through a transparent supply chain.
A distributed ledger enables two parties (traders and a supplier or offtaker) to do business real-time in a reliable way, without really knowing each other and without involvement of an intermediary (a role currently often provided by a bank). From the traditional two-party exchange of data (title documents, quality and quantity certificates, customs forms, etc), distributed ledger technology (DLT) allows participants to reach multiple supply chain partners and stakeholders in a peer-to-peer fashion.
Basically, blockchain is the internet 2.0. Where the current internet is about sharing information, blockchain and DLT offer extra on transaction capability and security. In other words, a common administration with market players, optimising the physical flow of products/transport and related trade documents and financial support. The clear advantage lies in complexity reduction, a single source of truth, speed in lead time, efficiency, reduction of fraud sensitivity, amongst others.
Blockchain technology can digitalise and authenticate records across very traditional paper-intensive processes such as letters of credit and collections.
With the use of blockchain technology, each component of a transaction can be recorded and traced, making the ultimate destination and use of the funds clearer.
Terms and conditions of a contract will be set in a digital contract (a so-called smart contract), and can be shared through the distributed ledger.
Each party across the supply chain, including ship owners, insurers and agents, will input and validate the data exchanged through the distributed ledger, and the data will be irrevocably matched against the sales contract and the terms of the letter or credit/collection. Data are validated and electronically linked to events which can automatically trigger real-time self-executing steps such as the transfer of a digital asset and payment/financing when certain conditions are met.
All participants will be able to view the transaction history, and track real-time when ownership of the goods changes hands and see the next steps to be performed.
This process can also potentially change the way credit and risk assessment are undertaken as the creditworthiness of users could be traceable through the ledger and could therefore help secure participants to secure working capital.
Marketplaces could attract direct financing for transactions presented on the platform.
The above examples are a number of ways in which blockchain could disrupt trade and commodity finance in a positive way.
The context will change rapidly: commodity trade and commodity trade finance will not be like before, and Rabobank is highly excited about it.
