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Nedbank has closed a US$12mn revolving sugar import stock facility for Tate & Lyle Sugar Trading, to import sugar into Kenya, Ghana and Togo. Although small in size, the facility could act as a useful template for future soft commodity financings in the Sub-Saharan region, writes Rebecca Spong.

Terry Sparling, head of risk and commodity finance for Tate & Lyle, is sitting in the offices of the sugar company’s London refinery, Europe”s largest sugar refinery, processing over 1mn tonnes of raw sugar every year.

He works on the busy trading floors of Tate & Lyle’s sugar trading house, based within the complex. Tate & Lyle is believed to have the third biggest sugar trading company in the world, and its global network of traders handle around 5mn tonnes of sugar every year in the international marketplace.

Given the credentials of Tate & Lyle”s trading activities, Sparling was slightly surprised with the reactions he faced when he and his team of traders began to look for financing to support its Sub-Saharan African import activities.

“We approached a number of banks looking for means to finance our sugar imports, but due to the small size of the deal, we didn’t find a huge amount of interest,” he remarks.

The trading team then turned to Nedbank, an institution with strong African roots and that prides itself on its knowledge of the Sub-Saharan markets.

“We want to be seen as an African partner bank,” explains John Vowell, director, structured trade and commodity finance at Nedbank. While Tate & Lyle has always worked with a close group of relationship banks, Nedbank has stepped in to help support its more specialised African activities and develop Tate & Lyle’s destination business.

Tate & Lyle’s traders tend to buy their sugar from their main origin markets in Brazil and Thailand before selling it on to destination markets, and they are particularly keen to develop their African business. The three destination markets being targeted by this latest financing are Kenya, Ghana and Togo, but it is hoped that the deal structure can eventually then be applied to other African countries.

Nedbank structured the financing as a revolving facility. The revolving nature of the deal means that sugar can be drawn down as and when needed. This avoids the need for the offtaker to buy vast quantities of sugar which then needs to be kept and maintained in a warehouse.

“We have one committed offtaker in place in each market, through which all distribution will take place. We like to work with what we term as ‘local market champions’ to manage the distribution of the sugar,” explains Paul Baksh, head of whites trading at Tate & Lyle.

Baksh goes on to explain how as a publicly-owned company Tate & Lyle has the responsibility to really get to know their partners in Africa. “We took KYC (know-your-customer) to the nth degree,” he remarks.

Both Tate & Lyle and Nedbank made regular trips to Africa to see the warehouses for themselves, and meet the warehouse managers in person. This level of one-on-one collaboration continued, even when Kenya, one of the key destination markets, faced serious political turbulence when protests against the elections broke out at the beginning of this year.

During the course of the various trips, two collateral managers were selected to oversee the warehouses and monitor the locally-selected warehouse managers, therefore providing insurance against loss of stock. Collateral management arrangements (CMAs) were set up with London-based Drum for the deals in Kenya and Ghana, and Paris-based Getma for Togo.

The deal works by allowing Tate & Lyle to drawdown funds against presentation of a warehouse receipt issued by the CMA partner. All proceeds from the sale of sugar are held in a collection account, which is essentially a straightforward account managed by Tate & Lyle, over which Nedbank holds a charge. When the proceeds are deposited in the collection account, the CMA partners are instructed to release the goods.

Nedbank also has a pledge over the sugar so, for instance, in the extreme situation where Tate & Lyle failed to repay the advance, Nedbank takes control of the goods. All market risk, such as losses and credit default is taken by Tate & Lyle, and the political risk is written into the margin being charged on the Nedbank-arranged deal.

Commenting on how the deal structure helped to mitigate political risks, Charles Morrison, partner at DLA Piper, who provided legal counsel on the Kenyan tranche adds: “The Kenyan transaction includes an element of risk sharing in relation to certain political risks. On the occurrence of a risk event, the borrower’s liability to repay is limited to a certain sum plus the value of the security granted to the bank. The value of ensuring that appropriate security was properly taken and perfected was therefore even more important than usual.”

Ursula Owczarkowski, solicitor at DLA Piper, who also worked on the deal, adds: “The biggest challenge in structuring the Kenyan transaction is related to the security taken by the bank in Kenya.

“The Advocates Remuneration Order in Kenya determines minimum fees which must be charged by Kenyan counsel. We were able to explore different types of security instruments available in Kenya with our Kenyan counsel and agreed upon an instrument which provided the bank with the necessary protections while attracting half the fees that would have been incurred by a debenture. In addition, the chosen instrument was subject to nominal stamp duty as opposed to the ad valorem stamp duty applicable to a debenture.”

The nature of the facility also allows Tate & Lyle some flexibility in managing its trade flows. With prices for sugar, and commodities in general rising, it would have been unwise to arrange a deal where the price of sugar is fixed in advance. The price of sugar is open to much fluctuation, and cost of freight and transportation is inevitably climbing in line with the ever-increasing price of oil. Under this revolving facility, Tate & Lyle can minimise its exposure to the risk of being long in freight costs.

The deal structure differs from import facilities established in previous years. Up until around 10 years ago, trade deals were usually arranged with parastatals, fully or semi state-owned corporations. These arrangements would usually involvement a lump sum investment which would then be repaid in instalments, rather than a facility you can draw down on as and when needed.

“Now the Sub-Saharan market has become privatised, the process of organising deals has become more transparent and open,” further remarks Baksh.

From Nedbank’s point of view, this relatively small facility can now potentially be used across the Sub-Saharan region and finance an increasingly level of business. “In a year’s time, US$12mn revolving facility could accommodate a flow/turnover of up to US$48mn, making it an interesting facility. And the facility structure also allows us to bolt on other countries,” remarks Nedbank’s Vowell.

Nicholas Grandage, partner at Denton Wilde Sapte, one of the lawyers providing legal counsel to the bank for the Ghana and Togo portions of the deal, explains that the deal documentation reads more like a financing programme rather than a single transaction loan agreement. He adds: “Tate & Lyle has operations in many countries in Africa. Rather than arrange a new financing each time, we suggested that the Ghana and Togo deals might be structured in a way that additional countries could be brought into the financing net in the future with the minimal fuss.”

Vowell now hopes the transaction can act like “an umbrella deal for Sub-Saharan Africa,” as well as demonstrate Nedbank’s capacity to tailor-make commodity financings for the sometimes tricky Sub-Saharan market, regardless of the size of the deal.

Deal Information:

Borrower: Tate & Lyle

Sole mandated arranger: Nedbank

Amount: US$12mn

Facility type: Revolving sugar import stock finance facility

Legal counsel: Denton Wilde Sapte and DLA Piper

Date Signed: May 2008