Learning from emerging markets


On October 2, 2006, acting as coordinating bank, agent, initial mandated lead arranger, underwriter and joint bookrunner, Deutsche Bank signed a syndicated debt facility of up to €850mn for Italy’s KME Group, one of the world’s largest producers of copper products. This facility was signed alongside another credit facility of up to €800mn signed by GE Commercial Finance.


KME Group is based in Florence, Italy and Osnabruck, Germany and is one of the leading producers of copper and copper alloy semi-finished products in the world. It has 15 plants in Italy, Germany, France, UK, Spain and China and two research centres.


GTRdoesn’t make a habit of awarding deals that aren’t in emerging markets, but what makes this one stand out is that it is a first for a multi-jurisdictional commodity-backed ‘borrowing base’s structure for a major European industrial processor across all the major European legal jurisdictions that takes advantage of new legislation regulating the taking of current asset collateral.


It was structured to comply with best practice for commodity collateralised transactions under Basel II which will help protect the company from unwelcome increased costs from Basel II implementation.


“This is a ground breaking deal for commodity finance, bringing the techniques developed in emerging markets into the Western European arena,” says the lawyer for Deutsche, Andrew Gamble at Lovells in London. “This facility for a European group involved taking security in the UK, Germany, France, Italy and Holland and necessitated grappling with a number of difficult issues in relation to security over inventory in continental jurisdictions. In particular, the facility saw the use of new security instruments which have only just become available to certain continental jurisdictions. It also had to address issues that arose in operating an Italian bank sub-group within the context of the overall European syndications for both Tranche A and Tranche B.


“KME Group had a number of financings from different banks and needed to integrate those financings into one facility and provide themselves with a range of different means by which they could draw down against the combined facility.”


Joining Deutsche as MLAs for its two-tranche facility were BNL, Capitalia, Commerzbank, Dresdner Kleinwort, HSH Nordbank, Mediobanca, and UniCredit.


Tranche A is an up to €650mn three-year borrowing base facility, secured on inventory in Italy, Germany, France and UK and designed to allow flexible drawings on a revolving basis to provide headroom for KME’s working capital.


Tranche B is an up to €200mn five-year amortising tranche with a three-year grace period, secured on fixed assets in Germany. Tranche B is secured on fixed assets including buildings, plant and machinery in Germany at the five production sites, the largest of which is Osnabruck.


Tranche B’s higher pricing reflects the different capital weighting afforded under Basel II to collateral in the form of commercial real estate as opposed to commodities, claims Deutsche.


The agreement signed with GE Commercial Finance consists of a five-year non-recourse trade receivables factoring facility with a credit line of up to €800mn.


GE didn’t syndicate its facility, being a bilateral loan and its largest in Europe. The global agreement was executed in parallel to the bank signing but operationally the factoring facility is being rolled out by individual jurisdiction, starting with Germany and then the UK.


The relationships between Deutsche Bank and GE Capital are regulated by an inter-creditor agreement which enables the two facilities to provide mutual support for each other to their benefit and that of the group.


“Our facility ‘breathes’s with the copper price, offering the client much greater flexibility to absorb higher copper prices without having to over-capitalise the company or seek further approvals from their banks for working capital needs,” says John MacNamara, managing director, structured commodity trade finance, at Deutsche in Amsterdam.


“The deal received a very positive response during the senior phase and general syndication confirms the developing interest in the market for this type of commodity backed transaction.


“It required not just innovative structuring but the ability to act as agent on a facility of this complexity (effectively Deutsche was security agent in Amsterdam, facility agent in Frankfurt and for legal, fiscal and regulatory reasons, Italian agent in Milan).




Deal information:


Borrower: KM Europa Metal AG and subsidiaries
Amount: Up to€1.65bn
Initial mandated lead arranger: Deutsche Bank
Mandated lead arrangers: BNL; Capitalia; Commerzbank; Dresdner Kleinwort; HSH
Nordbank; Mediobanca; UniCredit
Guarantor: KME Group
Tenor: 3-5yr
Margin: Tranche A – +125bp; Tranche B – +175bp
Law firms: Lovells (Deutsche); Weil Gotshal; D’Urso Munari Gatti  (borrower); Allen & Overy; Bonelli Erede Pappalardo (GE Capital)
Date signed: October 2006