TMT Metals, one of the traders Trafigura has accused of participating in a “systematic” fraud scheme, was turned away by lenders in 2021 after concerns over the viability of its proposed financing terms, GTR has learnt.
According to internal company documents seen by GTR, TMT Metals was seeking inventory or voyage financing for London Metal Exchange-grade (LME) nickel in early 2021.
The documents say payment terms would be 60 to 90 days, with ticket sizes of US$2.5mn to US$5mn carrying a funding requirement of US$11mn to US$13mn.
However, multiple lenders say they turned down the opportunity, on the basis that TMT was offering to pay extremely high premiums that did not appear to make commercial sense.
The company has since been accused by Trafigura of participating in an alleged US$577mn fraud scheme orchestrated by Indian businessman Prateek Gupta, in which the trading giant provided transit finance for shipments of nickel that was not actually on board.
Oliver Chapman, chief executive of supply chain procurement OCI Group, says he was approached by TMT Metals in early 2021 for help purchasing nickel, but decided against taking up the opportunity.
“The major red flags for us were around the price of the interest payments,” he tells GTR. “They were looking to pay 12% per annum, which is way above what you’d expect them to be paying.
“For instance, if they’re only supposed to be making 1% or 2% on a trade, how could they pay 3% in financing fees over a three-month period? It’s just not a viable business model.”
Another source, speaking on condition of anonymity, says their company – a higher-yield non-bank lender – was approached in 2021 by an intermediary seeking financing on behalf of TMT Metals.
“If it’s a robust counterparty that’s involved in the trade, any LME metal merchant should be borrowing at SOFR plus,” they say – referring to the secured overnight financing rate benchmark for dollar-denominated loans.
“There are plenty of banks that would finance metals at that rate, so why would you bother bringing it to a much more expensive lender? That was the immediate concern that I had.”
The cost of a trade finance facility does not tell the whole story. Some industry insiders suggest that paying seemingly excessive premiums can make commercial sense in some cases.
For instance, a trader might have a separate lower-cost line of finance with another lender, giving them an overall blended cost of capital that may ensure trading activity remains profitable.
“In order to look more closely at whether a particular rate was appropriate, you also have to look at the loan-to-value ratio, and determine whether it was in line with expectations,” a source familiar with the case says.
“And it may well be that for the borrower – in this case TMT – maximising liquidity was of more importance at that moment than actual profitability. People do pay for liquidity.”
Additionally, hedging costs could be incorporated into the rate a borrower pays.
The TMT documents say that “no hedge will be transferred/involved with the bank/fund” and that its LME hedges are maintained via credit lines with brokers, but the lender may take its own hedging position if it is taking title to the goods and pass that on.
Jean-François Lambert, founder and managing partner of Lambert Commodities, adds that transactions involving LME-grade or LME-warehoused metals often involve an element of counterparty financing.
“When this is the case the trading margin is inflated to accommodate the cost of financing,” he tells GTR. “The weaker the collateral or the weaker the counterparty, the higher the spread, and this probably explains the astonishing mark-up.”
Lambert says financing on such terms remains unpredictable, however, adding: “Is it worth the gamble? Certainly not for US$500mn exposure.”
TMT Metals has not provided a comment as of press time.