Alternative Finance in Commodities
Category: Insights

Alternative Finance in Commodities: “There is demand for everything from fertilizers to metals”

Demand for commodity trade finance has been rising since the Russia-Ukraine war caused severe liquidity issues for many traders. Mounting ESG pressure also means that traditional banks have been less keen to support those vying to secure alternative sources of coal amid reduced energy supplies from Russia. Many are turning to private credit providers such as US-based Goba Capital. Here, Peter Ryan, Managing Director at Goba Capital, explains what makes it different from traditional lenders and describes its talent needs in the face of increased demand. 

Can you tell us more about Goba Capital and what differentiates it from other lenders? 

Peter Ryan: Goba Capital is a multi-family office, privately held credit provider. We focus specifically on trade finance, providing short-term working capital to support the movement of bulk goods and physical commodities. Our primary competitive advantages lie in our willingness to embrace complex fact patterns and in the flexible solutions, dynamic underwriting processes and speed of execution that we offer. 

Organizationally, we benefit from being incorporated as a company. This separates us from most alternative lenders who operate as regulated funds, relying on issuing securities to raise capital and are subject to liquidity shocks due to unexpected withdrawals. In contrast, Goba’s capital is permanent, allowing us to move quickly to capitalize on fleeting opportunities that require a rapid response. 

With regards to trade and specifically commodities finance, we have the flexibility to support working capital requirements at both ends of the supply chain. We can pre-pay a supplier at the origin and finance pre-export inventory at the port on behalf of our clients in almost any foreign jurisdiction. Most lenders shy away from commodities inventory, focusing exclusively on receivables financing.

We concentrate on the more challenging element of the deal flow: we finance the commodity in transit from origin to the port and when the cargo is on the water bound for its destination, or if transported on land - in a rail car, truck or pipeline. We can also offer extended payment terms to end buyers if required. 

In the commodities space, we are busiest right now financing thermal coal. Price escalation and volatility has been spurred by several factors: Russia’s war on Ukraine, the persistence of the pandemic-induced supply chain issues and the energy crisis in Europe.

Ticket size, Goba’s capacity in terms of facility size for commodities ranges from a minimum of US$5mn to $100mn per program. We can close and fund a US transaction within 30 days of an introductory call and 90 days for a non-US deal involving multiple jurisdictions.  

What sectors and geographies do you currently cover? 

PR: In terms of geography and products we are relatively agnostic. Our single largest program happens to be consumer electronics in Mexico and South America. We finance one of the largest distributors of Chinese-made mobile handsets in that region.

In the commodities space, we are busiest right now financing thermal coal. Price escalation and volatility has been spurred by several factors: Russia’s war on Ukraine, the persistence of the pandemic-induced supply chain issues and the energy crisis in Europe. Due to these disruptive forces and the cut-off of many commodities from Russia, we are encountering demand from cash-strapped traders across the entire spectrum – coal, softs, metals, refined products and natural gas. 
Aluminum is a good example. The market believes there is a real threat that material sourced in Russia will be sanctioned. We're seeing demand for our capital from traders and marketers rushing to secure alternative supply lines. Other new products and geographies we are currently contemplating include metal concentrates sourced in Latin America, precious metals coming out of West Africa and Peru and even anthracite (hard coal) from various origins.  
In the Americas, we also finance natural gas flows from the US into Mexico, as well as transportation fuels; jet, diesel, gasoline - again going into the northern Mexican market from the US Gulf Coast. 

Fertilizers also present interesting opportunities. Venezuela and Russia who have long been suppliers are no longer in the market. Traders who are smaller and more agile are trying to carve out a market niche. Yet, they find themselves un-bankable due to a lack of maturity and thin capitalization. These companies are prime candidates for our working capital solutions. 

We will consider financing any commodity in any jurisdiction for which we believe we understand the country, counterparty and supply chain risks and where we are confident that we can devise a sufficiently robust transaction structure to protect our capital. 

What is the scale of demand for thermal coal financing? 

PR: We are seeing demand from small and medium-sized enterprises (SMEs) shipping single $5mn cargoes once a month all the way up to multi-billion dollar, multi-national companies who are moving several cargoes worth more than $25mn each at any one point in time. 

We are looking at opportunities involving coal originating from all the major producing countries - Indonesia, South Africa, Australia, Colombia, Tanzania and Mozambique. Several large European utilities are importing material and storing it on the ground close to their assets to strengthen supply security and ensure uninterrupted power generation. We are evaluating several such deals in the UK, Italy, Germany and France all involving significant volumes.

Are you not involved in performing the trades?  

PR: Absolutely not. We are strictly a lender and do not compete with our commodities trading clients. However, from a risk perspective it is critical to understand the physicality of the commodity: how it’s transported, stored, processed, handled and delivered. We need to know if something goes wrong at each and every stage of the trade flow from origin to destination. Therefore, we do monitor, track and trace the flows of product, documents and payments in a very forensic manner at a granular level. 

We can take title to goods through a repo structure [repurchase agreement] however only as a mechanism through which we can inject working capital into the supply chain. We do not buy and sell commodities for profit.  
We adopt a very pragmatic, commercial approach to our business. We don't finance speculators, or anyone who's buying a commodity and keeping it in a vessel offshore or a warehouse, hoping that the price goes up. We don't finance cash-and-carry trades either, preferring pre-sold, back-to-back transactions. 

How do your fees compare with other lenders’? 

PR: For most traditional commodities banks interest rates fall anywhere between 4% and 7% per annum. Whilst Goba’s pricing varies from case to case, our current yield floor is 12% per annum. 
Occasionally we encounter an established and large client that is well banked but has a particular flow that its existing lenders won’t support. Rather than decline the opportunity they'll come to us to finance that specific piece. The blended rates result in a weighted average cost of capital to the client that makes economic sense in these special situations. So, we attract larger corporates as well as our base audience of SMEs. 

What is the risk for you? 

PR: The primary risk in all trade finance is fraud, it can take many forms - fake inventory, double financing, phantom receivables, synthetic letters of credit schemes - to name a few.  We look at every metric, data point and statistic that any other prudent lender would look at. However, we are extremely lazer-focused on the character of a prospect’s senior personnel and the integrity of management.  

We take the simple view that if you lend to someone who is dis-honest, you'll lose all your money plus significant legal fees. We understand it's the real world and that in commodities things can and will go wrong. Pandemics occur, wars occur. We can be patient and work with businesses that are facing headwinds, and, in some cases, we can waive certain loan covenants to allow our borrowers to recover from short-term challenges.  

Alternative lenders are often defined as unconstrained. How does this apply to you?

PR: We have no ESG constraints. We finance all fossil fuels. We are not actively going where other lenders won't because it’s fun. We simply have very flexible capital, a dynamic organizational structure and a risk-positive culture when it comes to the products and geographies we are prepared to finance.  

As a private direct lender, we are also free of regulatory oversight, mercifully unaffected by the upcoming Basel IV banking reforms. The reforms will result in banks having to reserve greater amounts of capital to support their trade finance activities and absorb the administrative burden with the additional costs resulting from the tighter regulations. 
Consequently, we anticipate increasing demand for alternative capital from commodities traders as ESG restrictions proliferate and heavily regulated banks become more selective and restrictive in their deal qualification processes. 

Do you see a bigger role in the future for entities like yours to address the liquidity squeeze across energy and commodities markets?  

PR: Yes. As a case in point, the spectre of persistent inflation has led some governments to introduce price caps for energy. These politically motivated band aid measures simply do not work in the long term. They tend to force smaller, undercapitalized operators out of business, resulting in further reduction of market capacity, in turn triggering increased volatility and other disruptive side effects. The bailout of Uniper is a good illustration of what can happen in such circumstances. 

Separately, traders using derivatives to manage risk are scrambling for additional working capital to finance the elevated margin deposits required by exchanges such as ICE and the CME. 

This liquidity shortage and market uncertainty is good for our business. It is spurring demand and reducing price sensitivity. 

What are your hiring needs? 

PR: We are currently expanding our underwriting team. In particular, we need additional credit and risk experts to support our commodities team. We are actively hiring in the United States, Colombia, and Ecuador. 

What specific skillsets are you focused on?  

PR: We are interviewing commodities bankers and inventory finance specialists. In the arcane world of trade finance, digitilization has become a major theme amongst lenders seeking to improve efficiency and reduce fraud.  

Technology is effective when it comes to verifying information, authenticating records - bills of lading, shipping, quality/quantity of title documents, etc.  But digitalization has its limitations if we exclusively count on it to accurately surveil the actual movement and handling of physical commodities across complex global supply chains. 

These processes remain manual and paper-based in some developing countries. There is currently no effective substitute for quality human capital to effectively mitigate misdirection and mis-delivery risks. 

We also need experienced field experts to conduct due diligence site visits for new and existing clients. We inspect transportation assets and physical infrastructure – ports, terminals, warehouses, railcar fleets as a condition precedent to funding. For example, we're looking at several coal inventory financing opportunities in the port of Richards Bay, South Africa. We will send a team to meet with the miners, transporters, collateral agents, port authorities and vessel operators along with the prospect company’s owners and key personnel. Thorough due diligence conducted by highly trained and knowledgeable professionals ensures optimal lending outcomes. We commit to only high-quality transactions that lead to long-term mutually rewarding relationships. – FS

For any query related to HC Group’s activity in capital markets, please contact: 
Daniel Cordell, Portfolio Director, Capital Markets, at HC Group.