Traders or Commodity Finance Banks? Part II

“Trading houses’ lending to distressed producers and refiners is booming and cheaper than ever even though many are owed hundreds of millions of dollars after the collapse of some risky pre-financing deals”.

oiltraders

As we explained in  Jacques, S and Simondet, A. (2016)“Traders or Commodity Finance Banks”, the frontier between traders and commodity finance banks is not as exactly clear as one might say.

Me and my co-author explain the role of the prepays, simplify their mechanics and link them to market risk.

trafiguraprepay.jpg

“Around 2011, the world’s largest commodity traders saw a distinct anomaly, this time it was in finance. By depositing metal or another commodity as a collateral and getting money as low as Libor +95bps, they realized that they could also straddle loans for other traders/producers, neutralizing the price delta and purely engaging an arbitrage between interest rates like a bank thus creating a profit center between Trade Finance and Credit Finance”.

“In fact, at one large trading house, the finance spread became so attractive that the commodity loans origination arbitrage opportunities became the greatest profit center over the margins on the purchases and sales of physical commodities”.

“The finance incentive underpins the willingness of merchants to bid a premium for producers’ commodities”.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2847437

What to keep in mind:

Some big trading models are also dying but banks are in shared-deals with those houses and “protected“.

Many of the borrowers are behind their repayment schedule, failing to supply the commodity or cash-flows to service their facilities.

Despite non-performance, Banks are manifestly reluctant to provison their commodity loans. 

The additional dillemma: they are risk-regulated

In the world of Basel, an entire institution would be penalised because of a few non-performing loans.

The measurement of provisions is directly linked to the capital ratio calculation. 

Navigating the commodities markets with Freight and Spreads  © 2016 

Advertisements

Leave your comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s