Insight & Analysis

Game-changing sustainable borrowing facility

Published: Jun 2020

Headquartered in Singapore, Agrocorp is a global supply chain company specialising in various agricultural commodities. In June 2020, it announced a US$50m sustainable ‘borrowing base’ facility from FMO and Rabobank.

Aerial shot of a combine harvester in a corn field

Borrowing base facilities are a type of working capital facility. The amount of money which can be borrowed is based on the value of a pool of assets held by the company, referred to as the ‘borrowing base’. Or, as Trade Finance Global puts it: “the amount of credit granted will be determined by the value of the company’s current assets. The pool of assets can vary from time to time, meaning that the credit will vary in accordance with the assets’ value.”

Exploring new waters

The facility is a first for Agrocorp, and Vishal Vijay, Head of Business Development at Agrocorp explains that all other working capital facilities the company has are not committed to a cause such as sustainability. For him, it’s also a promising sign of things to come. “In our industry, all the leading players have committed lines, whilst smaller players have more transactional lines. So getting a committed line is a bit of a rite of passage to Agrocorp becoming a larger player,” he says.

Securing the facility was due to Agrocorp’s commitment to sustainability, he explains. The partnership with Dutch entrepreneur-development bank, FMO, was secured largely due to the company’s decades-long relationship with Rabobank. FMO was looking for a counterparty to support which promotes movement of food into developing markets, explains Vijay. “We’ve been doing a lot of work over the past five years on our sustainable agenda, and so when we presented this to FMO, Rabobank provided comfort to them in order for us to be onboarded as a client and to finalise the facility,” he says.

Nuts and bolts

When it comes to establishing the loan covenants, Vijay explains that this facility differs from that of a traditional sustainability-linked loan. “For us, the pricing advantage is inbuilt at the start of the facility and we have sustainability-linked covenants that we need to meet throughout the course of the year to maintain pricing.”

By comparison, a sustainability-linked loan generally reduces the pricing once certain metrics are reached. Agrocorp’s facility allows the company to get the advantages upfront instead of having to unlock them further down the line.

Agrocorp worked closely with the bank to establish the covenants and ensure that what was required by them was sustainable and achievable. A three-year plan was created that gradually digs deeper into the supply chain to ensure that more of what is being sourced meets sustainability criteria. Currently, in year one, it includes:

  • Appointment of a Group Head of Sustainability.

  • Establishing a Sustainability Committee that reports to the board.

  • Including sustainability metrics as part of the customer and supplier KYC process.

  • Starting a group sustainability report that will be released, covering all the initiatives.

Vijay explains that in years two and three, these goals deepen as Agrocorp will work to better understand its suppliers and customers and try to help them improve their systems and processes. He also adds that the company is also committing to running training programmes for smallholding farmers, starting with a focus on those in Myanmar. “We’re trying to see how farmers can incorporate modern technology but also sustainable farming practices to improve their yields, because we often see extremely low farming yields in that part of the world.”

A timely arrival

Having been in the works for over a year, the arrival of this facility in the middle of a global pandemic was good luck, according to Vijay. The COVID-19 pandemic has caused a lot of volatility in the food and agriculture industry, and he believes that this volatility means that it’s the best time to get a new banking facility. “You can never have too many banking lines right now,” he says.

The facility is also extremely flexible in terms of Agrocorp being able to hold inventory as well as provide for pre-payments in the markets that it sources products from. It allows Agrocorp to source more product to facilitate those into the main customer markets; largely India, Bangladesh, China, and Southeast Asia. This will help the company to grow its volumes, which will ultimately serve it well in the long run, as well as during the pandemic.

Hopes for the future

The move to sustainable financing has been a long time coming for many businesses, and Agrocorp is no different. Vijay explains that this sustainable ‘base borrowing’ facility has been a year in the making. Elsewhere in the food supply chain, Agrocorp is working to improve sustainability. For example, its Australian food processing operations has an onsite solar farm to power it – estimated to save approximately 30% of its consumption per year – and in Canada a protein extraction plant has been built, which produces plant protein that can be used in the alternative meats industry as an ingredient. “Sustainability just makes good business sense,” he says. “It’s not just something that makes you feel good, but it’s something the market actively wants.”

Indeed, consumers are increasingly demanding to know more about the products they buy, and businesses are seeing that flow through the entire supply chain. Agrocorp began tackling this with its blockchain solution that saw it named Overall Winner for Best Fintech Solution at Treasury Today’s 2019 Adam Smith Awards Asia.

The ultimate aim, says Vijay, is to link this new facility with the existing blockchain application, in order to provide even more traceability for customers. The current blockchain platform has performed well with banks, as it has offered them full transparency of the supply chain: where the goods are grown, which farms they’re grown on, the farming practices used, when the product was harvested, when it was brought into Agrocorp’s facilities, and when it’s shipped out.

Linking the two platforms will bring an even higher level of traceability and transparency to the supply chain, whilst encouraging sustainable practices, which in turn unlock lower costs of borrowing.

The same transparency is also being demanded from banks. Vijay notes that many banks’ shareholders are also calling for a higher level of accountability which is why many are looking to divest from companies that deal in coal, or oil and gas, and are instead investing in companies such as Agrocorp that have sustainability on their agendas. “It’s a real gamechanger for us,” he concludes.

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