Insight & Analysis

Vindication for syndication

Published: Nov 2023

In a difficult year for the syndicated loan market, commodities giant Trafigura has continued to lean heavily on its banking partners.

Multiple people looking at loan agreement

Trafigura is a market leader in the global commodities industry with in excess of 12,000 employees across more than 60 offices and turnover of US$318.5bn for the financial year 2022. The company requires a large amount of financing for the huge quantities of oil and petroleum products, non-ferrous concentrates and refined metal, and bulk minerals it moves every year.

Speaking at the LMA syndicated loans conference in September, Laurent Christophe, Group Treasurer explained the company has access to US$75bn of credit lines, including about US$10bn in revolving credit facilities and US$16bn of corporate facilities.

“We have developed over the years a model to finance our working capital using trade finance, a very versatile tool that is effectively financing shipments in a secured way,” he said. “We also have long-term financing in place, such as revolving credit facilities and bonds. It’s kind of a symbiotic model whereby on a daily basis we have been financing shipments using trade finance, but also using the revolving credit facility to pay for the daily margin calls.”

Trafigura hedges all its physical commodities, so when the price of a commodity goes up it has to pay a margin call on the derivative position.

“This means we need to have cash at hand at all times and when I say cash, we are talking about billions of dollars,” said Christophe. “This model works very well – it provides access to the liquidity we need as well as bridging the financing of the investments we make into long-term assets.”

The company works with around 150 banks and Christophe acknowledged that managing such a large banking group takes time and energy.

“There are over 200 people in the finance team and a lot of different touch points, but the banking community is the bedrock of our financing model,” he said. “I expect my banks to take the time to understand what we do and I tell them to ask as many questions as they want. They are able to take the time they need to understand the way we operate and our risk management framework, which is extremely important.”

Christophe reckons he spends about 30% of his time managing this banking group, providing them with updates on the business, and believes they have played a key role in helping the company manage the commodities liquidity issues caused by the war in Ukraine, which severely disrupted supply chains.

“We needed to backstop what could have become a full blown crisis and were able to very quickly put in place some backup lines,” he said. “There was a lot of discussion with our banks to provide information about sensitivity analysis on our books and our liquidity position. They were able to understand there was no idiosyncratic issue with our company or others in the sector.”

To meet margin calls in the order of billions of dollars, Trafigura looks first to its existing partners, but also looks beyond its banking group because these institutions will have their own limits.

“Diversification is one of our key principles,” said Christophe. “We have worked over decades to diversify our access to capital. For example, we were one of the first companies in our industry to issue in the debt capital market. In the US placement market we have a securitisation programme on receivable inventory, so we tend to be very creative as long as we can source a stable pool of liquidity.”

Last year Trafigura started talking to private debt funds, but found the magnitude of the issues facing the industry was difficult for them to digest.

“Stepping into a situation like that where it is so uncertain and you don’t have a long relationship can be daunting so they were unable to close the facilities that we would have expected to, although we are still in discussion,” said Christophe. “Another important development was to source liquidity from export credit agencies.”

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