* Loans: Higher margin reflects lenders’ growing unease over sector
By Chien Mi Wong and Mirzaan Jamwal
HONG KONG, May 22 (LPC) - Gunvor Group is offering a 20bp higher margin on its latest Asia-targeted syndicated loan, in the first test of new pricing levels for the commodities sector since the coronavirus outbreak.
The Swiss trader’s South-East Asia unit, Gunvor Singapore, has launched a US$500m one-year refinancing with top-level all-in pricing of 190bp based on an interest margin of 115bp over Libor.
Those price points are 20bp and 15bp richer, respectively, than the margins on a US$455m one-year deal the borrower signed in June 2019. Gunvor’s 2019 financing attracted 22 lenders, including six lead arrangers. In contrast, this year’s deal is self-arranged.
“Pricing needs to be changed to reflect increased in funding costs to most banks,” said a Singapore based loan syndications banker. “It’s the quantum of increase that will be most intensely negotiated.”
Gunvor is typically the first among several commodity traders that tap the syndicated loan markets in Asia (ex-Japan) every year, and the response to its latest deal will be closely watched by other commodity credits that are expected to return in the second half of the year.
Between August and October last year, the Asian subsidiaries of Louis Dreyfus, Mercuria Energy Trading and Trafigura Group, along with Olam International, closed loans totalling US$4.88bn.
Louis Dreyfus is expected soon as it has a US$500m three-year revolving credit facility due in September. The Netherlands-headquartered commodities trader’s Asian arm was sounding out relationship banks for a new loan in April, but put that on hold pending the closing of a separate loan in the US first, banking sources said.
The commodities sector has been hit hard by the coronavirus pandemic, with plunging prices pushing numerous companies into financial difficulty.
Singapore-based Hin Leong Trading was placed under the management of a court-appointed supervisor in April with debts of over US$3bn, after it was caught out by the slump in demand for oil and failed to secure new credit lines. It also admitted to hiding US$800m in futures losses over several years and said it had already sold a lot of its inventory, according to court filings, leaving its 23 lenders at risk of heavy losses.
Smaller commodity players are already facing stress and risk being cut off from crucial funding. Earlier in May, HSBC filed a court application to place Singapore oil trader Zenrock Commodities Trading under judicial management over non-payment of dues and other issues.
In March, Hontop Energy, an oil trader linked to a Chinese refiner, went into receivership, blaming cratering demand due to Covid-19. The same month Singapore’s High Court rejected commodity trader Agritrade International’s request for a debt moratorium on US$1.55bn in outstanding liabilities to dozens of creditors, including US$983m owed to secured lenders. At least 20 banks face losses from the collapse of Agritrade.
“It is bad timing for the commodity companies to refinance because of the Covid-19 impact and Hin Leong default,” said a second Singapore-based loans banker. “Banks are more cautious now and borrowers have postponed deals for these reasons.”
FLIGHT TO QUALITY
While the commodities sector continues to see price volatility, not all commodity traders are expected to struggle with their fundraising plans.
Bankers believe that the larger, stronger players – including the likes of Swiss firms Mercuria and Trafigura and Singapore-based agri-business Olam – would be able to navigate choppy markets.
“I believe the crisis is mostly affecting the smaller, Asian trading houses,” said a Singapore-based relationship manager at a Chinese bank. “International banks will continue to support the larger, global trading houses, although participation will be limited to just the refinancing amount and not incremental amounts.”
The first Singapore-based loans banker said: “There will be a flight to quality. The top-tier ones with transparency over their structured trade financings will survive. Those that are less forthcoming or smaller will suffer.”
Others believe that the composition of the syndicate of lenders will also shrink.
“A 30-bank syndicate for the top-tier commodity names is a thing of the past,” said another senior Hong Kong-based loans banker. “Smaller banks that previously were participants in commodity deals are unlikely to feature this time.”
Given the troubles the sector faces and the risk-aversion from lenders, syndicated lending for commodity credits could take a hit this year, exacerbating a slowdown last year when such loans raised US$15.41bn from Asia (ex-Japan), according to Refinitiv LPC data.
The 2019 tally for syndicated loans from the commodities sector in the region was 4.17% lower than the US$16.08bn raised in 2018 and a far cry from 2014’s US$29.33bn, which was a record since 2009.
Reporting By Chien Mi Wong and Mirzaan Jamwal; Editing byPrakash Chakravarti and Steve Garton