Belgium's Diarough offers $150M of Diamond ABS
Belgium-based diamantaire Diarough is offering $150 million in notes backed primarily by its inventory of rough and polished diamonds, according to a presale report from Kroll Bond Rating Agency.
The transaction, Four Seas 2017-1, consists of two $75 million senior tranches, one with an anticipated repayment date of August 2021 and the other in August 2024. Both are rated A rating from Kroll and pay a fixed rate of interest.
Guggenheim Securities is the initial purchaser.
Collateral consists primarily of the company’s inventory of polished and uncut diamonds, as well as its outstanding receivables. The deal includes a borrowing base concept requiring the value of collateral must equal or exceed the debt balance by day-end Friday of every week. If Diarough cannot cure shortfalls for three weeks in a row, rapid amortization is triggered.
In the diamond industry, mining companies sell rough diamonds on a regular basis to long-term contract holders known as “sightholders”. Diarough is one of the few diamantaires to have four separate sightholder agreements with major mining companies. Along with the trading of uncut diamonds, Diarough also manufactures jewelry and sells polished diamonds. According to the Kroll report, the company is an experienced servicer capable of meeting market demands due to its unique position and overall exposure to various sectors within the mining industry.
Diarough is a family-owned business currently operated by the second generation of the Parikh family. Right now, the family’s third generation is becoming acquainted with the company and preparing to assume control of its operations in the coming years. The family is providing over $40 million in subordinated notes and equity for the securitization, giving it financial interest in the securitization. Kroll also noted that the family has contributed additional equity to the company during economic downturns over the past ten years, demonstrating its commitment to the company’s success.
The growing synthetic diamond market poses some risk to diamantaires like Diarough. Although there is no indication of a preference for synthetic diamonds over mined diamonds, synthetics have identical chemical compositions to mined diamonds and are created with “specific qualities and characteristics to enhance marketability." According to Kroll’s presale, there have been several instances where comparable synthetic diamonds cost anywhere from 30-40% less than their mined counterparts. Furthermore, many individuals and activists groups have raised social and ethical concerns surrounding diamond mining practice, potentially lessening mined diamond demand. Lastly, although Diarough checks all diamonds they purchase from vendors other than Mahendra Brothers and the company’s four affiliates with the latest technology to ensure it is not synthetic, it is difficult to verify a diamond is not synthetic for lower-carat diamonds used in small pieces of jewelry.
Kroll also noted that the possibility of discovering a new diamond deposit in the coming years is unlikely. The exploration of a diamond site is a “lengthy process” requiring a large amount of capital investment, though profits are in no way guaranteed. The last major diamond deposit discovery occurred in 1997 with the discovery of the Murowa deposit in Zimbabwe.
Diarough was founded in 1975 and has since been actively involved with the sale and purchase of diamonds. The company issued a private securitization in 2007 which it later refinanced in 2012. This latest transaction is its first securitization under rule 144a.