SG Corporate & Investment Banking (SGCIB) completed the $325 million commodity securitization conduit program for Trafigura Beheer BV, backed by oil and metal export receivables through the private placement market last month. Sources at the underwriter said that based on the positive reception, the issuer is already paving the road towards a public market launch in the near term.

"Securitization replaces traditional commodities finance sources, frees traditional bank lines to increase the company's business volume," said Benoit Champion at SGCIB. "Bank lines tend to be quite expensive in that business, and this type of deal provides funding at the triple-A and triple-B levels and it ends up being much cheaper for these guys."

SGCIB noted that the program would enhance Trafigura's already established bank financing and added that banks would continue financing the company's oil and metal cargoes purchases through the dedicated financing lines. However, the program will accelerate the turnover of bank lines, which were formerly repaid when the clients cashed out the price for the resale of a cargo. Under the securitization structure, the lines will be repaid at the time the invoice is issued and purchased by the program.

The inaugural launch of the program was completed last month and offered investors a $300 million five-year triple-A rated A class and a $25 million five-year triple-B rated B class. While Trafigura is unrated, the company would be below-investment grade if it were, said a source close to the transaction.

The nature of the underlying assets makes the deal unique and not easy to manage, because of the frequency and size of turnover. Receivables are held on counter parties in more than 50 countries on six continents. The inter-creditor agreement with 20 of Trafigura's banks monitors interactions of the program with Trafigura's specific financing arrangements. Each receivable has a high value - individual oil cargos total $40 million to $50 million - and high turnover, which requires daily monitoring of each cashflow.

The structure incorporates mitigating factors that dealt with this and included a very tight built-in legal and operational features allowing for a triple-A rating without the use of a third party wrap or support facility. "We had to integrate the securitization program with the traditional bank financing lines and go through inter-creditor agreements which makes it all a bit more complicated," said SGCIB's Champion. "On the other hand, the fact that the bank's commodity specialists initially finance the assets, provided rating agencies and investors with additional comfort as to the quality of the assets."

The securitization structure had to incorporate a system allowing the program administrator to track the daily asset fluctuations and adjust the amount of funding under the variable funding notes on a weekly basis. The use of a segregated collection account in the name of the SPV ring-fenced the payment flow from the assets against the company's estate.

"This deal gives the company access to the capital markets when it had reached a point where its growth could be limited by the financing available on the commodity finance bank market," said Champion.

Thus far, the reception has been positive and sources at the SGCIB said that a built-in feature of the program would allow the company to access the public market in the near-term. "On the investor side, indications have been positive up to now, and people are just waiting for this to

go public," said Champion. "We believe that the fact that the underlying asset is oil will facilitate public placement."

Swiss-based commodity trading firm Glencore AG completed a similar transaction last year. Its conduit, Arth Capital Corp., was backed by unalloyed base metals inventory sold by the issuer to Base Metals Finance Company limited and hedged at least once every three commodity business days. According to sources at Bemo Securitization, the word is that the commodities market is gearing up in Europe with an increasing number of institutional investors allocating more to alternative assets in their structured finance deals.

"More companies will want to access capital markets and more banks will also be looking to do these deals - lower rated entities become more attractive candidates for securitization in the current regulatory environment - to the extent that one can structure transactions that are safe enough, which is possible with commodity-related assets" said Champion.

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