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Trafigura issuing another $300M of notes backed by trade receivables

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Trafigura is tapping the securitization market to finance another $300 million of credit it extends to customers who purchase crude oil, oil products, non-ferrous metals, non-ferrous metal concentrates, iron ore, coal and refined metals.

The deal, which may be upsized to $500 million, consists of four tranches of notes: two senior tranches, one floating-rate and one fixed-rate, are provisionally rated Aaa/AAA by Moody's Investors Service/S&P Global Ratings and benefit from at least 15% credit enhancement; and two subordinate tranches, one fixed and one floating, are provisionally rated Baa2/BBB and benefit from 9% credit enhancement.

Société Générale, Citigroup Global Markets and SMBC Nikko Securities are the arrangers.

Trafigura issued $300 million a year and a half ago, but since then the balance of receivables in the revolving trust has more than tripled from around $1 billion to over $3.5 billion, according to Moody's.

Altogether, the four new tranches of notes to be issued represent 7.85% of assets (if sized at $300 million).

Trafigura established the program in November 2004 and has issued four other series of notes, in 2007, 2012, 2014 and 2017; all but the $300 million of note issued in 2017 have since matured.

The portfolio includes only receivables that represent physical deliveries of goods that have been invoiced by Trafigura, according to Moody's. Those receivables benefit in many instances from payment undertakings, including guarantees and letters of credit, provided by banks.

Although the program’s revolving period ends in March 2022, the underlying trade receivables have a short average life (on average less than one month). This feature combined with early amortization triggers (mainly linked to performance) strongly protects the transaction against a steep performance deterioration, according to Moody’s.

Moody’s assumes that 0.7% of obligors will default, and 35% of defaulted assets will be recovered; that’s up from its estimate of 0.54% for the deal Trafigura completed last year.

There are no swaps in the transaction: The receivables are all denominated in U.S. dollars.

Among the primary risks to the deal, Trafigura at times has high concentration of end obligors, with in some cases less than 100 end debtors or group debtors. However, the largest concentration limits are allowed only for highly rated obligors (e.g., each obligor rated Aa2 can account for a maximum of 17.5% of the total pool). “These large concentrations in the pool give rise to a potentially greater volatility than would be the case with a less concentrated pool,” Moody’s noted in the presale report.

In addition, many of these obligors are below investment grade and are domiciled in lowly rated countries. During the revolving period ending in March 2022, the issuer may purchase receivables with maximum limits of 30% of unrated or noninvestment grade debtors, 70% of debtors rated below A1 and 25% of the debtors could be located in countries with foreign currency rating between Ba1 and B3. However, Trafigura has most recently faced low concentrations of obligors (less than 1%) domiciled in countries with a foreign currency country rating in the Baa3 to B3 range.

Another weakness is the fact that degree of linkage to Trafigura, itself, which is not rated and acts as both the originator of the receivables and master servicer in the transaction. However, this risk is mitigated by a "hot back-up servicer arrangement" with Société Générale, a major bank in the global commodity finance industry that would be able to step in rapidly as backup servicer if needed as it receives daily receivables reporting.

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