Non-traditional securitisation: Inventory securitisation

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In our previous newsletter issued in June, we introduced whole business securitisation and went deep into its structure and its benefits brought to the business owners. In this month’s newsletter, we continue to look at securitisation of the next non-traditional asset – inventory securitisation and illustrate this innovative financing technique through two successful cases: securitisation of diamonds and commodities.


Introduction

Like whole business securitisation, inventory securitisation also provides an opportunity for companies to diversify away from traditional financing methods with potentially reduced financing costs and other benefits. For companies having a large amount of inventory goods, they can raise financing and create cash flows with their inventory through securitisation, rather than waiting for cash flows only when the inventory is sold. Inventory securitisation is usually focused on inventory goods in regulated and organized markets or inventory goods with high tradability and high durability. Assets viable for inventory securitisation are illustrated in the diagram below[1]:

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The Rosy Blue Diamond Securitisation Deal

This securitisation raised USD100 million for Rosy Blue NV, a Belgian diamond trader. At inception, the inventory of diamonds valued at USD165 million were sold to a SPV, which issued notes to the investors to raise funds to purchase the diamond stocks from Rosy Blue NV. The SPV then delivered the diamond stocks back to Rosy Blue NV on consignment basis so that the diamond stocks remained with Rosy Blue NV while their ownership belonged to the SPV. Whenever any diamond was sold, the SPV would sell the diamond to Rosy Blue NV, which would in turn sell and deliver such diamond to the buyer. The proceeds from the sale would go directly to the SPV first and then be paid to Rosy Blue NV for the SPV, through Rosy Blue NV, to buy fresh diamonds. At all times, investors’ investments were fully collateralized by the diamond stocks and outstanding receivables as well. The following diagram shows a graphic of the simplified legal structure of the Rosy Blue diamond securitisation deal:

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The Trafigura commodities securitisation deal

In recent years, Trafigura, one of the leading commodity trading and logistics companies, launched a commodities securitisation programme and raised USD470 million to finance its inventory of crude oil and refined metals. It took two years to structure Trafigura’s assets. At the inception, the bonds were not rated yet but had been structured to satisfy a rating agency methodology. Eventually, the senior bonds received an “A” equivalent rating. All the commodities were sold to a SPV on a true sale basis under a commodity purchase agreement, which granted the SPV the right to sell the commodities back to Trafigura. The SPV issued USD470 million in aggregate principal amount of senior variable funding notes, through private placement, to six banks. The legal structure is similar to the Rosy Blue diamond securitisation deal as illustrated above, in which the SPV was formed for the sole purpose of holding the inventory of commodities and issuing tradeable notes to the investors and investors’ investments were at all times collateralized by the inventory and sales proceeds.

The structure of this deal could be taken as a reference when other commodity trading companies seek new financing. Various commodities are viable for inventory securitisation, which include (i) agricultural commodities such as grains and oilseeds (corn, soybean, oats, rice, wheat), livestock (cattle, pigs, poultry), dairy (milk, butter, whey), lumber, textiles (cotton, wool) and softs (cocoa, coffee, sugar); (ii) commodities for heat, transport, chemical manufacturing and electricity, such as renewable fuels (biofuels, biodiesel, ethanol), primary non-renewables (coals, crude oil, natural gas liquids, natural gas) and secondary non-renewables (gasoline, jet fuel, diesel, bitumen, condensate, naphtha); and (iii) metals and minerals such as iron ore, aluminium, copper, zinc, lead, nickel. Closer to home, inventories of retail stock, such as sneakers, fashion, luxury goods, toilet paper, and masks may also be considered for inventory securitisation.


Conclusion

Through securitisation, inventories could help a company to raise additional funds, increase its cash flow liquidity and decrease its reliance on bank loans. The structure and mechanism of inventory securitisation discussed here will undoubtedly evolve over time and adapt to changing market conditions.

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[1] Fabozzi, F. J., & Choudhry, M. (Eds.). (2004). The Handbook of European Structured Financial Products (Vol. 131). John Wiley & Sons.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2020