Audentia Global investor relations head Sophia Vanco and chief of staff Nick Makin answer SCI’s questions
Q: How and when did Audentia Global become involved in the capital relief trades market?
NM: Audentia was founded 2.5 years ago by its co-chief investment officers Fasil Nasim and Chris Newman, who had previously worked together in commodity finance at BNP Paribas, in response to the global trade finance market’s US$1.5trn funding gap (as per Asian Development Bank figures). Their idea was to provide investors with access to the commodity trade finance asset class, given that it is the last pillar of trading to come out of investment banks, while lowering RWAs on bank balance sheets and creating further economic benefits to the banks through redeployment gains.
RWAs for commodity assets have increased with the roll-out of Basel IV and the introduction of an output floor. The new risk spectrum doesn’t easily fit the commodities world, which is concentrated in SMEs and frontier markets that are inherently more capital-intensive sectors. Yet banks want to maintain their relationships with clients and many are waking up to capital relief trades as a solution.
Q: What are your key areas of focus today?
SV: Our strategy centres on partnering with banks and providing credit protection on future and existing commodity trade finance loans originated by them to provide regulatory capital relief. We sit above the borrower’s equity and allow the bank to redeploy the released capital.
As far as we know, we’re the only fund doing this in the commodities space – which is uncorrelated and characterised by low default rates (historically 0.2%, which is lower than triple-B corporate debt) and a robust, deep market sized at around US$15trn.
The aim is not to replicate or compete against the banks; instead, our co-investment structure allows us to benefit from what banks do really well – lending – as well as their operational due diligence, infrastructure and origination pipeline. We have our own screening process on top of this, with a bias towards energy products, as well as exposure to metal and agricultural products. Notional values of oil products are higher than other commodities.
There is significant capacity in the market in which to deploy, in either single-name deals or small portfolios. In time, once working relationships/partnerships with banks have been established, we aim to increase our exposure to taking tranches across commodity portfolios. The final aim is to be partner of choice when a bank is considering a new facility and they know they can bring in Audentia when going through the credit committee process.
Q: How do you differentiate yourself from your competitors?
SV: The Audentia team covers the three pillars of what makes a commodities business successful – expertise in physical trading, commodity finance and derivatives. Most commodity financing funds don’t have physical trading or derivatives expertise – they’re comfortable taking naked exposure because they know the counterparty. However, we’ve built risk management into our strategy and this is a value-add for both our bank partners and investors.
NM: Commodity trade finance requires expertise in commodities and boots on the ground to originate deals. Borrowers are typically privately-owned SMEs, which requires specialists in the underlying in order for investors to get comfortable with the credit. Due to our deep expertise across all aspects of physical commodity trading, we have the ability to assess transactions through a lense that can mitigate perceived risk versus actual risk.
Q: What is your strategy going forward?
NM: Basel IV, which sees capital floors starting in 2022, will lead to banks being penalised even more for lending against the types of collateral that form part of commodity trade finance activities. This greatly increases opportunities for a co-investor, such as Audentia, to introduce third-party capital to these transactions.
We are currently engaged with 15 tier one bank partners based in Asia, France, the Netherlands and the UK. We may grow this network in the future, to include regional banks and specialist commodity banks.
Q: Which challenges/opportunities do you anticipate in the future?
SV: One important factor impacting the industry has been the loss of physical commodity trading knowledge, including how capital can be recovered in the event of default. Audentia’s physical commodity experience allows us to act either as a recovery agent directly or assist the bank in protecting the value of collateral in a default scenario. Again to highlight the robust nature of the asset class, recovery rates in commodity trade finance are 90%+ due to the deals being well collaterised by the underlying goods.
Published by Structured Credit Investor on 26 March 2020.