(Corrects in paragraph 30 to show Allen & Overy advised on the
deal, not Glencore; also removes mention of Societe Generale in
* French banks' dominance in traditional trade finance
* Biggest trading houses fill the gap
* Money still coming from banks, traders seek access to
By Dmitry Zhdannikov and Ron Bousso
LONDON, July 17 The world's top trading houses
appear to be quickly turning into commodity finance banks, by
lending billions of dollars to clients as a decades-long
dominance of French banks shrinks.
The fast growing trend has made big headlines in the past
year every time a large Swiss trader provided financing to a
counterparty, ranging from European refineries to African state
The trend is certainly growing, yet bankers and trading
executives say it is far more nuanced than merely the exit of
banks and the entry of traders.
Banks such as BNP Paribas have cut funding of
small and mid-sized companies with low credit ratings because of
growing regulatory and political pressure, risk aversion and
But banks still feel comfortable in providing large trading
houses with billions of dollars in credit lines and then often
watch this money being re-lent at higher rates to those they
chose not to deal with directly.
Recent deals have shown how far trading houses have gone in
providing commodity finance. Last month, Glencore agreed to
provide a $1.4 billion pre-payment loan to Chad's national oil
company. Its rival Vitol this spring signed a $500 million trade
finance deal with mid-sized Russian oil firm Bashneft.
"These are exactly the sort of deals we were doing at BNP a
few years ago when we were market leaders," said a former BNP
banker, who left together with dozens of colleagues as the bank
shrank its trade finance department.
"But big traders are still getting money from us, banks, be
it via credit revolving facilities or other lines," he added.
BNP scaled back its trade finance department in the past
years as it cut down on risks amid a U.S. probe over violations
of sanctions against countries such as Sudan..
BNP declined to comment.
Kris Van Broekhoven, global head of commodity trade finance
at Citi, said large trading houses were effectively doing
part of the job previously done by banks.
"Some of the large trading houses are bridging the time
between when financing is required and when banks are able to
provide it. They have become much more active in arranging,
structuring and syndicating financing," he said.
Citi and other U.S. banks have been enlarging their trade
finance divisions to partially fill the gap left by BNP.
Large trading houses have been packing their ranks with
trade finance bankers as they grow in the sector.
"At least 95 percent of the pre-payments we do as Trafigura
are not public deals," head of Trafigura's trade finance,
Stephan Jansma, previously with Rabobank and Fortis Bank, told
Trade Finance Magazine this year.
In summer 2013, Trafigura made public its $1.5 billion
pre-finance deal with Russian state oil major Rosneft
following a similar $10 billion deal guaranteed by oil exports
between Rosneft and rival traders Vitol and Glencore.
The size of the transactions, one of the largest pre-payment
deals ever organised by trading houses, sent powerful signals
about the scale of changes in the market.
"Traditionally, banks that have been involved in pre-export
deals have had less of an appetite for those kinds of
transactions. And consequently traders are stepping into those
deals and restructuring them into pre-payment deals," he said.
But it is also clear, that apart from publicly listed
Glencore, trading houses have relatively small capital.
Trafigura's shareholder equity is in the area of $5 billion and
Mercuria's of $2.7 billion.
So the money has to come from banks.
Trafigura's annual report says it deals with more than 130
banks across the world, has $42.5 billion worth of credit lines
opened to it of which $13.4 billion of headroom or excess
liquidity "to ensure resilience in all market conditions".
A $2.65 billion revolving credit facility raised by
Geneva-based Mercuria last month offers another example.
The deal involved 52 banks and was led by some of the
biggest names in trade finance, including ABN AMRO, BNP Paribas,
Credit Agricole, ING Bank, and Societe Generale. But it also
included many smaller players. To see the list
"I must confess that out of those 52 banks - I've never even
heard of some of the names before. Especially in connection with
trade finance," said a senior executive involved in the deal.
"That just shows that some banks and investors are seeking a
decent yield but don't want to get involved in complicated trade
finance leaving this to trading houses. Compared to five years
ago it is a completely different world."
Trade finance helps small and mid-sized players avoid tying
up large amounts of their capital when trading, as an average
cargo of crude oil costs in the region of $100 million.
But banks generally have much larger capital that even the
biggest Swiss traders, who now act as lenders.
"What is already happening is the transfer of risk from
banks to traders which have very much smaller capital and which
are less regulated," a former senior BNP employee said.
Others say traders split risks with banks.
"Traders are willing to take on up-front risk in the deal.
They commit to the deal with the producer before they get the
liquidity to finance the purchases," said Adrian Mellor, partner
at law firm Allen & Overy, who advised on the Chad oil deal.
"Trading houses will seek to keep a portion of the risk, so
that they keep 5-10 percent of the loan for themselves," he
said, adding there were around 8-10 banks in the Glencore
syndicate and it was still accepting new ones.
Unlike banks, which provide just financing, traders will
always seek to have access to the material exported or imported
by a borrower in order to earn an extra margin.
For example, Glencore and Vitol are top off-takers of oil
from Chad's state oil company and Bashneft respectively.
That sometimes creates an industry perception that large
Swiss traders will squeeze the last drop out their client.
However, a trader with a Mediterranean refiner said he is
actually benefiting from the trend: "There isn't one refiner in
today's reality with the awful refining margins that doesn't do
trade financing with traders."
"They give an open credit line and in some cases you are
ready to pay more than you would to banks because the conditions
are better," he said.
(Additional reporting by Simon Falush and Emma Farge, editing
by David Evans and William Hardy)