“We estimate that there is $1.5 trillion of annual flow in the sub-investment grade trade finance space. “
It is a huge, underserved opportunity set. Banks are increasingly absent, due to Tier 2 capital constraints, which creates regulatory pressure to delever. Banks also have to meet new minimum revenue thresholds for each client. Small exporters are rarely big enough clients for the banks.
Of this $1.5 trillion, we see that commodity trade finance adds up to around $50 billion of annual flow. Of this, the vast majority (as high as 85%) is financed by commodity merchants. The firms provide the finance, but they insist on being the offtaker. This is bad for the exporters as they can suffer adverse prices pressure and expose their supply chain to competition.
As a result, we see that only 5% of the commodity trade finance market receives impartial lending. The pressure on the banks and the actions of the commodity merchants makes us believe that impartial lending will rise to 20%. In other words, it will increase by a factor of four. That is a huge opportunity set for alternative, impartial lenders.
There are many benefits arising from the growth in alternative, impartial lending. It will allow banks to maintain relationships with smaller clients, without breaching minimum revenue guarantees nor capital ratios. And It will help the exporters gain more control of their offtake arrangements. When will this happen? The recent growth of the sector makes us think it will occur by 2022. The way that commodity exports are being financed is changing rapidly.