* Ex-BNP executives form firm to connect investors, traders
* Banks cut lending in $1.5 trillion-a-year market
* Some trading houses also play role of bankers
By Emma Farge
GENEVA, March 13 Private investors and hedge
funds seeking new ways to gain exposure to commodities may
provide a lifeline to trading houses desperate for the
short-term liquidity that banks used to offer.
European banks have cut their lending in commodity trade
finance, the $1.5 trillion-a-year business of financing oil
shipments or copper deliveries, ahead of Basel III restrictions
aimed at reducing systemic risk after the 2008 financial crisis.
Lending cuts coincide with traders' growing need for funding
due to high commodity prices, especially for oil, where a single
shipment can cost more than $200 million at current Brent crude
The liquidity crunch has thrown some trading houses into
crisis - forcing several to close or consider takeover bids from
bigger competitors, accelerating sector consolidation.
"Investors want a piece of what banks can make in lending to
traders," the president of Geneva's Trade and Shipping
Association, Jacques-Olivier Thomann, said.
Some new investors were prompted to try new ways of getting
exposure to commodities after being disappointed by investments
in the handful of publicly listed trading firms, Thomann said on
the sidelines of a conference.
To fill the funding gap, two former bankers from one of the
biggest traditional lenders, BNP Paribas, have started
a firm called Commodity Trade Invest (CTI), they told Reuters.
Jacques Begle, former co-head of trade finance at BNP, and
Philippe Steiner say they will specialise in structuring the
type of deals that helped once-small trading houses in Geneva
grow into sector giants such as Trafigura and Vitol
"Banks are upscaling their criteria radically. They also
want equity of $5 million and a cash margin. The banks have also
become so heavy that they are no longer able to deliver
decisions on time for trading houses," said Begle, CTI's
"It's a service that we have outsourced from the banks to
investors. They want exposure to the real economy through
merchant trading and this is a new alternative for them," added
Steiner, who is vice president.
They said the company expected to offer investors 4-15
percent margin, depending on risk appetite, and would target
borrowers with annual revenues of $100 million to $500 million.
Investors are expected to include hedge funds, corporations
and private investors known as "high net worth individuals".
TRADERS OR BANKERS?
Large trading houses that have come out trumps in the recent
market consolidation are becoming lenders in their own right.
While some trading firms have opted to expand into commodity
trade finance, such as Trafigura via its Galena fund, others
have been pushed into it to meet customers' needs for credit.
"Now we are asked more and more to give credit to the
roasters," Nicolas Tamari, chief executive of coffee trading
house Sucafina, said at the Tuesday conference.
"We are sort of becoming what we're not supposed to be:
financiers, banks. That's not healthy."
Trading houses are not covered by the Basel III rules,
although regulators have questioned whether they should come
under regulations that apply to the so-called "shadow banking"
sector, according to a Swiss government official.
CTI's Begle warned that for small trading houses to borrow
from bigger competitors poses inherent risks to their survival.
"There's a conflict of interest," he said.
Private banks have also begun to show interest in providing
funding for commodity traders, including Hinduja Bank which last
year doubled its commodity trade finance team.
"There is a traditional know-how in the private banks...and
it would make a lot of sense to structure the right vehicles to
private bank customers to invest in trade finance instruments."
said Guillaume de la Ville, a professor at the University of
Geneva's commodity trading diploma course.
Pictet Wealth Management's chief investment officer Yves
Bonzon said the Geneva-based bank would consider lending to
commodity trading houses but did not yet have a dedicated
"Essentially it's an asset management activity so why not?
The only caveat is to produce the kind of returns banks do
requires some leverage and we are not very keen on leverage in
general," he said.
Thomann said the scale of new entrants in the business of
lending to commodity traders was still small and entailed
greater risk for investors than borrowing from a bank.
"You can always find a pool of private investors willing to
put up $10 million for a specific deal outside the banking
system," he said.
"But in those transactions you lose the institutional
structure, the bank due diligence and its risk management
(Reporting by Emma Farge; Editing by Anthony Barker)