July 14, 2020 / 10:12 AM / 25 days ago

Niche U.S. finance firms grease global trade of masks, gloves

NEW YORK/BOSTON (Reuters) - From specialty finance firms to boutique investment banks, a disparate mix of small financiers is bankrolling a U.S. gold rush for masks, gloves and other supplies in the wake of the novel coronavirus.

FILE PHOTO: Various N95 respiration masks at a laboratory of 3M, which has been contracted by the U.S. government to produce extra masks in response to the country's novel coronavirus outbreak, in Maplewood, Minnesota, U.S. March 4, 2020. REUTERS/Nicholas Pfosi/File Photo

These financiers stepped in as demand for personal protective equipment - “PPE” for short - exploded in recent months, but large banks largely shied away from the trade because many of the deals were too small or the companies involved too risky, according to interviews with financiers, brokers and bank executives.

Technology investor Benjamin Kosinski’s VendorTerm, for example, normally offers online invoice financing to technology startups. But the company started financing several PPE deals after some of the companies it normally funds branched out in the market, Kosinski said.

The New York-based startup is offering to finance deals smaller than $5 million in return for 5% to 10% of the total value of the order and a 5% to 25% share of the profits, according to figures confirmed by Kosinski.

Kosinski said the rates reflect the high level of risk involved and that without financing many deals would not happen.

“Banks aren’t doing it due to the high risk, and this is where alternative lending and alternative financing can provide value and capital,” he said. “Without these deals, there would be less equipment available.”

In another case, Cambridge Wilkinson, a small New York-based investment bank, in early May offered a distributor help securing financing in return for a 5% cut of the total value of the funding, according to a draft contract seen by Reuters.

A representative of Cambridge Wilkinson did not respond to requests for comment. The investment bank’s deal ultimately fell through because the mask broker found another source of capital that was able to provide the funding more quickly.

Some family offices and hedge funds have asked for up to 50% of deal profits, according to Edward King of King Trade Capital. He said his Dallas-based firm has provided “much less expensive” alternatives using purchase order finance, especially for businesses new to the PPE market.

Much has been written about fly-by-night, distributor middle men arranging deals and driving up prices of essential supplies during the pandemic, but little is known about the financiers who fund various distributors.

While they serve an essential purpose by greasing a complicated trade that meets an urgent demand, some market participants said their presence can drive up costs of these essential supplies.

“It adds to the cost of the product and makes it more expensive,” said Murlikrishna Kannan, an anesthesiologist and the founder of Anesthesia Hygiene, a medical equipment company that has been distributing coronavirus-related supplies since the pandemic began. Kannan said he looked into a financing offer over the past few months and opted not to go ahead with it in part because of the cost, but may have to consider these options in the future.

In many cases, however, the fees these financiers are charging are in line with what banks typically charge, according to trade finance experts. Banks can charge 3% to 8% of transaction costs, depending on creditworthiness of the borrowers, they said.

Several investors said their fees were justified because these transactions were especially risky. Most involve multiple parties across the world, many new to the market, they said. Things often go wrong, from shipments being delayed or stuck at customs, to the price of transport rising unexpectedly. Fraud is also common, they said.

Moreover, some manufacturers ask for payment upfront, making the role of financiers crucial to keep trade flowing.

Revenue for the U.S. personal protective equipment sector is expected to surge 15.2% to $5.7 billion this year, as the industry responds to the coronavirus pandemic, according to a May report by research firm IBISWorld.

Distributors and financiers said demand is expected to continue into the winter as the economy reopens and masks, gloves and sanitizers remain essential accessories for the foreseeable future.

“We are the key that’s unlocking the solution,” said Mead Welles, head of Octagon Asset Management LLC, a trade and commodity finance firm.

He said his fees are usually “well below” 2% of the total transaction cost.

Reporting by Anna Irrera in New York and Lawrence Delevingne in Boston; Editing by Paritosh Bansal and Matthew Lewis

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