Editor’s note: The author of this article may have a short position in the company, also see the firm response to the piece at the bottom of this article
Financials firms, or course, should be the experts at managing these risks- credit- it’s their métier. Traders are ‘self risk-regulated’ whereas financial institutions are risk-regulated. In return, the financial institution/bank can benefit from the access to central bank funds and the convenience of the inter-bank market- Traders just can’t.
Traders have commonality with the lenders: their survival is derived from their ability to operate with frequent small gains / few larges losses.
I and Art. Simondet became quite interested by the pre-pay and its debt-like risks in 2014 as it became apparent that traders were lending to customers as opposed to arbitraging commodities.
As commodity traders business started to depart from ‘pure commodity trading desks built on perceived arbitrages to the pre-export financing, lending project financing, structured commodity solutions became de-facto doctrine of commodity trading, the ‘new-cool’.
With the new doctrine, came new risks.
Essentially the traders become a trade & structured finance arm attached to the flow.
1) Who, company, financial situation, KYC ? 2) what risk is the counter party managing and 3) execution & timing….. 4) The constraints for commodities ? If you move ahead further 5) who will be handling collateral management, facility agent ? 6) How do you exercise your titles ? and all areas where newcomers to the business can easily get ripped off.
With the doctrine, came a corollary: positive carry (the income earned on the attached commodity-flow must exceed the funding cost of holding the securities).
Beyond the traditional exposure to price and currency risk, commodity traders become increasingly exposed to:
- Liquidity, funding risks (the convexity)
- Negative carry (incoming cashflows that are smaller than the offsetting position obligations).
There are so many trades with irregular cash flows (seasonal as an example). Let’s call it normal-carry.
I happen to know a private who lends to traders. He lends $10M clips at R% with asset backed security….he makes a lot of money and has only had one sideways/bad deal…
The trader appears happy to pay this rate for the “liquidity” that is deployed into commodities…. since avoid the hassle of its existing bank loans. Welcome to the gray zone of the commodity finance.
The trader takes some unsecured risk (credit exposure) because this simple loan with a wrong princess, according to his words, is far less risky than be Long ‘pre-pay arrangement kiss goodbye’.
What are the two things about a trader that should frighten the most a lender ?
-Arguably; not having a risk management in place or an incompetent one because both will open the possibility of protracted financial losses and frauds (or a combination thereof).
Epitome of the ruthlessness in commodity trading, the trader advanced nearly $200,000,000 in pre-financing to iron mines in Brazil and Sierra Leone between 2014 and 2015.
- Not only the CFR price to China plunged but the short run marginal cost curve shifted to the right, (e.g sunk-costs).
- Negative carry at its best.
- 2016: -150M losses
- 2017: in the red
- Banks have reduced their funding to the group, the question is now how much protracted losses comprised the $3 billion balance sheet ? e.g the ultimate convexity.
If you think a trader not having a good risk management is scary, try one not fully comprehending their exposure.
The merchants and traders have landed on the shores of Lake-Leman since the 14th century, many came, quit or will come, but the Banks will remain.
See the CEO reponse below
As you know there was an article written in French by a journalist (Sylvain Besson – (https://muckrack.com/sylvain-besson/articles / from Le Temps who was able to obtain confidential information to try and create a story in order to sensationalize and twist information into an article. As many of our stakeholders are aware, we have been dealing with an onslaught of negative articles from various websites and press with highly inaccurate, false, and misleading information with the intent to persuade our stakeholders that Gerald, myself, and others from the executive management team have committed some sort of wrong doing, illegal activities or that the Group is under some tremendous financial stress. This has been primarily driven by a counterpart who owed the Group more than US$50 million and was refusing to pay, even after we had won an arbitration award enforcing our guarantees. I believe that we have made people aware that all of the allegations, statements, and misinformation is false and those that know our Group and me personally know the information cannot be correct in any way shape or form.
In addition to the above referenced publication, we have been receiving numerous requests from reputable mainstream newspapers who have been provided with inaccurate and misleading information about Gerald from nefarious individuals who want to force the Group to discontinue its legal proceedings to collect the material sums of money that are rightfully owed to Gerald.
Normally, we do not respond to the press when they are inquiring into our operations and businesses as it generally does not benefit anyone and the information often ends up being twisted. However, some of the publications who contacted us were certain that the information they had obtained was accurate and believed that people should be aware. For example, I had one highly reputable investigative journalist contact Gerald and specifically say they had proof that the president’s daughter in Sierra Leone owns 20% of our company (SL Mining). He held documents that appeared to be legitimate official documents, proving that Gerald had given a piece of the project company to the president’s daughter. As such accusations were false, detrimental to me and Gerald, and the journalist was going to write a story based on this fraudulent information, I personally took the time to prove that the information was false and subsequently he did not proceed to write the article. As you are aware, the Group has had to defend itself against market rumors, false accusations, false publications, and false information over the past 12 – 18 months due to the arbitration we had started and eventually won.
To specifically address the Le Temps article, I had to personally spend hours answering questions and proving that the information the reporter obtained from people was inaccurate, false and misleading, and as a result I was able to have him eliminate most of this from the article. However, he let me know that he had obtained our RCF presentations, quarterly management letters, and spoke to one or more ex-employees of GMSA (his credible sources) who had confirmed certain information. He advised that the people of Geneva region (his readers) like to read this sort of sensationalized news so he would continue to print his article regardless, but agreed to eliminate much of the completely erroneous information he was going to print. I have included a link to the article below.
Sylvain Besson refused to allow me to read the article prior to its printing, and would not give me context of what he was going to print but requested that I comment to his specific questions or he would state the company would not comment. This is why the article has me commenting at times, however my answers may have been taken out of context. For the benefit of the stakeholders, I will comment on each part of the article so that the Group’s position is clear as to anything that was printed or stated.
His article as written is in the attached link.
In addition, there were various other web articles that printed over the past weekend which took the false information and twisted stories of Le Temps to sensationalize things. Those that are familiar with Gerald will know that the information is false, inaccurate, and written to put additional pressure on Gerald for the same reasons as already stated. I have included two of the links below which I’m referring to.
It’s unfortunate that counterparties and ex-employees would cooperate on such a smear campaign of Gerald, but as our operations, financials, market position, and legal position will continue to materially improve in 2018, they are trying to discredit Gerald with hopes they may have a negative impact on us.
We will be sending the same or similar email to all our RCF lenders.
Please let me know if you have any further questions,