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Cocoa group’s bankruptcy fuels lending fears

Chocolate industry executives breathed a collective sigh of relief earlier this year after the impact of the bankruptcy of a key cocoa industry player at the end of 2016 remained muted as a result of a weak cocoa market.

Expectations of bumper supplies from west Africa, the leading regional producer of cocoa beans, have been weighing on bean prices of the key chocolate ingredient. This has helped make sourcing of alternative raw materials easier for chocolate manufacturers after Transmar Commodity Group, a top 10 supplier of cocoa beans and processed products, filed for Chapter 11 in the US in December.

Transmar’s client list includes top chocolate makers such as Hershey, Mars and Nestlé, and cocoa traders say there would have been panic if prices had not fallen. “The chocolate industry would have been extremely worried,” says an executive at a leading cocoa trader.

“Maybe [the effect] would have been worse, but prices had been declining,” adds Laurent Pipitone, director of economics and statistics of the International Cocoa Organization.

While chocoholics can rest easy about the supplies of their favourite confectionery, cocoa traders and processors, who trade the key ingredients, are concerned that the insolvency would make access to bank credit more difficult.

Court filings show that Transmar owes more than $400m to banks and creditors, but the sharp decline in collateral value described in a filing by ABN Amro, an administrative and collateral agent for a group of banks behind a credit facility extended to the cocoa group, has surprised many in the industry.

ABN, which provided the credit facility alongside other top commodity financing banks such as Société Générale, BNP Paribas, Natixis, Macquarie and the Bank of Tokyo-Mitsubishi, notes “significant discrepancies” in the value of the collateral in a legal filing.

Seeking the bankruptcy court’s authorisation to investigate “the apparent disappearance of hundreds of millions of collateral and other property of the debtor’s estate”, ABN said that as of October 28 2016, Transmar reported more than $555m for its collateral, which fell by more than $313m to $242m as of the end of November.

“The lenders now have reason to suspect that the monthly borrowing base reports were inaccurate, if not falsified for many months before October 2016 and that the impropriety may trace back before the credit agreement,” the bank says in a court filing.

Transmar’s lawyers told the Financial Times that it would respond to the allegations “in court at the appropriate time”.

Since ABN filed its request to investigate last month, Transmar has committed to make materials available to the banks to provide additional documents and information in the coming weeks.

While the bankruptcy process continues, executives in the cocoa industry fear that borrowing from commodity trade finance banks will become more onerous.

“[The Transmar case] will bring into question a lot about the banks and their lending structures. I’m sure we’ll have to go through new hoops to get funding,” says one cocoa trading executive.

Other cocoa specialists are worried that the tightening of finance will extend to other “soft” commodities such as coffee. “The unfortunate thing from a cocoa and coffee point of view is that these banks are those who lend most to our sectors,” says one agricultural commodity specialist.

Transmar’s insolvency highlights the risks of commodity trading where volatility can hit, possibly wreaking havoc for the small and medium sized players. Trading of soft commodities tends to be capital intensive, while the market can react violently to factors such as bad weather, political instability and currency moves.

According to a court filing by Robert Frezza, Transmar’s chief restructuring officer, the group expanded rapidly in 2015-16 which led to issues in “infrastructure and corporate governance to integrate its activities into a single network”. The company was also hit by financial issues at Euromar, its European affiliate, which “entered into various unfavourable forward purchase contracts, including certain unhedged forward contracts”, which resulted in enormous losses for Euromar.

Euromar’s financial woes worsened after the UK voted in June to leave the EU, as the London cocoa futures market is priced in pounds. Brexit “had further significant negative impact on the liquidity of Euromar and the valuation of the commodity futures contracts with Euromar’s suppliers” according to Mr Frezza’s filing. The European group’s problems led to a severe shortage last year of cocoa butter, processed from cocoa beans.

Managing the economics of cocoa processing is a complicated process, say industry executives, as cocoa beans processed into butter and powder need to be hedged using the cocoa bean futures market. For processors to be profitable, the margins, or the “combined cocoa ratio”, which measures the combined sales price for cocoa butter and cocoa powder, needs to be 3-3.2 times relative to the bean price.

Euromar continued to struggle and filed for insolvency in Germany at the start of December. The European affiliate’s inability to pay Transmar for the products it bought as well as the burden of financial support, ultimately led to the US company’s bankruptcy.

One of the reasons that the cocoa and chocolate industries were not completely caught out by the Transmar bankruptcy was that news of Euromar’s situation had been spreading among players last year. Mr Pipitone says: “We knew that these price declines could put some players in difficult positions.”

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