BNP Paribas Offloads Risk in First Commodity Loan Securitization

BNP Paribas SA said it sold bonds backed by commodity trade finance loans in the first deal of its kind as the lender seeks to offload credit risk.

The $131.6 million Lighthouse Trade Finance Issuer I Ltd. transaction got a top AAA grade from Fitch Ratings, according to the lender. The bonds are backed by short-term loans made by the Paris-based bank to help finance shipments of commodities including oil and metals.

Stricter capital requirements for banks are causing lenders to trim assets and changing the way they operate. The commodities finance business is changing as the development of shale gas deposits in the U.S. increases the nation’s energy self-sufficiency and China’s demand for commodities declines, according to Gabriel Vaduva, BNP Paribas’ deputy head of energy and commodity distribution solutions in Geneva.

“Historically banks have held these kinds of loans on their balance sheet, but given the regulatory requirements it’s time to share the risk with the investor community,” he said.

The Basel III regulations, being introduced by the European Union in January, require banks to hold capital equivalent to at least 7 percent of their risk weighted assets, while also meeting an indebtedness limit and liquidity requirements.

Funding gap

The securitized assets backing BNP Paribas’ Lighthouse transaction are short-dated and typically mature within 15 to 90 days, and the portfolio will be updated until the expected maturity date in 2015.

The loans cover a funding gap between the commodity companies’ payments to suppliers and the receipt of payments from buyers, the bank said in a statement.

The transaction includes a $100 million senior tranche that pays 85 basis points more than the one-month London interbank offered rate, Bloomberg data show. The lender also issued an unrated $20 million tranche, a $5 million tranche of subordinated notes and retained notes worth $6.6 million.

“To get 85 basis points on the senior tranche of an AAA securitization is attractive to investors, especially considering the assets backing the deal are likely to be less correlated to the traditional auto loans or residential mortgages,” said Dalibor Jarnevic, Frankfurt-based ABS trader at DZ Bank AG.