Innovation is the name of the game for the Noble Group

Trade finance for the commodity industry could no longer be the domain of banks if the Noble Group''s new trade finance arm proves to be successful with its innovative finance arrangements.

Noble Trade Finance Hong Kong's managing director, David Sullivan, discusses why the company won't be a bank, yet.

Q: What's the idea behind setting up a trade finance arm in Noble Group?

A: The reason is quite simple. If you look at the trading business of Noble in the last five years, it has increasingly diversified. Noble Group used to be a steel and aluminum trade company. These days, Noble Group has expanded into sectors such as coal, sugar and cocoa. We have also expanded our traditional steel and aluminum trade to a wider marketplace. For different markets you need different financing techniques, such as different instruments, different guarantees and so on.

For that kind of finance where you are increasingly pre-paying, trading and processing, more sophisticated financing structures are needed. So we decided there should be a more dedicated approach to financing the group's activities. We converted part of the finance department to Noble Trade Finance Limited, and made it a profit centre to provide financing for the group's activities.

 The company lends money and then goes into the market to structure it in a better way. That is, not only borrowing in the most flexible way at the cheapest rate, but also looking to eliminate the risk from the balance sheet, but, say, borrowing on a limited recourse basis. We also play the insurance market a lot more. That is how the whole thing started.

Q: Does Noble Trade Finance also extend its services to third parties?

A: What happened was that Noble traders were buying material from, say, Eastern European steel mills and those mills needed financing. Now, the trader is in the front line with these people, and apart from buying commodities from them they would become close to the producers who, if they needed money, would mention it to the traders. Those mills would also say to us, "We need to buy machinery and we need $30 million, can you arrange finance for us?" And in the past, the Noble trader would say, "Sorry, we can only buy steel from you", or introduce them to a bank.

But when we started employing bankers and third party business was being introduced to us, the first thing we thought was how to link it to our existing business. So, if we had a steel mill where we were buying 40,000 tons of steel at $10 million, which we paid in advance, they would then produce us with monthly shipments of  steel to liquidate the contract.

Say the steel mill also wanted to borrow $30 million for capital expansion, we thought, why don't we lend them money and they pay us back in steel? Don't forget that every Russian mill will get 20 traders approaching them for steel at better interest rates and to pay earlier. But if you can walk in and say that in addition to the steel contract, I can loan you money to buy that power station that you want, and you can pay us back in steel, we all win. So we decided to build on that and we started to make a profit from financing and gradually the financing part became more important than the price of steel.  

Q: Will this in-house bank then start to become a trade finance bank?

A: We don't have a banking licence, so we can't be a bank. Maybe if this is a success it may eventually evolve into a financial institution. What we do today is arrange finance for our group of companies, and to do so, we have to approach a lot of banks. Unfortunately, these days, we are looking at banks outside Hong Kong as it is difficult to find support from banks in Hong Kong. So in that way we are not competing with banks.

Secondly, if you look at our third party business, the producers repay us in steel rather than money. So we keep an eye on them and make sure they keep producing the steel, and we are essentially doing due diligence for the bank. We are the ones that are responsible for the repayment of the loan as we are taking the material. So number one, we are an in-house bank, and secondly we are want to work with our banks to enable our producers to access more innovative forms of financing.

Q: Noble Trade Finance also intends to get into the forfaiting business, won't you be competing directly against banks then?

A: Many banks in Hong Kong are buying 90-day, 180-day paper and selling it off in the market. We think that, as a trader, we can also buy and sell the paper. So, if we really, as we plan, go into forfaiting, we have to be careful as to what our banking friends thing of us in the forfaiting market.

At the moment, if our trader sells goods to Vietnam and the Vietnamese give us a 120-day letter of credit, we then give it to our bank to discount. That bank will then sell that risk in the forfait market. But if we can become a player, then our traders will ask us to buy the paper and trade it ourselves. Then there may be competition with the banks. We are worried about that as we are just trying to provide trade and financial services to our clients. But where you get involved in financial services, banks may view you as something different.

Q: What other TF products are you looking to offer?

A: We have to look at two issues when considering new products. Firstly, what kind of synergy does it have with the existing group companies and client base? Secondly, how does the activity impinge on bank activities and how are they going to react to that? For example, we have an interest in debt swaps. There are plenty of Chinese companies that owe money to a lot of people, but don't have the money to pay them back. What they do have are products such as steel, copper, et cetera, that we may be able to take in settlement of debt. That kind of business we can work with the bank. Counter trade is another possibility. But again, we are looking more at arranging than actual financing.

Q: You came from Fortis bank, what was the switch like?

A: Before Fortis, I worked with Mees Pierson Bank for 15 years. It was a specialized bank for the commodity and raw materials industry. Then Fortis, which already owns five other banks, bought Mees Pierson. When you merge such a specialized bank with a "real" bank you tend to lose the specialization. Over the last years that I was there, they were doing more plain vanilla lending than trying to specialize in commodities.

Noble, however, allows myself and some of my colleagues who also came over from Mees Pierson to continue the specialized lending that were disappearing under Fortis. We are now arranging deals but not underwriting them, as the money is still being borrowed from the banks.

For example, in Singapore today, there are three or four banks active in commodities, there used to be about 10. So if you look at it on a micro level, is it different from working at Fortis? Yes, as I'm working with a company and a smaller team. But on the macro level, Noble just lets us continue what we were doing. 

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