The recent decisions by ADB/KBC, ABN-AMRO and Standard
Chartered to leave the diamond business have made it clear that European banks
don’t want to be involved in the industry anymore. With that, a number of
prevailing illusions have been stripped away: that banks can keep lending money
as long as the interest is paid, regardless of risk officers’ warnings that the
borrowers can’t repay the loan (as reportedly occurred with Standard
Chartered); that manufacturers can keep buying rough diamonds at higher prices
than those of the polished stones they yield; that replacing inventory-based
financing with turnover-based financing — i.e., requiring borrowers to show
proofs of sale in order to get a loan, rather than relying on the stock they
have as an indicator of what they can sell — will solve the problem.
The industry can’t regain capital unless it’s built on
trust. One could draw a parallel between the diamond trade’s situation and the
recent economic crisis in Greece. In Greece, at some point, trust in the system
was so damaged that people were lining up at the banks to get their money back.
In the diamond trade, the dynamic is the same — except it’s the banks that are
lining up to claim their money.
In the meantime, there are some newcomers to the
diamond-financing scene, even if their approach is somewhat different than that
of the banks. One example is Channel Capital Advisors, a London-based credit
asset manager authorized and regulated by the UK’s Financial Conduct Authority.
Channel has completed a series of financing arrangements with three leading
diamantaires, and its partners include a panel of large non-bank institutional
investors, bringing a diversity of both funding sources and loan deadlines to
the sector.
One of the issues banks face in diamond-financing is the lag
between the purchase of rough and the sale of the final polished product — in
other words, between the time the borrowed money is spent and the time the
borrower receives a sufficient return on the investment to pay back the loan.
Non-bank sources are stepping up as an alternative source of funding — or
working capital — for that period, known as “financing days.”
“Financing gaps are increasingly emerging in trade finance,
working capital finance and SME financing across a number of industries,” said
Channel CEO Walter Gontarek. “Banks are subject generally to greater capital
requirements and are now adjusting their risk appetite, rationing credit
allocation and increasing pricing. There is growing evidence of nearly zero
growth [in new major banks entering the scene in Europe] for several years now
across all corporate sectors.”
Though Channel hasn’t disclosed the total amount of
financing it has provided, some have estimated that it has given its three
clients a global sum of approximately $200 million to $250 million in credit.
Still, initiatives like these are unlikely to compensate for
the billions of dollars folding away from the trade. Furthermore, as diamond
banking specialist Pierre De Bosscher noted, “this is the kind of financing
that will only mainly work for the top diamond companies. And this is for a
very simple reason: In order to deliver attractive and workable interest rates
to the diamond companies, the latter have to be extremely well-managed,
[compliant with International Financial Reporting Standards (IFRS)], and as
such, transparent [if they want to receive] this kind of long-term financing.
It’s the only way to reduce the risk [to] the lender and justify lower interest
rates.”
Article from the Rapaport Magazine - October 2017. To subscribe click here.