Why AFEX N45bn Asset Backed Commercial Paper is Risky for Investors

AFEX Investment Limited or AFIL SPV Plc is in the market for its Series 3 Asset-Backed Commercial Paper (ABCP) issuance of up to N45 billion under its N100 billion Programme.

The programme which is 50% guaranteed by AFEX Commodities Exchange Limited is open and scheduled to close on 16 November 2023.

The Asset-Backed Commercial Paper (ABCP) is a short-term, senior secured debt instrument collateralized by a variety of commodities, backed by AFEX-issued warehouse receipts.

The product is intended to provide low-cost financing to small-size Agro-commodity processors who are unable to directly raise capital in the conventional commercial paper markets.

For potential investors in the issue, MoneyCentral believes there’s little incentive to invest in the Asset backed notes as opposed to comparable Nigeria Government Treasury Bills with negligible risk premium (extra yield) available on the AFEX Asset-Backed Commercial Paper.

The Offer

AFIL SPV Plc intends to issue up to N45 billion in four tranches (Tranches A – D) as part of a Series 3 Issuance as conventional or Shari’ah Notes either as a single tranche or in multiple tranches of not more than 270 days under the ABCP Issuance Programme in line with the existing transaction structure.

The proceeds of the conventional CP Notes to be issued under the Series 3 ABCP Programme shall be domiciled with the Custodian.

Processors/Obligors will purchase commodities and deliver same to the Collateral Manager at an accredited AFEX warehouse, wherein the Collateral Manager will issue electronic warehouse receipts (e-WR) for the stored commodities which shall be pledged to AFIL or Custodian.

Furthermore, the Custodian will disburse the cash equivalent of the pledged commodities to the obligors.

Under the Shari’ah-compliant Murabaha Notes structure, the Issuer will purchase the commodities on request from the processors (and deposit with the Collateral Manager at designated warehouses) and resell them to the Processors at an agreed price consisting of the purchase price and markup.

Risk points identified by MoneyCentral

Market Risk

The Issuer (AFEX Investment Limited) and Sponsor (AFEX Commodities Exchange Limited) say they have entered negotiations with some of the leading agro-processing companies in Nigeria. These Processors will be the end-users of the Issue proceeds, as they will purchase volumes of grains for processing in their businesses and will repay the funds borrowed from operating cash flows.

The Processors have to have Minimum shareholders’ funds of N500m, 10,000 metric tons (MT) of processing capacity (per annum), clean credit report, and minimum of 5 years of operation.

Processors prequalified for the issue include Amo Byng Farms Limited with after-tax profit of N131.99m in 2020, Animal Care Services Konsult Ltd (N604.5m profit), Hillcrest Agro-allied Industries Limited (N1.92bn profit), and Golden Oil (N131.99m profit).

Risk: Since these 4 operators/obligors are to repay the funds borrowed from their operating cash flows, looking at their financials, MoneyCentral believes that their profitability and margins will have to rise sharply to enable them pay off a total of N45 billion plus interest from the issuance.

This however seems highly unlikely in the low margins agro-processing industry.

The Issuer and Sponsor Financials

The Issuer (AFEX Investment Limited) had EBITA of only N710 million as at June 2023, and profit after tax of N176.5 million for the period.

Interest expense for AFIL came in at N2.92 billion in just 6months signaling a high level of indebtedness already.

AFEX Commodities Exchange Limited which is the main Sponsor of the issuance made a loss of N263.2 million in 2021 (the most recently available financial year) per issue documents seen by MoneyCentral.

Risk: Gross margins of only 4.76% and finance cost of N2.217 billion adds to the risk that AFEX Commodities Exchange Limited may be unable to bail out investors (up to the agreed 50%) in the unlikely chance of a default by the issuer or obligors.

AFEX Commodities Exchange Limited also had outstanding borrowings of N67.69 billion for the period.

Business model

An analyst with deep knowledge of the industry speaking on condition of anonymity told MoneyCentral that the AFEX Commodities Exchange Limited business model does not look sustainable for an Exchange.

“No Commodities Exchange operates that way successfully and I don’t think they will. An Exchange is a market place, and they need to create the ecosystem and allow participants to run the race, not bringing themselves into being the participants and the Exchange. They are merely running as a commodities dealer and not Exchange and incidentally they don’t even have the capacity to run the model. They are at best an adaptation of Baban Gona (Kola Masha’s business) with a different flavor,” the analyst said.

Concerning the N45 billion Asset-Backed Commercial Paper issuance, another source said: “FSDH that is running the transaction as Lead Arranger won’t put money in the Notes.”

Ratings agency warning

Agusto & Co. in a rating report on the AFIL SPV N100 billion Asset-Backed Commercial Paper programme, released this year, affirmed the “S3sf” rating of the issuance but warned that:

“we remain concerned about the absence of external liquidity support to fund the commodities exposure in a stressed scenario given the extreme liquidity requirements of ABCP Programmes.”

Conclusion

The up to N45 billion in Asset-Backed Commercial Paper being issued by AFEX Investment Limited or AFIL SPV Plc, while innovative is a little bit too risky for all but the most sophisticated investors in our opinion.

With an implied yield ranging from 17.50% – 18.50% for the 4 trances (A – D), Investors may be better served buying risk-free 364DAY Nigeria Treasury Bills yielding 16.75% in the primary market.

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