�Barclays will not change its credit underwriting standards�
Correspondent | Friday July 29, 2016 15:27
Just before the signing ceremony, Kgotso Bannalothe answered some of Diamond Intelligence Briefs’ questions
Question: While for a variety of reasons several international banks are either exiting or reducing their exposure to the diamond midstream financing sector, Barclays has decided to step up its profile in one of the industry’s most problematic places from a manufacturing perspective, the Botswana beneficiation scene. Beneficiation has not yet found a sustainable model. So why are you intensifying your involvement at this particular time?
Kgotso Bannalotlhe: The current trend in the diamond producers is towards beneficiation – it is not Botswana alone moving in this direction. Barclays has over the last two years cautiously financed several sightholders with operations in Botswana and has gained a much better understanding of the sector financing over these years from being a complete non player prior. With the right partnerships to reduce various bottlenecks to diamond midstream financing, Barclays believes it can participate meaningfully and in a sustainable way in this sector.
Q: The current financing model in Botswana is based generally on a company’s three month DTC sight cycle. You are following a similar approach – and have captured around 30% of the diamond financing scene. As you know, many DTC sight recipients are hardly manufacturing, but rather trading their rough boxes. Will availability of money draw in more players or induce your existing clients to expand manufacturing?
Kgotso Bannalotlhe: Barclays Botswana currently finances DBGSS sight holders with operations in Botswana – hence these entities have manufacturing facilities in the country thereby directly impacting beneficiation locally. Our aim is to support these profitable manufacturers with proven track record in the sector to advance their business plans through sustainable provision of facilities.
Q: At the moment, there are some $200-220 million diamond financing facilities available to the Botswana diamond sector and, in fact, most of the facilities are not fully utilised. Our estimates are that your facilities are in the range of $70 million – with utilisation in the $50-60 million range. Currently manufacturers can get 120 day money at 2.5%-2.75% above the 3 month LIBOR. As your risks will be reduced by some 75%, will that mean that you will reduce the spread and charge a more attractive (i.e. lower) rate? If the costs or money at Barclays Botswana will be similar or the same as others are charging, why would someone move to you?
Kgotso Bannalotlhe: Our pricing will continue to be determined on a client by client basis and our credit underwriting standards will not change due to the guarantee. Whilst it may be distributed differently, the overall risk to all credit risk participants in the lending does not change.
Q: The $125 million advanced by OPIC needs to be matched with $42 million Barclays moneys. Your own exposure is currently already above that level. Will you restructure existing facilities and bring them in the OPIC framework agreement and reduce the costs to your clients? Will the reduced risk allow you to be slightly more relaxed on your collateral demands for clients? Again – what’s in there for the industry that will make them want to move to Barclays? Why would you become the “preferred choice”?
Kgotso Bannalotlhe: Barclays intends to expand its lending to profitable sight holders with established track records and operations in Botswana in line with our desire to become the bank of choice for sight holders with operations in Botswana. Barclays will not change its credit underwriting standards due to the guarantee – however this gives us capacity to significantly increase the size of the portfolio with a reduced capital footprint.
Q: How does it work: is the financing risk covered proportionally (pari-passu) between OPIC and Barclays, or is OPIC taking the first risk?
Kgotso Bannalotlhe: The risk is shared pari-passu.
Q: We know that Standard Chartered, which has announced its exit from diamonds, had indicated that it was not interested in concluding an OPIC agreement. It currently holds 50%-55% of the market – albeit their facilities are also under-utilised. The global “exit from diamonds” also applies to Botswana.
However, their best diamond clients are told that they can remain “regular” clients. If one assumes that you will absorb many (or maybe all) of the Stan Chart clients that are left “bank-less”, this doesn’t really mean a growth of the diamond beneficiation sector. And if you absorb these clients, you exceed by far the levels of the OPIC agreement. Please explain and let me have your thoughts on this.
Kgotso Bannalotlhe: Barclays intends to become the bank of choice for diamond financing in Botswana for diamond manufacturing companies with a strong track of success in the industry over many business cycles. We therefore intend to provide facilities to any clients who meet our credit standards and we believe our partnership with OPIC and LKI allows us to provide this in a sustainable way going forward for all our current and future clients. Our entry into the sector is intended to be for the long term. (Article reproduced with permission from Diamond Intelligence Briefs)