Driving product innovation: How Vivriti Capital has created an alternative asset class to facilitate access to finance backed by agri commodities

Financing for stakeholders in the commodities sector has been fraught with challenges, making it difficult for market participants to secure timely access to financing and hindering their procurement and distribution requirements.

Some of these challenges for investors include a perceived risk of adverse price volatility, the ability to control or monitor the physical commodity and liquidation of commodities, among others. These, coupled with a lack of capital market products in the space has kept this relatively underpenetrated with only banks and some NBFCs historically engaging in commodity financing.

Sensing an opportunity to address this gap, and with a strong track record of making deal structuring and its execution for complex products a fast and efficient experience, Vivriti Capital has structured India’s first securitisation transaction backed by Negotiable Warehouse Receipts (NWR) assigned by Origo Commodities India Pvt. Ltd (OCIPL).

A new asset class

Vivriti Capital has added a new asset class in the domestic securitisation market with the structuring of this new transaction. Investors can subscribe to Pass Through Certificates (PTCs) issued by ‘Vivriti Agro 07 2020’ (henceforth known as the Trust).

These PTCs are secured by Negotiable Warehousing Receipts (NWRs)* that would be endorsed in favour of the Trust. These NWRs allow the transfer of ownership of the underlying commodity stored in a warehouse without having to deliver the commodity physically. These PTCs are also backed by receivables that are due to OCIPL (also referred to as the Seller) against the future sale of certain identified commodities to its customers, who are the various stakeholders of the commodity sector (henceforth known as Off-takers).

Promoted by Sunoor Kaul and Mayank Dhanuka, OCIPL offers end to end supply chain solutions in the agri-commodities space. Services offered by the company include Collateral management, Professional warehouse management and supply chain among others.

Given the relatively higher liquidity seen with basic commodities (likes of wheat for example) and the ease of liquidation that comes with NWRs as an instrument, this allows for the sale of the underlying commodity in the open market in a timely manner, which helps in mitigating risks.

This is one of the factors due to which series A PTCs that are issued under the transaction are rated A1 (SO) by Credit Rating Agency ICRA. Instruments with this rating carries the lowest credit risk with regard to the timely payment of financial obligations, and as a result, they have a strong degree of safety associated with them.

Commenting on the development, Vibhor Mittal, Chief Product Officer at Vivriti Capital said, “Over the years, Vivriti Capital has helped expand the domestic securitisation market by introducing several new asset classes like gold loans and education loans. Warehouse receipts backed securitisation is another such offering that would provide collateral management and warehousing companies access to capital markets.”

Safety net

The transaction is structured to significantly reduce the credit risk to the external investor in the following ways:

• Choosing underlying commodities that have demonstrated high price stability over the past several years as the collateral, and thus, reducing volatility to the transaction for investors.

• External investors see added safety to their investments as they are entitled to subordinated interest from the Seller in the assigned receivables and cash reserves, which together amount to 35 percent of the collateral value.

• Limiting the external investors’ exposure to risk from other factors by asking them to directly fund the Trust account.

• Appointing an independent collateral manager to ensure the safe storage of the collateral, and if required, its liquidation to mitigate fraud risk.

• Appointing an inspection agency to carry a monthly audit of the collateral.

• Insurance cover on the collateral against natural calamities like floods/ fire and for protection against theft and pilferage.

Sunoor Kaul, Director at Origo Commodities India Private Limited, said, “Financing of agricultural commodities and warehousing business has traditionally been the forte of banks. The sector needs more pools of capital from other investor segments to build the necessary infrastructure for procurement, warehousing, and distribution of food grains. We are delighted to partner with Vivriti Capital in this first of its kind transaction that can help meet the government's objective of food security net for all Indians in a small way.”

With the structuring of this new transaction, the team at Vivriti Capital hopes to open up more avenues of financing for stakeholders of the commodity sector beyond banks, and provide more opportunities for investors to structure and execute transactions related to commodities through its enterprise and retail finance platform CredAvenue, which has seen more than 1,300 trades amounting to around Rs 28,000 crore across all the key products in the fixed income space.

* NWRs are instruments issued under the Warehousing (Development and Regulation) Act, 2007