In 2020, the EBRD helped a gold producer in Turkey to hedge its gold price risk in order to stabilise its balance sheet and debt-servicing costs. Together with other lenders, the EBRD participated in a club gold-hedging programme incorporating International Swaps and Derivatives Association (ISDA) commodity derivatives documentation.
Additional lending to an EBRD client
The EBRD’s portion of the transaction involved a US$ 50 million senior loan to Tumad Madencilik Sanayi ve Ticaret, a wholly owned subsidiary of Nurol Holding. This was part of a senior loan provided with parallel lenders, worth as much as US$ 255 million.
Tumad was already an EBRD client, having received another US$ 40 million senior loan in 2017 as part of a US$ 200 million senior loan the Bank had provided for the development of the Lapseki and Ivrindi gold mines in north-western Turkey. That loan was fully guaranteed by the project sponsor.
The company was originally established in 1989 as a construction materials supplier. Between 2012 and 2014, however, it expanded into the metals and mining sector by acquiring several mineral exploration licences in Balikesir, the Black Sea region, Gumushane and Ankara. In 2017, Tumad divested its building materials business to focus solely on metals and mining.
Designing an elegant hedging solution
The documentation for EBRD’s US$ 50 million senior loan to Tumad was signed on 16 July 2020 and included an intercreditor agreement (ICA) that set out the common terms for all lenders. Within this ICA, the EBRD Treasury Client Solutions Group helped to design the hedging policy and other provisions.
The goal of the hedging policy was to ensure that the borrower could easily meet its debt-servicing and other obligations on a one-year rolling basis, irrespective of gold-price fluctuations. It involved European-style put options, with strike prices at reference points that supported a historical debt-service coverage ratio (HDSCR) and a forecast debt-service coverage ratio (FDSCR) of no less than 1:1 over the term of each contract.
The EBRD Treasury’s intermediation in the commodity derivatives market enabled the alignment of pricing among parallel lenders. The hedging policy was designed to this end, with a mechanism that accepted the lenders’ median put-option offer price, provided the median was no more than 112.5 per cent higher than the lowest price offered. The EBRD Treasury’s market access, backed by its AAA credit rating and strong relationships with derivatives dealers, ensured a lower median price for the borrower.
Looking forward to other commodity-hedging opportunities
The Treasury Client Solutions team was integral to structuring the solution and explaining how it worked, both to the borrower and the other lenders. The standard loan and ISDA agreements needed to be revised to include the ISDA Commodity Definitions and took into account the EBRD’s commodity hedging as part of the overall lending and security package.
The EBRD Treasury is delighted with the outcome of Tumad’s commodity hedge and looks forward to further opportunities to structure similar solutions in other markets and for other commodities.