Commodity Watch: Is the Tide Going Out?

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" data-fr-image-pasted="true" src="/getContentAsset/e4db1c4c-2687-44cd-adbd-db1eb849e5d2/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.jpg?language=en" alt="Ahmad Al Sati" title="Ahmad Al Sati" class="fr-fic fr-dii" style="width: 180px"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI<br></strong>PORTFOLIO MANAGER<br><br><p>Ahmad is the President and Portfolio Manager for Gemcorp Capital Advisors LLC, based in New York.&nbsp;<br><br>Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser.&nbsp;</p></div></span></div><hr><p>Warren Buffett likes to say, "only when the tide goes out do you discover who's been swimming naked". Two bankruptcies provide an illustration. Tricolor (sub-prime auto lender) and First Brands (auto supplier) filed Chapter 11 for different reasons. These included overleverage (both corporate and asset-based loans), increased supply chain costs (First Brands’ inventory costs increased by $100 million in 2Q), demand disruptions (approximately 66% of Tricolor’s borrowers were undocumented) and perhaps fraud. The losses for creditors are significant. For example, Tricolor’s Class E securitisation price dropped from near 106 on September 8th to 12 on September 10th. First Brands’ debts fared no better, as they traded substantially below par. In addition, the filings revealed seemingly lax standards that hindered enforcement actions, especially for First Brands’ supply chain loans ($800 million) and factoring arrangements ($2.3 billion).</p><p>These issues have emerged as more capital has moved into asset-based finance (ABF) over the last 2 years – some of the largest asset managers have launched ABF funds, mostly focused on the US and Europe. A Preqin survey also found that 58% of private credit funds were looking to increase ABF exposure in 2025. Concurrently, the space experienced several insolvencies in the last 18 months: Rasmala Trade Finance (May 2025), Artis Group (March 2025), Stenn International (December 2024), Kimura Capital (December 2024) and Stronghold Global Finance (August 2024), which collectively decreased overall funding.</p><p>Investing in ABF has its benefits. It is a large, underserved market, the loans are secured by discrete collateral, and the instruments are short in duration and self-liquidating. However, difficulties for borrowers and lenders (as outlined above) may give investors pause. It should not. ABF is essential for the global economy and funds a variety of key assets: consumers (cars and credit cards), aviation (global travel) and commodities (energy and food) among others. Yet, to reap its benefits it must be deployed correctly.&nbsp;</p><p>Points to consider:&nbsp;</p><p>One, diversification. Yes, by borrower (GFG Alliance was 60% of Greensill’s loans when it became insolvent), but also by product and geography. If most ABF is funding the US consumer in autos, aviation and credit cards, then what are the diversification benefits? Financing other assets, other borrowers across different economies may provide that.</p><p>Two, stay close to the asset. Owning paper that gaps down without real nexus to the collateral effectively negates the benefits of ABF.&nbsp;</p><p>Three, monitor. Allocating resources to managing the collateral is key to creating value.</p><p>Default and delays are inevitable in a credit portfolio, but the ability to recover value and manage risk through diligent underwriting and monitoring is what pays dividends. The nature of repeat business in ABF means that careful deployment results in long-term repeat business mutually beneficial to borrower and lender. To borrow from the US SEALS: “slow is smooth and smooth is fast”.</p>