205 (29.11.18)



“Munch”: Bankers Eye $230bn of Mining Deals

Lifting ideas from the doughnut trade, bankers have a plan that could eat $230bn of mining assets for breakfast. Not everyone welcomes the idea. “Last time a trader tried this at scale it led to the biggest corporate collapse of all time.”


Mining finance has a lot of growing to do. That's the message coming from Dunkin Donuts, an American fast-food franchise that bankers are eyeing with intent.
Known for its hot pink branding and slogans that include “Munch Munch Munch”, Dunkin has more than 9,000 shops across the US, in airports, gas stations and the foyer of your local Walmart. Best-selling products include “layery” Donut Fries, chicken chunks drenched in waffle batter and an “All you can meat” sandwich option. “No need to choose between bacon, ham or sausage.” Most of its sales happen before 11am.
Dunkin has had ups and downs, changing hands under private equity owners, listing on the New York Stock Exchange and merging with its biggest rival, Mister Donut. But its current board has got the cash register ringing: with 50 doughnut combinations and three million customers per day, its shares keep going through all-time highs.
Chief executive Dave Hoffmann wants to open 1,000 new stores in two years. Donut Fries especially, he says, have been “one of the best-performing limited-time offer bakery items in recent brand history.”
Anyone can open a Dunkin, providing they put up cash of $250,000. All its outlets are owned by franchisees, which pay a royalty of around 8.4 per cent to its parent company, Dunkin Brands. That money piles-up quickly: Dunkin's royalties generated $861m last year at margins of over 40 per cent. With minimal outgoings and nonstop cash flow, it is “a tremendous asset-light model”, the company says.
An equally elegant financing model is gobbling-up cash flow in the mining industry. Earlier this year, platinum miner Sibanye announced a $500m streaming deal, selling a percentage of all future gold from its mines in the US to a financing company, Wheaton Precious. Just as Dunkin clips money from shops, Wheaton collects cash from gold mines, pulling in $843m last year from more than 20 operations, all owned by other companies.
So-called royalty and streaming deals have gone off like popcorn in recent years, turning jumpy mining profits into fluffy cash flow streams. In 2007 there were only two companies in the niche, Franco-Nevada and Wheaton Precious. Today there are more than twelve, scooping-up $13.7bn of mining royalties in 10 years, paying out $1.9bn of dividends.
It has turned into big business: two of the world’s largest asset managers, Elliott and fund manager BlackRock, have started buying-up mining royalties directly in gold and copper from Brazil and the Nevada desert.

But then Dunkin Donuts upped the game. In 2015, just as sales hit a new high, the company took all its franchise agreements and dumped them in a new subsidiary. Registered in Delaware and known as “DB Master Finance LLC”, the vehicle was sliced-up into notes, then sold to investors.
Dunkin got cash upfront, $2.6bn, whilst investors will be repaid out of Dunkin's cash flow, plus around 3.7 per cent. If sales continue at their current clip the notes will be paid off in four years and the royalties will flip back to the company; if the notes default, investors have no claim over

Dunkin or its assets. In Wall Street-speak, it had “securitized” its royalty payments.
Securitization is best known for causing a stock market meltdown in 2008. In all the packaging and repackaging of assets, America's banking system lost track of its mortgage payments, leading to a $700bn US government bailout.
But securitization has a longer history in commodities. Fittingly it was invented in the coffee-sugar business. Dutch merchants in the 1790s lent money to American plantations, pooling the loans and flipping them on, freeing-up capital for further investments. Having boomed in the 1980s, securitization is now common in everything from credit cards to car loans. By pooling multiple cash flow streams, then dividing them among investors, companies can turn small, risky assets into large and stable revenues, one banker explains.
But Dunkin's deal was the closest any company has ever come to securitizing all its assets, flooding it with cash at cheaper rates than any alternative. Behind the masterstroke was Guggenheim Partners, a bonus-driven banking group in New York.
Bankers in the mining industry say they are eyeing the same concept, creating “bespoke” securitized deals and boringly “predictable” revenue streams, lowering the cost of capital for companies willing to dive in. Mining revenue might be volatile, one corporate adviser says, “but the way around that is to only roll in 50 per cent.”
The world’s largest commodity traders are halfway there already. Oil trader Vitol has used arms-length subsidiaries to raise money for loans to oil companies in Russia, whilst metal trader Trafigura has gone one step further, dropping $470m of metal into a vehicle that has been fully securitized, releasing capital otherwise locked-up in zinc and aluminium ingots.
The deal took two years to put together and “should become a reference point for commodity financing,” said Chris McGarry, a partner at law firm White & Case, which advised on the legal complexities.
Now the government of Ghana, one of the world's largest gold producers, is working on a similar agreement, putting its state mining revenue into a $750m fund it plans to list on the London Stock Exchange. Bankers structuring the deal “have begun working in earnest”, Ghana’s finance minister has told parliament.

Royalty groups may be next, and Wheaton is an eligible candidate, advisers say. Its revenue bobs up and down with gold and silver prices and the company is carrying $1.4bn of bank debt, priced at 1.67 per cent. But if Wheaton dropped part of its cash flow into new Dunkin-style subsidiaries it could sell billions of dollars of notes at even lower rates than its borrowing.
Overnight, that could unlock almost unlimited money, turning royalty and streaming players into the industry's dominant source of capital. As their businesses grow, they are already displacing the debt and equity markets: after its deal with Wheaton Precious this year platinum miner Sibanye used the money to pay down $400m of borrowing.
“There are things in our portfolio we could sell to pension funds,” the head of one streaming group says. “These assets are almost perfect for them. I think the real

opportunity is yes, we acquire these things on our own account, but if the gold price moves up, selling mature assets to finance younger ones will make a lot of sense.”
Many in mining still need convincing. Instead of blending down risk, complex securitized deals can simply conceal it, leading to unpredictable blow-ups. Somewhere in the doughy sludge of Dunkin's securities there is an ice cream business, a Korean coffee roaster and a chain of shops in Bogota.
Wheaton Precious would meanwhile struggle to improve on its debt facility, one Toronto-based banker says. The company has “arguably the best debt instrument in the world. It's a $2bn revolver, unsecured, with a coupon that varies between 1.2 to 2.2 per cent. It's a ridiculously good product.”
Banks are “always” pitching the idea of securitization, but it “just makes an already opaque business even more opaque,” one mining finance director says, pointing to electricity giant Enron, which used securitization to cover-up debt before blowing-up in 2001. “Last time a trader tried this at scale it led to the biggest corporate collapse of all time.”
Bankers say they're working on it anyway. They like the idea of turning doughnuts, gold mines and unpredictable figures into perfectly smooth cash flow. Will securitization eat its way through the mining industry, releasing hundreds of millions of dollars currently being paid in interest? The world's forty largest mining companies carry around $230bn of debt, according to accountancy PwC. Adding in oil, gas and renewables and securitization quickly becomes a trillion dollar possibility.
Dunkin Donuts is there already. Money it was spending on bank debt is now going back into its business. The company is adding drive-thrus and expanding its coffee menu, steadily upping cash flow. “Nobody does iced coffee and hot drip coffee better than us,” said Hoffmann, 50, standing next to a man dressed as a coffee cup at a store opening earlier this year. “2018 will look a lot like 2017.”



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