A securitisation of Spanish trade finance and direct lending assets has been savagely downgraded by two ratings agencies following an alarming surge in delinquencies that began earlier this year.
Kroll moved first, last month placing Gedesco Trade Receivables 2020-1's senior notes on notice for a downgrade, before following through on Tuesday with downgrades of six classes of notes, including the senior Class A tranche, which it lowered from AAA to A–. Moody’s acted in even more dramatic fashion, downgrading the Class A notes nine notches from Aa3 to Ba3 on Monday and placing them under review for further downgrade, while also making multiple-notch downgrades on some of the mezzanine notes.
The defaults started to tick up after the originators of the receivables, Gedesco Finance and Toro Finance, failed to secure an extension of the revolving securitisation at the beginning of the year.
Until January, new receivables could be added to the pool to replace those that came due, but the transaction became amortising after a six-month extension was denied by noteholders in a consent solicitation. Gedesco needed 80% of the noteholders to approve the extension but received consent of just less than 75%, according to Miguel Rueda, the president of Gedesco's board.
Rueda told IFR the refinancing had been scuppered by an acrimonious dispute between Gedesco and its private equity sponsor, JZ International. JZI is suing Rueda and Ole Groth in a New York court, alleging, among other things, that they fraudulently caused Gedesco to make loans to companies in which they had an economic interest. Both Rueda and Groth are former JZI employees and both deny the allegations.
As a result of the allegations, "Gedesco was unable to renew the financing in the public markets", Rueda said. "If you start telling the banks that someone has committed fraud, the lenders will not continue lending to that company."
A source close to JZI denied that the firm had informed banks or investors of the allegations, arguing that it would not make sense for JZI to harm a business of which it was the majority shareholder.
Since the extension attempt failed, defaults on the underlying receivables have soared to €61.5m, meaning that more than a quarter (27.3%) of the loans in the pool were past due for repayment at the end of March, alarming ratings agencies.
"The pattern of observed defaults in the portfolio since the transaction commenced its amortisation period is not consistent with prior month reporting,” said a Kroll rating report in March. “Nor is it representative of observed historical performance with data provided to KBRA prior to rating the transaction or during the revolving period.”
Moody’s said on Monday that it was concerned that most clients had reportedly stopped paying, recoveries were likely to be delayed and the reserve fund would only cover fees and interest for a limited period.
Rueda insisted that all of the receivables would eventually be collected and that noteholders could expect to recover their full principal and interest.
“I don’t know to what extent a rating agency could predict litigation between shareholders, total interference with the business that would inhibit the business getting new finance. I think that’s what they didn’t have in mind," he said. "The litigation has precluded the company continuing with the day-to-day running of the business.”
The source close to JZI denied that it had interfered with or undermined Gedesco’s business.
Because of the rarity of public trade receivables ABS and the relatively small size of the Gedesco transaction, the bonds do not trade often and little colour is provided to the market when they do, according to traders. Speaking last month, one ABS trader said that a chunk of the Gedesco deal had recently been offered at par but that it was unclear whether it had changed hands.
Receivables originated by Gedesco and Toro have also been securitised in Castilla Finance, a privately placed transaction arranged by Nomura, and in another private transaction, Gedesco InnovFin, arranged by Banca-IMI. The Banca-IMI deal benefited from a guarantee from the European Investment Fund as part of a programme to encourage lending to small and medium-sized enterprises.
The Banca-IMI deal started amortising in June, according to Rueda, who said this was due to a letter sent to the Italian lender by JZI. The source close to JZI said that no one at JZI had ever contacted anyone about the matter, arguing that it would not make sense for JZI to harm a business of which it was the majority shareholder. Spokespeople for Banca IMI did not immediately respond to a request for comment.
Meanwhile, Gedesco is in talks with investors to extend the Castilla transaction.
In November, the Castilla noteholders passed an extraordinary resolution to appoint an independent auditor, Alantra CPA Iberia, to review the work carried out by the servicer, Gedesco Services Spain. Rueda said he expects the final report from Alantra to contain no red flags.
Gedesco Services Spain – which is also the servicer for Gedesco Trade Receivables 2020-1 and Castilla Finance – was previously a subsidiary of Gedesco Finance, but the Spanish commercial registry shows that it was transferred to an entity called Venalta Capital in October 2022.
Stator denial
Gedesco Trade Receivables 2020-1 broke new ground as the first of its kind to be marketed publicly when it was issued three years ago, but did not usher in a flood of similar transactions. The trade finance asset class – which includes products such as supply chain finance and invoice factoring – does not enjoy a stellar reputation, having been tainted by scandals such as the insolvency of Greensill Capital in 2021.
The Gedesco transaction was backed by a mixture of direct lending, promissory notes and factoring receivables originated by several subsidiaries of Gedesco and Toro Finance. The deal was arranged by Morgan Stanley and sold to 11 investors in February 2020. Morgan Stanley declined to comment.
In March 2022, the originators’ financial backers, including JZI, launched legal proceedings against Rueda and Groth including the allegation that they caused Gedesco to make loans that were not in its owners' interest.
Most of these allegedly fraudulent loans were made to portfolio companies of an investment holding company called Stator Management, according to the complaint, which was filed before the Supreme Court of the State of New York. Stator, which is named as a defendant in the fraud case alongside Rueda and Groth, has asked for the case against it to be dismissed.
Stator was established in 2018. Stator portfolio companies alleged to have received such loans include construction firm Lantania, gas and electric distributor Umeme Energia and flooring company FAUS International. Rueda said that Gedesco never made any loans to Stator companies.
Since the complaint was filed, the case has lost one of its two plaintiffs. JZI originally brought the suit against an entity called EuroMicrocap Fund-B, which is 75% owned by investment vehicles of AlpInvest. In February, this entity settled and withdrew from the litigation. Meanwhile, litigation is also underway in Spain, according to people familiar with the matter.
Gives greater prominence to denials; adds name of Banca IMI transaction in paragraph 15; clarifies ownership of Gedesco Services Spain in paragraph 19; adds reference to litigation in Spain in final paragraph.