In Beyond Wall Street Episode 16, Jan Brzeski of Arixa Capital interviews Nancy Obler Nancy Obler, Partner and Chief Operating Officer of AMERRA Capital Management to discuss trade finance of agribusiness internationally.
Beyond Wall Street Episode 16: Nancy Obler, AMERRA Capital Management, LLC
Jan Brzeski :
Welcome to Beyond Wall Street, presented by Arixa Capital, where expert investors make their
unique investment strategies easy to understand. I'm your host Jan Brzeski, and today I'm
speaking with Nancy Obler of AMERRA Capital Management. We'll be discussing trade finance
of agribusiness internationally. Nancy. It's so nice to see you. Thank you for joining us today.
Thanks Jan. Likewise. Great to see you.
So, let's start with your background. I'd love to hear about your professional journey to where you
Absolutely. Mine was a somewhat unconventional start, after graduating from college with a
degree in English and not much practical experience - that was back in the day when institutions
hired people as critical thinkers and communicators, but without many specific skills. And I didn't
have a formal, financial training background, and I joined Brown Brothers Harriman right out of
school. So I got my financial legs under me and then was placed in a lending group, which
focused on financing trade flows from Latin America.
Now I didn't have any specific background in Latin American investing or banking, but I did have
Spanish-speaking skills. I spent five years honing my credit skills, really focusing on soft
commodities, coffee, sugar, cocoa, things like that. And after five years I felt that that formal
educational training was somewhat missing. I decided it was time to go back for an MBA. But I
loved what I was doing, so I didn't want to give up my job and ended up doing an executive
program at Wharton. During that same period, I moved to a more international banking platform
and was hired by my - at that time, boss - and now my current business partner. And we built
out a multinational commodity, agribusiness, platform where we were servicing companies in
that space and selling all of the banks’ different products.
So after 20-plus years in banking and a lot of soul searching, I decided that it was time to do
something a bit more entrepreneurial. And I approached Craig - my now partner - and we talked
about what we really wanted to achieve in our careers. And while we had always been
entrepreneurial as bankers, the whole banking environment is somewhat bureaucratic and hard
to be creative because most banks have very specific boxes. And the minute you step over the
line of that box, you're reigned back in, which really limited our ability to provide our portfolio
companies the type of capital that they needed to solve problems. And we really wanted to be
able to solve some of those problems in a more dynamic way, in a targeted approach rather
than a one size fits all approach.
So after a lot of soul searching, we decided to give up our offices to go off on our own. And we
felt that the best way to become more entrepreneurial was to raise capital in the institutional
world and to be able to target that capital towards what we felt was the least developed
investment platform in the commodity world, that being agribusiness. So we set out to form
AMERRA Capital, and it is a partnership with two institutional partners and three of us as
individuals. We launched in 2009 and we have been growing ever since, and today we are on a
multi-billion dollar asset management platform and are continuing to do what we love, which is
providing investment capital to companies operating in the food and agribusiness space.
Terrific. So you mentioned that today you're able to provide investment capital to companies in
agribusiness. Can you talk through a recent investment or a case study of how that worked and
what type of agribusiness you are financing? And also what was the structure of the financing
that you provided?
Our platform has a series of funds that focus on credit. So we are making structured loans to
companies primarily in Latin America. About 70% of the business that we're doing is in
emerging markets because that's where we can get the returns that we're looking for in a
risk-adjusted way. So oftentimes a structured loan will be to a company in Latin America. We do
a lot of business in the sugar industry So a typical structure would be a pre-export financing
where we are providing funds to a sugar mill that's producing sugar in Brazil and they don't have
the working capital that they need because they're not getting revenues until that crop is
planted, harvested, processed, and shipped. So what we do is provide a loan to the company
that's going to be repaid upon shipment, with the assignment of the export proceeds in dollars.
It's a fairly standard structure for lending to companies that are exporting commodities and
Okay, wonderful. So we've got a sugar mill and they need working capital and they'll repay the
loan when they get paid in dollars. So how long is the loan typically outstanding?
It really depends. So I would say anywhere from 12 to 36 months, and that depends on the
credit quality of our counterparty, what they're using the proceeds for. So in the case that they're
using the proceeds of our loan to replant cane, which has a longer germination cycle to get to
maturity, that would be a longer dated loan. If they're just looking for intercrop period financing, it
might be closer to that 12-month cycle. and oftentimes these loans renew. So upon shipment
and repayment, the loan would revolve and they would be able to redraw against the
assignment of an appropriate export contract.
Okay. So 12 to 36-month loan, and the sugar mill in this case also grows cane as well as
processing it and shipping it. So it's one company that has typically all those assets, or is it
usually separate companies that do those different things?
It really depends on the company. Most companies have an industrial arm and an agribusiness
arm. So the lands would be under the agricultural umbrella, but the cane itself is the largest raw
material that they're using. So having committed access to cane, whether it's (their) own cane or
third-party cane is critically important. And also making sure the husbandry of that crop is being
appropriately taken care of. So whether they own the land or are leasing the land, typically
they're overseeing the farming.
Okay. Let's talk about the target returns. What would be a typical interest rate that these types of
loans feature? Are there fees upfront that the borrower typically pays, or fees at the end time of
repayment that they pay?
We're typically targeting low to mid-teen type of returns on a gross level, and that can be
structured in many different ways. Typically there is a fee upfront that's structured like a bond in
the form of an original issuance discount. So it's deducted from the proceeds. Then there's
going to be an interest rate. That's typically a LIBOR plus. Obviously, with LIBOR so low right
now, the LIBOR element is not particularly relevant, but anywhere from 8% to 12% would be in
the range. And then sometimes we have kickers or profit participation depending on the
structure of the transaction, and occasionally a warrant.
And the loans are in dollars, correct?
We are a US dollar-based organization. So we lend in dollars and we get repaid offshore in
dollars. So typically our sugar mill borrower would enter into a commercial contract with a
non-Brazilian off-taker who's going to repay in dollars. That contract - which sets out the
different specifications - would then be assigned to us. So the payment would come directly to
us as the lender. We would deduct the principal, the interest, and any fees, and then we'd return
the remainder to the borrower so that we're not taking the risk of repatriating those dollars into
Brazil. So we're paid off-shore before those proceeds hit our borrower.
But in order to pay to plant the crops, in the case of that type of loan, they have to pay their
vendors presumably in the local currency. So are they taking on that interest rate, that exchange
rate risk? Or are they hedging? Are they able to hedge that?
They typically are taking the currency risk. So all of their inputs with the exception of energy are
typically in the case of Brazil, Brazilian reais-denominated, but we're lending dollars and we're
being repaid in dollars via a contract as we talked about. So from a lender perspective, the
lender is not burying that currency risk. That's a dollar-to-dollar loan. And the counterparties’
overall currency risk is imbalanced, then they would hedge. So many sugar producers also are
producing ethanol as a by-product, and that ethanol is sold into the Brazilian market locally and
repaid in reais. So they have some revenues in reais, but the majority is typically in dollars for
the exported products.
So they typically have some protection they're already built into their business, because of
course I know from our lending business if your borrower is suffering for any reason that can
end up being a problem. And so you'd want to monitor, I would think to make sure that they're
not too far out of balance, or else perhaps require them to get some hedging done so that they
can repay your loans regardless of what happens to their costs, right?
That's right. So we're typically taking the performance risk that the, in this case, sugar mill is
actually able to produce and deliver that sugar. Once it's delivered onto the vessel, then we're
taking the counterparty risk of the buyer on the other side of that contract. But the performance
risk is really the main risk in that transaction. So over the 12 to 36 month tenor of the
transaction, we are underwriting the risk that they're going to be able to produce and ship the
spec and quantity of sugar required under that assigned commercial contract to repay our loan.
Nancy, I just want to say this is fascinating. And clearly, it's a very different type of investment,
which of course is beneficial to institutions that are looking for alternative investments that are
not correlated with each other. So I just want to thank you for walking us through it, I think a lot
of the people that are in our audience will be fascinated by this, including young professionals
that are looking to work in different aspects of the alternative investment industry. So continuing
on, you're making a loan at, say, an 8 to 12% interest rate, with all the fees that you collect.
You're targeting a gross return kind of in the mid-teens typically?
So there's no need to use structural leverage on these loans to get to the return targets. You
don't need to do that. Your financing is investment capital. You're not using bank financing, or
are you as part of your capital stack?
We are typically not. We are limited under our own governance documents on the amount of
leverage, but we're really generating the return through the underlying investments and we're
able to achieve those - I guess you could call them outsized returns - because we are providing
capital in areas where the banks typically are not playing. And we're not trying to compete with
banks. This is truly alternative capital. So, we are providing capital in an area, whether it's longer
tenor or slightly outside of the normal structure, that allows us to underwrite those returns. Now,
obviously, companies that are exporting commodities which tend to be very tight margin
businesses, can't afford all of their capital to be in the mid-teens type of levels, but we're
providing a tranche that's value-adding enough for them. And it makes sense to include a
higher-cost loan in their overall debt profile. And generally, if it's in Brazil, for example, local
interest rates in Brazil are much higher. So, on a relative basis, our cost of capital is not so much
But we're providing a service that really isn't provided elsewhere in the
market because many banks, they don't want to have to do the diligence or the traveling and
what's required to be able to actually get there and evaluate these loans. This is not a “sit at
your desk in whatever metropolitan city and underwrite a loan based on credit metrics”. This is
going down to sometimes remote areas in emerging markets and doing your own diligence. So
today, I'm wearing my pearls, but when I'm going to do diligence, it's roll up the sleeves and
work boots. And we're taking factory tours with our hard hats. And I've seen some really
incredible businesses, primarily in Latin America, but in many parts of the world where our food
is being produced.
When you drink your cup of Starbucks coffee in the morning, I've seen where those beans have
been grown and processed. When you're putting sugar into that coffee, the amount of
production to get that spoonful of sugar or packet of sugar into your coffee, there's a whole
supply chain behind that. And that supply chain needs financing. And more and more banks
seem to be exiting that supply chain financing business because it requires very specific skills.
Absolutely. In my case, it's two packs of sugar every time I have a cup of coffee, so I'm helping
to spur demand for the products that you're financing. So you mentioned banks are stepping
back and that's been a common theme across many of our guests is that they're filling financing
gaps that are being left behind by banks. So how is that playing out in your industry?
It tends to be a case of the haves versus the have nots. So, the big corporate credits - we call
them the ABCD companies: ADM, Bunge, Cargill, Dreyfus - they borrow as big corporate
lenders like any other corporation might borrow. And they get great coverage from the
investment banks and they have listings of bonds and traded securities. But when you get down
in sort of second and third-tier, the availability of capital really falls off of a cliff. And we want
professionally managed companies that are still going to be top quartile performers, but maybe
don't have the balance sheet or credit metrics, or they're in a stage of transition where they're
looking for private capital.
So if you take the big corporates out of the mix, there really is a dearth of available financing
opportunities. And it just isn't worth bankers’ time to focus on small transactions for
middle-market companies. They just don't have the bandwidth. They don't have the analytical
capabilities. Not that they couldn't, but the market isn't attractive enough for them to do that.
Banks like repetitive pieces of business that fit within their box. So if it isn't cookie cutter and
needs to be structured individually each time, that typically is not a good model for a bank.
Banks like things that they can replicate easily, they can train, they understand how to track and
monitor, and how to rate within their capital systems.
As a private investment provider, we can tailor-make things to have a bespoke product. And
that's one of the reasons why our portfolio companies are attracted to us because we can
provide customized solutions. And we can also act quickly because decision-making is very
dynamic as opposed to having to go up through a million different levels within a bank to get
assigned. So if a company is in need of liquidity and it's going to take 3 to 6 months to say yes,
that doesn't really solve their problem.
Well said. And, again, what you're saying fits into a theme I've noticed, which is: the last 10
years has actually been a time of entrepreneurship in finance, and there has been an opening
for small companies and startups to really grow. Do you see the trade finance for agribusiness
your own niche? Do you see that as continuing to grow in the years to come? And if so, what
would be the driver of that?
The driver is really the macro demographic story. If you look at the world, and world population
is growing over the next 50 years, our industry is going to need to produce enough food to be
able to feed that growing population. And as you get some of the emerging countries to want to
consume higher-level proteins, you move from a carbohydrate-rich diet to more of a protein-rich
diet. You're getting into food conversion cycles. So you have to produce more efficiently, which
requires investment capital, which requires supply chain financing. So it really goes back to a
very basic food story: people need to eat.
That is one thing that isn't going to change no matter what happens in the world. It's not about
technology. It's not about a particular product that's in favor or out of favor. We're talking about
basic foodstuffs and demand is going to be increasing. if you look at the demographics and the
world and population growth, I mean it sounds a bit corny, but there's a need to feed that
population at a very basic level.
Absolutely. That's a great way to explain it. So let's now turn to what comes to mind as one of
your favorite things about this?
There is no doubt that my favorite thing over the years, and not just this job, but I would say in
my career in finance, has been being able to make a difference with the portfolio companies that
we work with. It feels personal, it doesn't feel corporate. When I go down and I visit a sugar mill
in Mexico or Brazil or Central America, and I see how many families those businesses are
supporting, and that the money at the institution that I represent being deployed to really make
these companies more efficient and to make a real difference. I feel that every single day, and
I'm still excited every time I get to go on a site visit, every time I meet a multi-generational CEO
of a sugar company or a coffee company or a cocoa company. That really feel pride in a
relationship with my company.
That makes me feel good. That makes me feel like I'm adding value. That makes me feel like
I'm giving back, even though it is a job and we're investing money, and the business of investing
money is about making money. The money is being used for a purposeful reason. And that's
important to me.
Terrific. And now let's go back to the typical investment that we were talking about. What are the
top 1 or 2 risks that can lead to returns being lower than projected, or could lead to a loss of
principal, that you've found over the many years of doing this that come up repeatedly?
By far the number one risk is fraud: fraud in the underlying portfolio company. So you can be the
best structure around. If the company that you're lending money to decides to intentionally set
out to defraud you, it's very difficult to mitigate that risk. And where we've had losses in the past
tends to revolve around fraud. So doing that asymmetric diligence, not just looking at a piece of
paper in an audited financial statement, but going down and digging deep and making sure you
understand what your borrower's doing, where the money is going, the controls that they have in
Any red flags, making sure you listen to that gut feeling that if something doesn't feel right or it
doesn't make sense, typically that's for a reason. And even if you're very highly invested in a
successful conclusion, being able to step back and say no when something doesn't feel right is
really important, and that's not just specific to food and agribusiness, I would say. In any lending
business or any investment business, you have to really do deep and careful diligence. There
are a lot of other primary risks. So there's country risk. What countries are you lending into?
What is the legal jurisdiction? If something goes wrong, are you going to be able to enforce as a
non-local party? How are the courts going to treat you as an outsider? What is the case
precedent? And we spend a lot of time evaluating legal jurisdictions and keeping up with local
laws to make sure that our documents will protect us in the event of a problem. So companies
lose money, things go wrong all the time. If your transaction is properly structured, you're going
to be repaid through a liquidation of the underlying collateral. That works. If when you go to get
the collateral, it isn't there, that's a problem. And that's where we get into the fraud risks.
You mentioned currency risk, that's one. Price risk. So the price of the underlying good that's
being sold is fluctuating. So our business tends to do better in either a volatile environment or a
higher-priced environment. but when there's a low and not a lot of volatility, or prices are very
low and supplies are balanced, that tends to be more difficult for the earning streams of our
Okay. my final question is: I'm going to ask you to look out 5 to 10 years. And what do you think
are some of the changes that will happen and trends that will have most affected the industry
that you're in and your specific strategy?
At the moment, things are changing all the time. And one area that we've seen, I think the whole
world is seeing, is climate change. So when you're an agribusiness, that's a very
weather-dependent type of business. And when you see droughts that used to be the one in a
hundred-year drought that's happening every year, or a frost, or a hurricane, I mean, these are
things that really impact the crop cycles of these underlying businesses and they're getting more
intense and more difficult to predict.
So weather is absolutely something that's on our radar. Governance and ESG, these are also
some words that get bandied about often, but really being good stewards of the land is
something that we look at. Being more efficient, being cognizant of water use, being cognizant
of the types of fertilizers and chemicals that are being used by companies because more and
more people are examining the foodstuffs that they're eating. And there are definitely
consumer-driven health and wellness trends. And consumers, particularly millennials, have
been willing to pay more for organic, for non-GMO. And these are things that, as the consumer
side of the market is looking for these types of brandings, and are very aware of them and
willing to pay more for them, that tends to trickle down to the producer and the producers aren't
always able to farm organically or make sure that their seeds are non-GMOs. That's a process
of change over time and there's a cost attached to it. So the cost of doing business in our sector
is increasing, yet there's tightness always when you're dealing in commodity type of markets. So
those trends are definitely going to be impacting how we underwrite and how we invest over the
next 5 to 10 years.
Nancy, this has been terrific. I want to thank you so much for sharing your business and your
investment strategy with our audience.
My pleasure and thanks for inviting me. Great to see you.
About the Authors:
Beyond Wall Street (BWS) is an opportunity to learn about alternative investing and to be on the cutting edge of the next wave of finance. We interview fund managers and investors who have special insight into an area of investing that is typically not part of the mainstream of stocks, bonds and other public market securities.
It was created by Jan Brzeski who started his first private debt fund making real estate loans in 2010. In speaking with investors, he realized most investors don’t understand alternative investing, and feel overwhelmed by the risks of departing from the mainstream in any way. Jan believes their caution is well-justified, but that the answer is to learn the facts, rather than to avoid the whole category and settle for whatever returns the market may bring.
Our goal is to really understand what makes these different strategies work--and to get a realistic view of what risks are involved. We also embrace the democratization of finance, so technology and strategies that can disrupt the status quo are of special interest to us.