🇦🇷 Agree.ag - the Fintech that raised an A1+ rated bond 💵

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In this Issue

🧐 Thoughts ‘Agree.ag - the Fintech that raised an A1+ rated bond.’

In my last issue I discussed the problems of rising interest rates and how this impacts availability of debt funds for Fintech companies that need it.

One company in Argentina, has developed a unique route to market by using a listed bond to raise funds.

🗞 Relevant News

CreditAI - raised a small amount from Yield Lab Asia Pacific

Herdwatch - Irish Livestock management platform have raised a 'multi-million-euro' round

Reshamandi - Indian based platform focused on natural fibres raises external debt

Oceanfarmr - mapping the ocean for aquaculture

FullHarvest - marketplace acquires FarmersWeb

Agree.ag - the Fintech that raised an A1+ bond

In the last Issue "Why rising rates will slow Agri Fintech growth" I highlighted a few opportunities to overcome the 'problem' of funding a lending book.

One of these was using capital markets which I wanted to devote some time time to because a) it is super interesting and b) definitely relevant.

This conversation will be in two parts, with this Issue focusing on a typical capital markets solution, using Agree.ag from Argentina as an example.

A second Issue on this theme will look at the US system in particular and specifically at Farmer Mac as a source of liquidity. This will be at some point in the future, but necessarily next on my list. (Yes, the Farm Credit System warrants conversation but another completely separate one).

What are we talking about?

➡️ Introducing Agree

➡️ Make believe?

➡️ The transaction

➡️ Outcome

Introducing Agree

If you are familiar with Agree, it is possible you came across them when I asked "What can we learn from Agri Fintech in Latin America?" as their COO, Alejo Valverde, joined the conversation. (You can also find them here but will need to convert the site to English).

Agree are in the process of launching in Mexico, but work primarily with Ag Retailers in Argentina to digitise their workflows and provide credit to their customers. (If the Ag Retail x Fintech area excites you here is another Issue here for you to bookmark.✅)

Agree facilitate grower credits in two ways via their retail partners:

☝️Barter - A physical swap of inputs for a specified amount of outputs - soy in this case - based on a forward contract; and

✌️ Financing - working directly with the Ag Retail companies to finance their supply chain from the international seed and chemical providers all the way to the growers.

When we discussed Agri Fintech in Latin America, Alejo noted:

The financial institutions are very traditional with a lot of bureaucracy and a lot of problems, so while we look at the growers as the end user and in the commercial chain as our customer.. we solve more problems for the commercial dealerships than for the growers. They are the bottlenecks for business across the whole value chain.

However, finding timely and cost efficient capital to unlock these bottlenecks is a HUGE task.

So how did Agree approach this? By going to the Bond market  - obviously!

Make believe?

In preparation for their investor marketing a lot of work needed to be done. After all, this is Agri Fintech guys and not crypto. 😉

There were a few things that were already leaning in the company's favour.

1️⃣ Credit rating and analysis process - the financial modelling had to be very precise, in particular around projected defaults.

To make this precise, Agree were able to collate historical contract default rates which were less than 1% in the 5 years between 2016 and 2020 inclusive. This was a huge positive for lenders.

2️⃣ Agree were a new market counterparty without a track record, but they did assemble the best partners for the structure.

Carolina advised:

"Farmers committed to delivering grains to first class exporters - we also needed to prove that we had enough background of those farmers delivering the grain to the exporters. We ran a credit analysis based on this to see how good the prospective borrowers would be."

But it was not just about the offtakers (market buyers).

The team employed some experienced service companies to oversee the settlement proceeds and act as Trustee of funds received, which is typical in this type of transaction.

3️⃣ Carolina herself was an asset during this time. She has in-depth experience in local markets and this structure was the most challenging she had seen. The process was outside of the norm and many in the market told the Agree team this.

But Carolina persisted as she knew it was possible and she kept all players moving towards what was definitely the first of its' kind in Argentina and the region.

But still ... no takers

Several prospective underwriters initially sought to help Agree but became increasingly sceptical with the novelty of the process.

However, it would take more than this to dissuade the team.

There was still belief in Carolina's personal experience, the Agree modelling process and the underlying reliability of the agricultural sector itself.

So while the team were not yet getting a firm Yes from the market there were only a few firm No responses.

Investor conversations were still active, constructive and therefore the deal was still live - just about.🚦

But investors started to warm when:

➡️ Splitting the amount in two components - a junior and a senior component - and adding extra collateral started to warm investors; and

➡️ The rating attributed by FIX (Fitch Argentina) which rated the senior component at A1+, the highest possible rating for a short term bond and the junior tranche at A3, which was still credible. (The junior tranche received a lower rating as this would absorb any losses before the senior tranche, thereby protecting the senior investors.)

At this point once some investors signalled support, the momentum snowballed and the offer was oversubscribed by 75%.

The transaction

The transaction facilitated was a typical commodity trade finance deal, but for the first time was conducted in the agri sector using a complete digital process. 👏

Below is an outline:

(1) Sale of Inputs to the Agri Producer

(2) Credit application and forward contract submitted to Agree

(3) Credit integration provided to the Supplier

(4) Credit application and forward contract sent to Trust

(5) Debt securities issued to investors

(6) Proceeds received from investors into the Trust

(7) Grain delivery to exporters from the Producer

(8) Exporters settle with Trust

The outcome

Firstly, as noted above this transaction was the first of its kind in local markets using this fully digital process and proprietary market data provided by Agree.

The total value in USD was $1.7m, which appears low but I think provides a valuable lesson:

➡️ start small and scale, rather than start big and fail.

Fortunately, the repayment rate came in, even better than expected at 100% fully repaid. The predicted rate was <1% and there were actually 0% defaults in 2019 according to their data.

For their next campaign, Agree are planning to do another similar bond but noted some of macro-economic uncertainty around input inflation and local drought conditions, which have increased investor uncertainty - universal themes and not Argentina specific.

Their current funding operations actually didn't involve the rated structure described above as they were able to secure funding elsewhere. This is also important to note:

➡️ diversifying the funding base for credit is essential and Agree have already invested in several different channels.

Finally, what I really love about this story is the sheer determination and creativity of the team and the market to get a deal done. They did what it took and didn't give up.

If you are one of the many operators that read this Newsletter, I am sure this experience resonates.

Agri Fintech is a niche area but thankfully there are amazing teams driving it forward to inch, nudge and push things forward.

📰 News

It's a grind out there and things have already been slowing down into the holiday season.

There have just been a few funding announcements in the past 2 weeks that I have captured.

⦿ Herdwatch an Irish Livestock management platform has received 'multi-million-euro investment' from Irish PE fund Renatus Capital Partners. 🇮🇪

This is notable as livestock management platforms, like other farm management platforms, have become important data providers to lenders, especially where sustainability linked finance is involved.

⦿ Reshamandi, the Indian based platform serving the natural fibres industry, has raised debt of $6.2m from Stride Ventures.

The article also cites Reshamandi having a presence in the Middle East, South East Asia and North Africa.

⦿ Oceanfarmr have raised AU$1.45m from Katapult VC to build a "Google Maps of the ocean". Their mapping capacity will help farmers to manage and monitor aqua farms worldwide.

⦿ Full Harvest, the marketplace for slightly imperfect produce has acquired FarmersWeb, the farm management platform.

Full Harvest is one of few success stories in the output marketplace sector in the US. Many buyers will not purchase fruit or vegetables that have a different appearance - even if in perfect condition - as the appearance can reduce marketing options later.

Their marketplace takes these specific products and connects them directly with buyers who don't mind, such as food processors or restaurants.

⦿ Credit AI a Singapore based but seemingly India focused company, have raised a $48k convertible note from the Yield Lab Asia Pacific. The company aims to develop a credit score for farmers and seems to have taken place earlier this year.

*** If you operate in the sector and want to share updates, please do as I am more than happy to receive these.

THANK YOU!