Dfin, a London-based corporate finance firm that specialises in the diamond sector, plans to lend $250m (€212.5m) to diamond polishers, cutters and traders (known in the industry as the midstream) in the next two years, according to Dfin pitch documents. Within the next four years, it aims to expand lending to about $375m, the documents show.
The diamond midstream, dominated by Indian and Jewish family businesses, makes up the invisible link between African mines and jewellery stores in New York, London and Hong Kong. The companies are heavily dependent on trade finance to buy rough stones, yet that money is drying up.
Lending to the midstream has fallen from $16bn in 2013 to just over $13bn today and is forecast to fall below $11bn in the next couple of years.
Most of the contraction is coming from Standard Chartered and KBC Group which are abandoning the sector.
Standard Chartered has already taken about $400m in losses and has about $1.7bn of loans still to be recouped.
Dfin, run by a former investment banker Christopher Ellis and diamond banker Bryan Walker, will lend through its new Dial lending venture. Part of the problem for the banks is the way they lend.
Diamond companies borrow against IOUs, known as receivables, for goods that have been sold, but not yet paid for.
There have been cases of companies inflating the value of goods or producing fake receivables that undermine the bank’s collateral.
“The opportunity exists because financing to diamond midstream companies is completely broken,” Dfin said in its information memorandum to potential investors.
“Banks have been burned too many times by losses in this sector and are pulling away.” Dfin plans to sidestep lending risks by holding physical polished diamonds as collateral and lending a maximum of 55% of their value. The company hopes to attract outside investors and banks that see the sector as too risky to fund themselves. It’s targeting clients in the diamond hubs of Antwerp, New York, Tel Aviv and Hong Kong.
Lending will start in the fourth quarter, with the company building a $250m loan portfolio within two years. It plans to target medium-sized diamond traders and provide revolving inventory of loans between $5m and $15m.
Dfin is currently seeking $1.2m in seed financing and is in talks with banks and mezzanine investors to fund the loan book.