Bond flotation with exotic commodity collateral

M. A. H. Dempster

Quantitative Finance, 2020, vol. 20, issue 12, 1903-1925

Abstract: Exotic high tech metals such as rare earth oxides, titanium and nickel wire are increasingly important to semi-conductor, aerospace and high end defence technology R & D and production. As a result—while not market traded and therefore sporadic order dependent and highly volatile—prices of these commodities have been rising on average over the past decade. The metals trading subsidiary of an international group acquired over 6 M metres of nickel wire which at the current market price of about 300 EUR per metre is worth over 1.6 B EUR. The firm wished to raise from 300 M to 1B EUR in the capital markets in order to purchase a variety of these high tech metals to take advantage over the medium term (5–10 years) of generally rising prices. After a brief description of the current state of the exotic high tech metals markets, this paper treats the technical pricing and default risk analysis of an example 350 M EUR 7 year amortized corporate bond issue backed by a nickel wire inventory and subsequent high tech metal trading as collateral. Topics covered include security price modelling with high tech metal collateral, the design of 100% risk free securities with third party derivatives and security pricing and trading methodology. The complex stochastic and Monte Carlo simulation analyses presented are based in part on specially developed modelling of the nickel wire catalogue price and third party price projections for rare earth oxides and titanium. This analysis is based on 10 year (2008–2017) daily market data and supports an optimistic view in that after accounting for all ongoing costs we find a zero default probability for the bond issue—a situation seldom seen to accompany its stipulated 12% internal rate of return.

Date: 2020
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DOI: 10.1080/14697688.2020.1814002

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