How To Raise First Loss Capital for Commodity Trades via US Private Placements
Banks and senior lenders will not fund your commodity book without tangible credit protection. First loss capital sits beneath the senior and absorbs early hits. That alignment reduces expected loss, improves LGD, and can turn a soft no into a signed facility. Here is exactly how to raise it through US private placements, who writes the checks, and what it costs.
Outcome:
a funded first loss tranche that satisfies bank credit tests and supports a larger senior line for your physical flows.
Why Banks Require First Loss
Expected loss and LGD
First loss absorbs early defaults, quality slippage, or basis mismatches. That lowers the senior tranche loss expectation and tightens pricing.
Capital relief
Credit enhancement improves risk weights for banks. Better RWA math means more headroom to lend into your corridor.
Alignment
You or your investors eat first dollars of loss. Committees like sponsors with skin in the game and controls to match.
Operational noise
First loss smooths recoveries when cargo delays, quality disputes, or late documents jam the cash waterfall.
Who Buys First Loss
Family offices and HNW
Comfort with real assets, want double digit targets, accept illiquidity for control and transparency.
Specialty credit funds
Mezz and equity shops that know trade controls and want governance rights baked in.
Commodity merchants and offtakers
Strategic investors who profit from volume security and insight into flows.
Insurers and sureties
Occasionally backstop a slice with strict covenants, often via quota share or stop loss structures.
Structure Options That Work Under Reg D
| Route |
Best for |
Notes |
| Reg D 506(c) LP or LLC |
Accredited investors, quicker marketing |
General solicitation allowed, verify accreditation, file Form D, Blue Sky filings. |
| Reg D 506(b) club deal |
Known investor list, no public ads |
No general solicitation. Faster if your network is ready. |
| 3(c)(7) feeder into SPV |
Qualified purchasers only |
Cleaner Investment Company Act exemption for larger tickets. |
| Subordinated note to financing SPV |
Investors who want fixed coupons plus equity kicker |
Clearly subordinated to bank. Negative control and reporting wired in. |
How Much First Loss Do You Need
| Senior facility size |
Typical first loss range |
Form of first loss |
| USD 10 to 25 million |
8 to 20 percent |
Equity in SPV or subordinated note plus cash reserve |
| USD 25 to 75 million |
5 to 15 percent |
Equity plus funded first loss account with strict release rules |
| USD 75 million plus |
3 to 10 percent |
Layered equity, mezz note, and insurance where useful |
Ranges move with product, corridor, title control, hedging, and the bank model for expected loss.
Controls Investors and Banks Expect
Cash control
Blocked accounts and waterfalls. Senior repaid first, then first loss earns returns from residual.
Title and custody
Warehouse receipts or CMA with named collateral manager and release rules tied to collections.
Hedging policy
Pre defined hedge bands and counterparties. No naked price exposure in a credit structure.
Insurance
Stock throughput, cargo, and trade credit where it truly reduces loss severity.
Upfront Costs and Timeline
| Item |
Typical range |
Comment |
| Legal for offering docs and SPV |
USD 75k to 200k |
PPM or note purchase, LPA or LLC, risk factors, Blue Sky filings |
| Bank and intercreditor counsel |
USD 50k to 150k |
Subordination, waterfall, control agreements |
| Admin, auditor, and KYC onboarding |
USD 15k to 50k |
Fund or SPV accounting and investor registry |
| Placement costs |
2.0 to 3.0 percent of raised |
Varies by ticket size and speed |
Once documents and senior terms are ready, many sponsors complete a first close within 6 to 10 weeks.
Entity Setup and Jurisdictions
| Purpose |
Common choices |
Why it fits |
| Offering vehicle |
Delaware LP or LLC under Reg D |
Speed to market and investor familiarity |
| Financing SPV |
Delaware or Cayman SPV |
Intercreditor clarity and global investor access |
| Accounts |
US or UK collection accounts with blocked control |
Bank comfort and sweep discipline |
What Your Pack Must Show
Data tape
At least 24 months of trades, margins, DSO, defaults, recoveries, and hedge logs by corridor.
Waterfall and triggers
Priority of payments, reserve mechanics, early paydown tests that protect the senior first.
Control documents
Account control, CMA or receipts, insurance endorsements, intercreditor agreements.
Governance
Reporting calendar, advisory board, negative control items, valuation policy for residuals.
Step by Step to a First Close
| Stage |
What happens |
What helps |
| 1) Senior term sheet |
Agree advance rates, reserves, control stack, and intercreditor principles |
Share draft waterfall and sample contracts early |
| 2) Offering documents |
PPM or note docs, risk factors, use of proceeds, fee grid, governance, Form D |
Keep terms plain and reporting frequent |
| 3) Investor diligence |
Data room, trade audits, site or terminal calls, hedging policy review |
Grant view of bank drafts and control agreements |
| 4) Intercreditor and close |
Execute subordination, fund FL, senior goes live |
Dry run the waterfall and test reporting before funding |
Return Profile and Risks for First Loss Investors
| Topic |
What to expect |
| Return mechanics |
Preferred return or coupon plus profit share from residual after senior is paid |
| Risk |
First dollar of loss, illiquidity, operational slippage if controls weaken |
| Mitigants |
Hard covenants, reporting rights, advisory board seats, veto on key changes |
If you need first loss to unlock senior capacity for your commodity flows, send your trade data, target facility size, and current bank drafts. We will return a placement plan, investor list, and a costed closing timeline.
Raise First Loss Capital
Share your corridor, product set, and senior term sheet. We will scope investor appetite and structure the first loss so banks say yes.
Start the Process
For professional and accredited investors only. This page is informational and not an offer of securities. Any offering would be made only through final documents under an applicable exemption, including Reg D. All facilities are subject to KYC, AML, and sanctions screening. Terms, fees, covenants, tax, and risk factors are defined solely by the executed agreements.