DEEP LOOK | Programmes to securitise trade receivables can enable more businesses to tap into an alternative source of trade finance – and investors to add a well-performing asset at limited risk. PostTrade 360° contributor Paul Golden lets experts line out the operational challenges when setting up the solution, and the systematic approach that lets stakeholders succeed.

Trade receivables securitisation is a way for large corporates to sell pools of their outstanding invoices on the capital markets. A seller of products will pool their invoices within a special purpose vehicle, which in turn will issue securities or notes to investors, the proceeds of which are used to fund the ongoing purchase of receivables.

According to supply chain finance platform Demica, it is particularly suitable for companies with large numbers of customers who can aggregate receivables from operating companies across different geographies and business units.

Advertisement
PostTrade 360 Nordic 2024

More than a quarter of the trade finance specialists surveyed for Demica’s 2024 benchmark report referred to trade receivables securitisation as having greater growth potential than alternatives such as factoring and dynamic discounting.

There is strong interest in such facilities across the bank, trade finance and even institutional market. 

Miray Muminoglu, Lloyds Banking Group

Trade receivables securitisation is an important source of trade finance for a number of multinational companies. For instance, packaging producer Smurfit Kappa has a €100 million trade receivables securitisation programme maturing in January 2026 and a €230 million trade receivables securitisation programme maturing in November 2026.

Engineering group Bouygues operates a trade receivables securitisation programme via its subsidiary Bouygues Telecom, which amounted to €637 million as of 30 September 2023, while credit insurer Coface’s trade receivables securitisation programme is worth up to €1.3 billion.

Trafigura Securitisation Finance – a receivables securitisation vehicle of commodities group Trafigura – priced a new series of notes worth a total of $500 million on the 144A/RegS asset-backed securities market in May.

“We are committed to the asset-backed securities market which offers access to a deep liquidity pool and sophisticated investor base and will continue to issue new series on a regular basis,” says Laurent Christophe, Trafigura group treasurer.

Operational issues

According to Shaun Baddeley, managing director of securitisation at the Association for Financial Markets in Europe (AFME), the two main issues for corporates looking to establish a trade receivables securitisation programme are the operational complexity in aligning systems to the transaction structure, and the investment required to set up the transaction.

“Reporting can be challenging, particularly for originators with smaller treasury teams or those with a requirement to sell receivables daily,” says Miray Muminoglu, head of the securitised products group at Lloyds Banking Group. “The ability to reconcile cash and transfer between bank accounts in a timely manner may also present challenges.”

He adds that originators who lack the resources to manage the process internally have access to an increasing number of outsourced service providers.

“There is strong interest in such facilities across the bank, trade finance and even institutional market,” says Muminoglu. “Future growth will be contingent on finding the appropriate balance between structural flexibility and pricing expectations with market participants increasingly looking at techniques such as the use of credit insurance to bridge the gap between originator and financing party requirements.”

Jerome Farges, global head of corporate securitisation at Societe Generale agrees that the European market is well-developed and says it attracts a lot of interest from US and Asian as well as European banks.

“As securitisation is fundamentally based on a methodology implying the pooling and overall performance analysis of trade receivables portfolios across currencies, countries and different subsidiaries, corporates need to be in a position to extract at least three years of historical data,” he says.

But despite the fact that securitisation has become less complex, Farges says it should still be viewed as a project that requires a team to adequately cover the various work streams including co-ordination of the selling entities and historical data provision.

According to Abigail Deméocq, managing director, global head of origination corporate securitisation at Crédit Agricole CIB there are other operational challenges, such as availability of the information required for the asset reporting in a single ERP system.

Tackling technology

“Corporates may work with different systems and have to develop their IT infrastructure to ensure smooth extraction of the required data during the life of the securitisation programme,” she says. “When the programme is set up with multiple entities in different jurisdictions, co-ordination during implementation as well as the legal and tax review of each jurisdiction/governing law can be a challenge.”

Providing historical data on the proposed receivables portfolio, performing a review of credit and collection policies and measuring the impact on accounting are not inconsiderable tasks. However, they also contribute to closer monitoring of performance – which can be useful at group level.

[Sellers’] systems may be dated because the company hasn’t invested in upgrades and fragmented due to the fact that the company is a collection of entities whose original systems were never harmonised or replaced with a single company-wide system

Dominic Capolongo, LiquidX

Deméocq says there are enough trade finance providers and banks to support medium to large sized corporates looking to implement trade receivables securitisation programmes. “For smaller companies, options are fewer but factoring banks offer solutions well suited to their needs,” she adds.

Sellers have to be able to easily and effectively transfer information at the time any accounts receivable is offered for sale (including details such as invoice number, amount due, due date, obligor, description of the goods sold and delivery date) and provide information regarding reconciliation of payments on each receivable.

Most sellers have this information somewhere in their ERP systems but collecting and reporting it in the form required by the funder can be daunting for SME sellers suggests Dominic Capolongo, CRO of trade finance technology developer LiquidX.

“Their systems may be dated because the company hasn’t invested in upgrades and fragmented due to the fact that the company is a collection of entities whose original systems were never harmonised or replaced with a single company-wide system,” he says.

Capolongo reckons there are sufficient funders to support financing needs assuming cost is not an issue.

Cost considerations

“Depending on the quality of the seller and the portfolio of obligors, cost may be the factor blocking a supplier from proceeding,” he says. “Cost is a function of the discount the buyer demands plus the administrative costs the seller has to bear to obtain and manage a programme.”

The good news is that receivables securitisation is a very attractive type of finance for banks and other institutional investors that are looking for a low risk investment with returns comparable to other investment grade assets.

Jayme Bulcão, Finacity

Trade receivables securitisation is very attractive if it can be made to work as a replenishable or accordion facility. A debt accordion (also known as an incremental facility) is a provision that allows a borrower to expand the maximum amount allowed on a line of credit or to add a term loan to an existing credit agreement.

That is the view of Pablo Terpolilli, founder & CEO of receivables technology platform Vabble, who says his company has faced a number of challenges in automating the trade receivables securitisation processes.

“There are a lot of established buyer-centric programmes, but these address only a very small percentage of the opportunity set,” he says.

Jayme Bulcão is managing director of Finacity, which specialises in the structuring and provision of capital markets receivables funding programmes. He refers to a number of obstacles from an operational perspective, including:

• Upfront complexity – structuring, legal, collateral audit and rating
• Diversified pool of receivables often involves multiple countries, currencies and ERP systems
• Time and complexity for implementation
• Development and implementation of appropriate monitoring of the pool of receivables’ movements

“The good news is that receivables securitisation is a very attractive type of finance for banks and other institutional investors that are looking for a low risk investment with returns comparable to other investment grade assets,” he says.

The implementation phase typically lasts 2–4 months, which is a bit longer than for other products because of the bespoke nature of the programmes and the fact that they are structured for the medium to long term.

Simplified structures

“It is important to note that certain banks have worked on simplifying the securitisation structure for their corporate clients,” says Deméocq. “For example, in relation to the multi-jurisdictional aspects our structure is global, but also enables corporates to achieve off-balance sheet treatment, which can otherwise be challenging with standard securitisation structures using a special purpose vehicle.”

It should also be noted that some portfolios will not be suitable for securitisation, which might result in an unattractive advance rate for highly concentrated portfolios.

Once set up, trade receivables securitisation often enables the borrower to access long term financing at a competitive price, allowing the company to finance growth through the same structure – either through increased participation by the initial bank or by bringing in more banks into the same facility, explains Baddeley.

Muminoglu agrees that securitisation is often unfairly viewed as complicated, noting that it works in a similar fashion to other receivable financing products and that while securitisation structures can be prescriptive given their bankruptcy-remote nature, the fundamentals of these lending facilities are very similar.

“Benefits of securitisation structures include the flexibility and scale to grow with the businesses, the option to combine portfolios across jurisdictions/originating entities, and what should be lower funding costs compared to other financing facilities given the asset-backed nature,” he says. “A bank-led feasibility analysis including assessment of initial data, portfolio parameters and funding requirements will help corporates understand whether securitisation is the right fit.”

Unlike other funding solutions such as factoring or invoice discounting, the efficiency of trade receivables securitisation relies on the diversification and payment performance of entire pools of receivables, which makes it extremely resilient and reliable according to Farges.

“In addition, it benefits from its direct connection to the highly liquid short term capital markets,” he concludes.