Trade Services
Trade receivables securitisation is back in vogue
Avarina Miller, senior vice president, Demica, says the trade securitisation market is returning as a cost-effective form of corporate financing, however, it could be cut short in its tracks if regulation restricts the market's development.In the popular conception, the collapse of complex instruments constructed on the basis of low quality, high risk assets triggered a general loss of faith in the banking industry and in the securitisation market. However, as the global securitisation market gradually recovers, evidence has emerged showing that there are a number of robust survivors. Pre-crisis securitisations built on solid asset types have managed to perform well and trade receivables in particular has re-emerged as a favoured asset class in securitisation, as demonstrated by Demica’s latest research on trade receivables (TR) securitisation.
Among the survey respondents - bank financiers - there is a collective view that TR securitisation has been one of the great survivors of the financial markets turmoil. While respondents note that subprime assets, mezzanine (convertible) structures and exotic instruments have died in the market and are unlikely to return, quality assets in the form of receivables, leases, auto loans and prime residential mortgages are seen to be robust and are experiencing a post-crisis revival.
As other sources of distribution and risk-offloading have gradually, European bankers believe that TR securitisation is an essential tool in structuring, or restructuring, a corporate finance programme. One financier said “it offers more diverse sources now that other traditional avenues have dried up”; another called it “a valuable and vital tool – more real in comparison to exotic products and much more secure, since it allows banks to spread risks off their balance sheet and to raise funds.” Indeed, European banks are witnessing an increasing demand for TR securitisation at the moment.
By separating the pool of invoice debt from the issuer’s own corporate credit rating, not only does TR securitisation allow companies to diversify their funding sources in addition to traditional debt financing, but it also provides sub-investment grade or unrated companies with access to capital markets. Given that capital is scarce and banks are now under pressure to adjust to higher capital costs, banking institutions are constantly on the outlook for efficient lending mechanism amid a fiercer regulatory environment. TR securitisation can present banks with a safer, more secured way of allocating capital while enabling them to continue to provide funding through revolving bank facilities.
Volumes in TR securitisation are once again growing more strongly after the financial meltdown as companies who had to accept less advantageous rates during the market turmoil are now looking to restructure or refinance debt. In light of a rising number of sub-investment grade companies embarking on TR securitisation in the past couple of years, European banks are envisaging a steady growth in this area in the coming years, with especial demand coming from more highly-leveraged companies.
In the aftermath of the financial crisis, a raft of regulatory changes are being developed and implemented. The new capital and liquidity standards introduced for banks under Basel III require them to match risks with capital more closely, making it much more expensive for lenders to hold securitised products on their balance sheets or as special purpose off-balance sheet vehicles. For lower rated or unrated companies, especially in the SME sector, which often have a very limited choice of liquidity sources, TR securitisation represents a valuable and indeed vital form of financing. Regulatory changes should focus on addressing the real issues behind the breakdown of the market instead of blindly putting every form of securitisation, regardless of the robustness of its underlying assets, in the same basket; otherwise, a valuable and effective form of corporate financing might risk being stifled.