By Tom Huntingford and Cliff Pearce
In a rapidly evolving financial landscape, trade receivables securitisations (TRS) have emerged as a robust solution for financing and investment opportunities. In this article, Tom Huntingford, Managing Director of Structuring, Demica, and Cliff Pearce, Global Head of Capital Markets, TMF Group, explore the growth, intricacies, challenges and benefits of TRS.
As corporates increasingly search for new sources of financing, the interest in trade receivables securitisations (TRS) is exploding. These solutions enable corporates to sell and finance pools of their invoices to unlock capital. They are highly flexible and scalable, and particularly suited to periods where traditional financing becomes more expensive.
The Association for Financial Markets in Europe (AFME) estimated the European TRS market amounted to around €115 bn of commitments at the end of 2022. This far outweighs the size of the private securitisations of vehicle loans or leases, or consumer loans. Analysis shows the sectors where selling is most common are manufacturing, finance and insurance, electricity, gas and steam.
Securitisations are growing because they provide strong, risk-adjusted returns for investors and competitive, tailored funding for corporate sellers, as well as the option to deconsolidate the receivables from their balance sheet. They are not a new tool – they have been in use for nearly 40 years and offer a valuable source of funding for sellers, helping them manage risk, grow business and improve financial performance.
Despite their association with the financial crisis, securitisations also provide a low-risk option for investors, many of whom have close relationships with the sellers. Investors can put their money into an asset class directly exposed to the real economy, contributing to the growth of small and medium-sized enterprises, frequently as suppliers of the corporate sellers.
Within Europe, it is Germany, France and Italy where selling receivables is most common. Banks are by far the most common investors. For private securitisations, asset-backed commercial paper (ABCP) remains the dominant funding type.
The structuring of TRS
TRS transactions are structured in the same way as other securitisations, with the receivables sold to a special purpose vehicle funded through the issuance of a note to the senior funders, which are usually banks. They provide funding through their specialised conduit vehicles and the financing is repaid from collections of the receivables.
It is important to note that TRS transactions have significant structural differences when compared with other asset classes, including the short nature of the assets and a unique and diverse set of servicing risks.
Some of the main challenges for TRS programmes concern the large volume of data, the large variance and complexity in the underlying assets, questions of cash dominion and of course, reporting obligations.
All successful trade receivables securitisation programmes will require a wide array of third parties and partners to ensure the transaction, reporting and special purpose vehicles (SPV) run smoothly and securely. These include corporate service providers, security and data trustees, and cash managers to make required SPV payments. Programmes also need a reporting agent to ensure the portfolio is adequately monitored.
In many ways, a TRS is similar to a standard securitisation transaction, however a key difference is the rolling nature of the program in which receivables are sold to a non-recourse SPV daily. This differs from other securitisations where pools of assets are sold on an occasional basis.
Where TRS has the edge over other receivables financing
For corporates sellers, implementing a TRS program has significant advantages over other forms of corporate debt and receivables financing. Securitisations are committed for longer terms and can be tailored to client requirements. They are also more commercially competitive and less operationally involved than other receivables financing.
Structured open account products such as TRS are more compelling than ever today because in the current period of persistent inflation and correspondingly high interest rates, traditional forms of financing remain less attractive for corporates seeking additional liquidity. The demand is reflected in the reaction of banks, who are gearing up to provide support.
This confidence in TRS’s growth potential is largely rooted in its likelihood to be less affected by the economic cycle. Why? Because a company will do what it can to ensure a stable supply chain. It is the strong risk profile of receivables securitisation that attracts banks to TRS. For example, in the second of 2023, Demica went to market with two receivables securitisations worth $1.8bn and received proposals from 30 banks. A common theme for funders is the stability and resilience provided by receivables financing structures which allow pricing to be competitive compared with other strategies.
The challenges of TRS
TRS does come with its challenges, however. Receivables books generate a significant amount of constantly changing data and many of these transactions are intensely complex. Transactions in multiple jurisdictions can be highly complicated in terms of collection flows, which requires deployment of monitoring and reporting tools.
Other challenges for banks include reporting obligations, facing competition from other open account products and services, and addressing a lack of experience in the securitisation product from corporate issuers, which can prevent sellers and investors from having the required confidence to initiate a transaction.
How to surmount the hurdles
With the right preparation and partners, these challenges can be surmounted. Banks can, for example, automate the transfer of information from the corporate seller’s ERP, and build a full reporting suite, or appoint an external reporting agent to manage obligations and regularly review requirements.
They can alleviate the complexity by gaining more understanding of different sectors and corporate sellers, reviewing each type of receivables. They can work with funder and counsel to adapt transaction structures and documentation to meet corporate seller and funder objectives, along with legal, tax and regulatory requirements. The monitoring of flows, balances and collections can be included in the transaction reporting suite. There are many uses of technology to overcome these specific difficulties and smooth access and functioning of TRS.
The current surge in uptake for TRS suggests companies looking at their working capital through a longer lens can see its advantages over other open account products and services.
TRS is now fast establishing itself as a stable, reliable source of funding in the real economy. It is a compelling option that meets the demand for innovative financing solutions to bridge the gap between corporate financing needs and investor demand.
About the Authors
Tom Huntingford Managing Director of Structuring, joined Demica in January 2019. Before joining Demica, Tom was leading receivables securitisation and structured finance transactions at Liberty Global, a NYSE-listed owner of cable operators in Europe. He also has experience in infrastructure, renewable energy and real estate private credit for a corporate finance advisory boutique. At Demica, Tom advises large corporate clients finance and structure trade receivables transactions to help them achieve lower funding costs, asset deconsolidation and incremental liquidity.
Cliff Pearce is Head of Capital Markets at TMF Group. Before joining TMF Group, Cliff was Global Head of Capital Markets Services at for corporate service providers. He has over 20 years’ experience in capital markets gained at top-tier investment banks like Greenwich NatWest, Bear Stearns and Bank of America Merrill Lynch, originating and delivering structured finance and securitisation transactions to a wide range of clients. Cliff is also a board director of multiple finance companies and sits on the Association for Financial Markets in Europe (AFME) Securitisation Board, as well as being a member of the Forbes Finance Council.
