Are Trade Receivable Securitisation Programs an Option for You?

A recent article in Treasury Today talked about how uncertain bank regulatory and increasing costs of credit from Basel capital rules is putting Trade Receivable Securitization (TRS) programs back in the limelight and becoming a more important source of finance for companies.

In TRS programs, receivables are pooled into a special purpose vehicle (SPV) and the vast majority are packaged into conduits and funded through commercial paper (CP), commonly known as Asset Backed Commercial Paper (ABCP). Access to this method of securitization has been historically limited to large sellers with good creditworthiness and provide companies funding terms up to 364 days.  Many types of ABCP programs exists, including those for credit card receivables, auto loan receivables and even student loans.  According to Moody's, Trade receivables and auto loans and leases will continue to represent the largest asset types financed through the ABCP conduits - see image below.

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The article provided a number of benefits which I will summarize:

  1. Flexibility in designing a program to either lower the interest cost or maximize the advance rate. For example, Companies can take their receivable portfolio and use the best receivables, but perhaps they only represent 50% of a firms receivable base. You can package them into a AA or AAA facility and get the lowest cost but not the highest advance rate.
  2. This type of funding represents a committed facility, not only with respect to funding, but in term and cost as well. Companies will know they have a fixed funding for a specific cost for three years.

What the article was remiss on was detailing the cost of putting these structures together.

Setting up programs involves a number of legal and underwriting costs.  In addition, credit insurance is typically purchased on the pooled receivables, as well as a standby Letter of credit facility to backstop the SPV’s issuance of Commercial Paper.  Daily monitoring of the receivable is also necessary and in order to determine whether or not the assets of the SPV are sufficient to support the liabilities of the SPV, a collateralization test must be performed. This test may be applied as infrequently as monthly, or as often as daily.

Firms like Demica and Finacity have been bringing these types of programs to non investment grade companies and finding ways to drop the structures from a typical $100 million threshold to $25 million.

Finally, while the Fed reports on the size of the ABCP market for non financial firms, it does not break it down by type of receivable.  So any indication of whether this market is growing, stabilizing or even declining is hard to assess.  Auto loans continue to be the largest segment of the receivable base. According to Moodys, “In all conduit trade transactions liquidity will cover all seller recourse, including dilution and commingling risk. Because of these structural protections, performance for trade receivables are typically strong.”

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