Trade Receivables as a Short Term Fixed Income Product – Part II

This is a four part series on the emerging interest of Trade Receivables as a short term, fixed income product.   Part II talks about what investors are buying.

 

Up until recently, it has been only the banks that have experimented with several different approaches to transfer trade finance risks to non-bank investors.  The options presented to Investors to buy Trade Finance assets originated by Banks are neither user friendly or straightforward.  Think about buying EXIM notes or bespoke Credit Default Swaps or a SeaLane synthetic credit note that stems from a portfolio of complex trade instruments replenished by a bank.  An analyst or consultant at any pension fund or insurance company who lacks a background in the nuances of trade credit and trade finance instruments would be challenged to digest the risks.

Solutions that have come to market have not been scalable and have been focused on bank capital management objectives (ie, Regulatory Relief structures), rather than commercially viable and scalable investor options.

The Banks have done this via three forms of distribution:

(1) Synthetic securitization -  Synthetic securitisations involve an outside investor taking the first or second loss on a portion of the trade finance portfolio in exchange for a stream of payments.  These transactions help reduce capital required, but banks continue to fund the loans.  There have also been a few public deals, most notably Standard Chartered’s Sealane I and II (in 2007, 2011) as well as Citibank’s CAB structure.  In the Sealane structures, special purpose vehicles were established both to sell protection against the portfolio to the bank and to issue securities to the public.

(2) Outright securitization - Citigroup and Santander recently sold $1bn of trade finance assets in a SPV structure designed provide both liquidity and capital relief to the banks.  The deal was priced at 83 basis points over Libor.  Citibank has been working on this arrangement since 2008, a point that demonstrates how complex implementation of these programs can be in post 2008 world.

(3) Direct loan sales - large banks are increasingly attempting to bring investors and non-banks into their secondary market distribution efforts for trade loans.

Beyond the Regulatory Relief structures, there are two growth options for non bank investment – facilitating investment in Supply Chain Finance structures and investing in B2B and Supplier Network structures.

 Are trade receivables worth the trouble? One investor told me Trade Finance assets demonstrate “Sweat” Alpha but have high Barriers to Entry and are hard to scale as an investment.  So yes and maybe no, but if you can understand what you are buying (the Golden rule of investing) and have the proper risk mitigation in place, then trade receivables and trade finance structures can be.

Part III will look at some of the challenges in buying trade receivables.

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