Update on Where Institutional Investors Can Buy Trade Receivables? – Non Bank Sources

The challenges in making a market for trade assets are several and significant.

  • First, as an asset class, it is poorly understood by end investors. For example, some people I speak to consider trade and factoring the same thing. So there is a serious amount of education in order to develop products.
  • Second, trade finance data is not standardized, transparent, or granular, making it more difficult to package. A letter of credit (“L/C”) for coal can be quite different than an L/C for merchandise or corn or a supply chain finance receivable from a Vodaphone or Nestle program.

Still, many investors believe trade finance offers an opportunity for significant “alpha”.   Alpha is created due to several reasons, the Emerging Market trade flows, bank regulatory pricing, the lack of transparency in the market creating opportunities, the lack of mark to market capabilities, and others.

In our previous post, we looked at some of the bank sources for trade finance assets. Today we look at non bank sources of trade finance assets.

Non Bank generated sources of trade finance assets include:

 

1.     Institutional funds –There are several trade finance funds out in the market today, and they are very different in terms of business model, structure, etc. Some examples include hedge funds Markham Rae and BlueCrest, plus specialists Federated Investors and Crecera. I wrote about How Federated Investors invests in Trade Finance Assets. Crecera has trade funds focused on Latam.

These funds are still very small relative to the market for trade finance. For example, Crecera’s Regional Trade Finance fund is a US$60 million trade finance facility used to provide export financing to small and medium sized exporters in Argentina and Brazil, and subsequently to other countries in Latin America.

Federated has been successfully investing in trade finance assets since 2006 and currently manages approximately half a billion USD, which is still a tiny amount relative to the $360 odd billion of assets under management.

2.     Buy Supply chain finance assets from PrimeRevenue Capital Management or Orbian’s Special Purpose Entity – these structures are based on large scale buyer approved trade payable programs. PrimeRevenue established PrimeRevenue Capital Management (“PCM”) in July 2015 to go after non bank funds. PrimeRevenue believes they are restricted by bank lending and decided to use a Luxemburg based SPV structure and a relationship with AIG to tie credit insurers to attract non bank money. Orbian successfully launched the first proprietary US Capital Markets funding program in 2005 through the Orbian Special Purpose Entity (SPE). The SPE warehouses the suppliers that need to be financed on the system until they can be packaged and sold off in a note form.

3.     Buy Greensill Capital’s GAM Funds – There are two funds, one for investment grade assets and another for non investment grade. Moody's Investors Service has assigned a bond fund rating of A-bf to GAM Greensill Supply Chain Finance Fund, an open-ended alternative investment fund domiciled in Luxembourg and managed by GAM (Luxembourg) S.A.The Fund's primary investment objective is to generate steady and uncorrelated returns through selective investment in a portfolio of buyer-confirmed trade receivable notes (i.e. supply chain finance, SCF) with the underlying credit risk insured by insurance companies with Insurance Financial Strength rating of A2 or higher.

4.     Aztec Exchange has working with investors to invest in the Latin American einvoicing market. Aztec Exchange is attempting to dominate the invoice finance market in Latam. Aztec’s early payment service PayMe (known as ePayMe in Spain and Latin America) allows SMEs to get their invoices paid early, and it does so based on the creditworthiness of the debtor, not the supplier.

5.     Purchase to Pay and Supplier Networks are also in the business of transferring assets which are based on approved invoices from their network. Understanding where and how these vendors transfer assets is a first step. None of these technology vendors offer collateral transfer or perfection of interest services embedded in their third-party finance models. So far, the arrangements made between tech vendors and third parties have been private arrangements (e.g., Tungsten and Investment Insight, Taulia and Greensill Capital, Basware and Arrowgrass).

Trade finance and trade receivable assets are still a relatively niche area, not fully understood by many, but certainly offering attractive alpha yield opportunities in today’s short term fixed income environment.

Making this an asset class goes beyond stating it. There is critical infrastructure that needs to be put in place (custodians, asset managers, etc.) to scale this.

For those interested in understanding this space more, please contact me at dgustin@globalbanking.com

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First Voice

  1. Joon:

    thanks good read… how do you consider notes(co-mingled) program to be part of true sale/trade. Plus how do investors ensure that receivable assets are actually approved internally from the buyer’s perspective that they are indeed trade payable and not classified as bank debt ?

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