Update on Where Institutional Investors Can Buy Trade Receivables? Post 1

If you listen to some of the publications out there, you would think that trade is already an asset class and all you have to do is go on a Bloomberg terminal and invest in receivables from Vodaphone or Trafagura and Bob’s your uncle.

You also hear that trade finance is an asset class that has a wonderful loss rate compared to other investment classes. I read things about how institutional investors are becoming comfortable with it, and how low default rates are when looking at the ICC trade loss register. Really? Bonds are public and default rates are transparent. For something as private as trade finance, with all its contractual nuisance and techniques, any data is good data as they like you to believe. What do they say, caveat emptor?

But I digress.

I wanted to provide an update on the market for trade finance assets. Yes, it is mostly a private placement market. Investors buy trade finance assets that are accounting driven or inventory driven that are tied into balance sheets. For a material market to develop, the information about those assets is powerful – what state they are in, who physically owns, that information is not on a balance sheet.

Let’s review some of the sources of trade finance assets for investors starting with banks.

Bank Sourced Trade Finance Assets

For the last several years, large banks have looked to move to an originate to distribute trade finance model given their capital woes. Large banks have been experimenting with various trade structures and products to distribute trade finance exposures to non banks investors, most notably:

  1. Synthetic securitizations– Synthetic securitizations 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. These transactions appear to be primarily occurring on a bilateral basis between a subset of the largest banks and a limited number of credit hedge funds. There has been a few notable public deal. In 2007 and in 2011, Standard Chartered bank created a complicated special purpose vehicle structure that involved creating a term note whereby short-term trade finance assets were replenished. The structure was called Sealane I and II. In 2015, Deutsche Bank’s Global Transaction Banking division structured and placed first loss notes on a trade portfolio to seven key investors from Europe and the  This structure, called Trafin, represented the largest-ever securitisation of trade finance assets.
  2. Outright securitization– In 2013, Citigroup and Santander sold $1 billion of trade finance assets in a SPV structure called Trade MAPS designed provide both liquidity and capital relief to the banks. The banks issued three-year rated asset backed securities of trade finance asset and the original deal was priced at 83 basis points over Libor. Citibank had been working on this arrangement since 2008, a point that demonstrates how complex implementation of these programs can be in post 2008 world. TradeMaps is a synthetic securitizations but just a different type than Trafin or Sealane. There has not been a Trade MAPS 2 and this could be a product of new securitization rules. Securitization rules have changed and the new rules say Banks must retain 5% on balance sheet, but doesn’t say which 5%. Secondary market participants like insurers and pension funds would be a place to put these assets.
  3. Direct loan sales– large banks are increasingly attempting to bring investors and non-banks into their secondary market distribution efforts for trade loans.

To date, the scale of No. 1 and No. 2 above has been limited, with mass take-off not appearing imminent.

In the next post, we will look at non bank sources of trade finance investments.

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

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