Insurers now free to invest in Trade Finance Receivables

There are literally trillions of dollars of assets managed by Pension Funds, Insurers, Endowment Funds and Hedge Funds to meet their respective missions.  Many just assume these funds can buy anything they want.  This is not true. There are restrictions set by their various Governance bodies.

In the case of insurers, up until recently, trade receivables were considered a non ad­mitted asset under statutory account­ing. Non admitted assets require sig­nificant capital. An insurance company would need to have private equity or mezzanine level returns (ie, 12, 14, 16%) to afford the capital charge. You are not going to put your capital in 90 day receiv­able at Libor+200bp.

This has all changed.  In August 2012, the Valuation of Securities Task Force (“VOSTF”) of the National Association of Insurance Commissioners (NAIC) met to approve a draft by the New York Department of Insurance after sig­nificant input from other state departments of insurance, industry represen­tatives, and other participants, for the qualification and recommendation of Working Capital Finance Notes as a per­mitted asset.

Working Capital Finance Investment programs are private placements of pools of commercial trade receivables that offer higher yields than other short duration investment options of similar quality. These high-quality floating-rate investments offer a hedge against rising interest rates. 

In essence, think of working capital notes as part of an Approved Buyer Invoice program stemming from Wal-Mart or Mars, or Nestle.   Nestle  approves the invoice to pay, and a bank or non bank offer the supplier Libor based financing based off of Home Depot risk.  These programs can be huge.  Nestles buys $70bn worth of stuff each year, so putting some of that on this type of program means the banks need help to finance it.

These are attractive short term fixed income investments for any Insurers Portfolio.  Often yielding Libor + 100 to 500 bps depending on the quality of the Buyer for 90 or 120 Receivables, these investments have a significant yield gap over US Treasuries or Bank CDs.

This space just got a lot more interesting.

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