Trade receivables securitisation: a flexible response in troubled times
Trade receivables securitisations (TRS) were once thought complex and risky. Now, in this new age of uncertainty, they are growing rapidly in popularity among corporates seeking to unlock working capital, and investors looking for opportunities in the real economy. For its recent webinar, TMF Group brought together a panel of independent experts to look at why.
Under a TRS, the corporate ‘sells’ its unpaid invoices to a special purpose vehicle (SPV) which then issues a form of debt to investors.
Sellers can turn 60–90 days of unpaid invoices into valuable working capital while transferring the risk. Structured properly, there is no need to notify customers or clients (the debtors). Because the debt has been ‘sold’, the balance sheet is unaffected.
For investors, this is a robust asset class offering good returns. Risks are relatively low – measured in days not years – and are mostly insured. For investors keen to fund activity in the real economy, from large corporations to SMEs, TRSs are particularly well suited.
But none of this necessarily explains the recent growth in their popularity. TMF Group commercial director Michael Moffitt kicked-off proceedings by asking the panel for the real reason.
Michael Osswald, managing director at STS Verification International, pointed to the major EU regulatory update at the start of 2019, which “addressed the long-standing concerns about complexity and risk of securitisations in general, and includes TRS as one of the key funding instruments available to the real economy.”
Regulation of due diligence, transparency and risk retention was tightened up. A supplementary regime – to encourage ‘simple, transparent and standardised’ structures (STS) – also simplified risk evaluation and offered regulatory advantages (including reduced capital requirements) to some institutional investors. TRS is now a key asset class when it comes to compliance with STS requirements.
But firm foundations do not guarantee growth. Overall, the panel agreed, the true driver of expansion is the inherent flexibility and adaptability of these structures, helping investors and corporates deal with the current avalanche of macroeconomic and geopolitical upset: Brexit, the pandemic, supply chain crises, commodity price spikes and now sanctions.
Jeremy Levy, Partner at Baker McKenzie London stated: “The pandemic showed this clearly - when existing arrangements needed to reflect new realities, TRS structures enabled us to reach sensible resolutions efficiently.”
With Brexit in mind, participants learned that cross-jurisdictional TRS arrangements are commonplace. Just like any other TRS, a post-Brexit UK/EU transaction requires careful legal analysis of the seller’s home/EU presence and the originator’s EU standing. UK bank sponsors are now excluded from EU regulation, but they have access to the UK equivalent.
STS transactions must have an originator and the SPV must be EU-domiciled, including entities that are involved indirectly in the underlying trade contract. That said, sellers from outside the EU – including the UK, Switzerland and the US – are commonplace, especially when multiple jurisdictions are involved.
Multiple jurisdictions do complicate asset due diligence, Markus Zenz, Partner at PwC Luxembourg explained: “Arrangements commonly involve multiple corporations, multiple jurisdictions and selling on different terms in different markets. The legal analysis for the receivables sale must be done early to avoid local problems with notarisation, debtor notifications, credit terms, enforceability, and so on.”
TRSs are rooted in business volumes in the real economy. Just like other supply chain factors, sanctions will inevitably have some effect – perhaps delays to delivery or service, and ultimately payments – and particularly in certain industries. But these are all things that good due diligence handles routinely.
Recent developments in data flows and analysis are playing a big part in building investor confidence. With lots more information, investors find it much easier to understand the seller’s business and assess its ability to administer things efficiently.
Even so, as the session drew to a close, participants were warned not to think of technology and data-based solutions as a substitute for direct engagement with the seller at an early stage.
Because sellers do not need to declare their TRS arrangements to debtors, they are themselves the main source of risk to investors. It is vital to take a pro-active approach to auditing the seller’s processes and invoices. Do the invoices really exist? Can the finance systems divide cash flows efficiently between ‘sold’ and ‘unsold’? These are fundamental questions for every TRS arrangement. And to answer them fully, you always need to ‘go to the source’.
TMF Group’s global capital markets practice offers a range of administrative, agency, issuer/SPV and trustee services, across industries and clients.
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