Trade Receivables Securitisation in Sub-investment Grade Companies to Grow

Trade receivables (TR) securitisation has been one of the great survivors of the financial markets crisis, as revealed by Demica’s research on the position and growth of the field among Europe’s top 40 banks. Invoice-based finance in general, and invoice securitisation in particular, is regarded by the surveyed banks as an essential tool in structuring, or restructuring, a corporate finance programme, with 64% of the respondents rating the technique as “very important”. TR securitisation is also viewed as a particularly attractive tool for sub-investment grade (SIG) companies in what remains a tight market for relationship credit.

Since the underlying portfolio rather than the balance sheet of the originator represents the key risk factor in such securitisations, almost 80% of the respondents agreed that TR securitisation offers SIG or unrated companies better funding rates than relationship lending. As banks are constantly looking for efficient lending mechanisms in light of the fiercer regulatory environment, research participants also believe that TR securitisation presents banks with a safer, more secured way of allocating capital while allowing them to continue to provide funding through revolving bank facilities.

Although TR securitisation volumes dropped during 2008-9, they are gradually reviving, with over 75% of the survey participants anticipate that the growth in the sector will be “steady” in the coming years. At least 25% of the bankers have seen “many more” SIG companies embarking on TR securitisations over the past 18 months and even more deals are being evaluated at the moment. Similar to SIG companies, 90% of the respondents also believe that TR securitisation would make a good funding tool for unrated companies. Given that there is a sizable universe of unrated European enterprises, including mid-caps such as the German Mittelstand, there is a large market potential for the utilisation of TR securitisation in this particular sphere.

Avarina Miller, senior vice president (SVP) of Demica, said: “In the aftermath of the financial crisis, companies are now much more aware of the advantages and necessity in accessing liquidity outside the straightforward vanilla bank market. It is therefore of vital importance that firms explore a broader funding strategy, which allows them to gain access to different funding channels.

“As demonstrated in our research, TR securitisation is a particularly effective funding tool for SIG companies, as the financing is based on the debtor risk profile rather than the creditor’s rating. Since a robust monitoring system of the receivables pool is indispensable in TR securitisation, better working capital visibility and management often comes along as a welcome by-product in addition to diversifying funding sources,” she added.


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