The stable performance of trade receivables securitisation (TRS) through the volatility of recent years has made it an increasingly important alternative funding source for corporates and a favoured corporate financing technique for banks, according to the research from working capital specialist Demica.
The firm conducted its research among Europe’s biggest 30 banks and a small selection of US-based global banks active in Europe. The study reveals that more than 80% of bank respondents have seen growth in their TRS business or an increase in customer enquiries in the last 12 months.
Principal drivers of this positive development are the requirement for corporates to diversify working capital sources coupled with a recovering economy, according to survey respondents.
Demica comments that as traditional methods of raising funds are accompanied by increased financing costs due to more stringent capital regulatory requirements for banks, there is an increasing need for companies to seek alternative funding channels. At the same time, signs of global economic revival combined with a new-found investor confidence are giving companies a higher degree of assurance and sense of security to tap the capital market via TRS.
Spurred by an improving perception of this funding facility, banks’ favourable stance towards the product and a growing investor appetite for this short-dated stable instrument to manage their excess cash, respondents expect further growth of TRS in the next 12 months.
The report suggests that high demand is likely to originate in particular from sub-investment grade/non-rated companies, which find it increasingly expensive to borrow from banks. Also helping to fuel the demand are highly leveraged companies.
The increased requirement for TRS from the corporate constituency is equally matched by banks’ growing appetite for this credit facility, due to its safer profile and lower consumption of capital compared to unsecured financing. More than 65% of the surveyed banks regard TRS as ‘very important’. This funding technique is regarded by bank financiers as a particularly useful tool to develop new client relationships and to cross-sell. An overwhelming majority of respondents also confirm their banks’ ambitions to further expand TRS business in the next 12-24 months.
Successful implementation of TRS programmes hinges on various factors, with ‘accurate reporting’ and ‘quality of banking partner’ considered the two most crucial conditions. Two thirds of respondents regard frequent asset performance reporting as a vital pillar of a TRS programme because of the influential role it plays in managing operational and credit risk, in addition to ensuring transparency. A strong bank partner is required for providing stable lines of liquidity and professional project management skills.
“The improvement in the global economy brings new opportunities for growth which, in turn, encourages companies to make additional investment,” said Sarah Gannon, Demica’s director of business development.
“Raising affordable working capital to fund corporate projects, however, has become an increasing challenge for companies, in particular for mid-market enterprises, as the post-crisis banking landscape has rendered universally cheap liquidity a thing of the past. TRS, with its ability to help companies unlock the value of their debt assets while allowing banks to make the most efficient use of their capital, may therefore soon become a standard funding technique in a corporate’s financing repertoire while gaining strategic business importance in the banking space.”
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