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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
    • UK Brokerage Firms
  • Factoring Firms
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      • UK
      • France
      • Germany
      • Italy
      • Spain
      • Holland
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      • New Zealand
  • Hi-Tech
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    • UK Fintech
    • Articles
      • The 7 Types of AI and Their Implications for the Future
      • Transforming Trade Finance: The Role of AI
      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
  • Rating Agencies
  • Securitisation
    • Deal Arrangers
    • Book Runners
    • Articles
      • The Roles of Deal Arrangers and Book Runners in Securitization
      • What is Trade Receivables Securitisation?
      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
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      • A Guide to Accounts Receivable Purchase Agreements and Invoice Discounting Agreements
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      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
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Home Securitisation

The Appeal of Trade Receivables Securitisation

John Goodden by John Goodden
December 28, 2022
in Securitisation
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The Appeal of Trade Receivables Securitisation
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The Appeal of Trade Receivables Securitisation
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Download file | Play in new window | Duration: 6:45 | Recorded on November 30, 2022

Trade receivables securitisation began in the USA in the 1980s. It is a system whereby a company can raise money by selling on a revolving basis a selection of its trade receivables to a Special Purpose Vehicle (SPV) which is legally separate and bankruptcy remote. The SPV issues collateralised notes that can be bought and sold. It is estimated that there are between 80 and 100 billion USD worth of such securities on the market at the moment.

Turning trade receivables into securities has become a popular financial tool for dealing with large invoice bundles, typically between 50 million USD and 1 billion USD. Securitisation is not limited to US dollars. The transactions represented by the trade receivables can be from multiple countries. Furthermore, the issuers or sellers can be unrated or below investment grade because the process of securitisation renders the bundled trade receivables investment grade.

The Appeal of Trade Receivables Securities

Since their inception securities have appealed to investors for the following reasons:

  1. Securities have performed well through the various stages of the economic cycle. There have been few cases of securities comprised of trade receivables having parts that default causing the markets to run away from these products.
  2. These securities are structured in such a way that they can be modified: the reserve levels can be adjusted monthly to mitigate risk. This facet of trade receivables securities provides protection to the assets.
  3. They perform well against other asset classes. Since these securities comprise of unpaid invoices, they provide returns after a few months.
  4. From an invoice financier’s point of view, securitisation of trade receivables represents a low-risk option to extend credit to companies with weak credit ratings. Moreover, separating the receivables from the seller makes the financial product more attractive to investors. Records indicate that securitisation has resulted in lower risk for the financier.
  5. From the point of view of banks and other regulated institutions, it is possible to reduce the capital requirements on their credit services due to the strength of the high credit ratings such securities are awarded.

Advantages of Trade Receivables Securitisation

Securities are classified as Asset Backed Commercial Paper (ABCP). The assets in this case are the unpaid invoices. An ABCP is further enhanced with a Letter of Credit (LC) from the sponsoring bank. This provides a double security net that has stood investors in good stead even through the Global Financial Crisis of 2008. Another strength of this type of security is the added layer of protection given by credit ratings. These are made by independent rating agencies that further scrutinise the securities for weaknesses.

As the composition of securities change as invoices come due for payment, rating agencies are obliged to check the portfolio of trade receivables and re-confirm their credit ratings. It is like having a car regularly serviced so that the vehicle remains road worthy for a long time.

As a result of these strengths, more than 20% of ABCPs are now using trade receivables as assets.

Banks

In the past banks would keep trade receivables securitisation at arms-length from their main balance sheets. Funding has been through bank-sponsored paper conduits instead. However, recently banks have been changing their attitudes to trade receivables securities, often bringing them onto to the balance sheet and applying their own fiscal discipline.

Capital Market Investors

In developed markets other funders are usually traditional capital market investors such as pension funds, insurance companies and asset management companies. In emerging markets there is a lack of ABCP conduits to release bank funding for trade receivables securities. As a result, these securities are funded by the capital markets. This is not necessarily a bad thing as this spreads risk in emerging markets, not placing all the burden on banks to provide trade financing.

The downside for emerging markets is that capital markets cannot offer the same level of sophistication. They do not accommodate variable funding amounts so the rewards of securities remain at a fixed amount during the revolving period of the security’s life. This inflexibility is detrimental to the seller. As a result, trade receivables securities in emerging markets generally have longer lifespans (up to 5 years) compared to trade receivables securities in developed markets that are renewed annually.

In Summary

Since the 1980s creating securities using assets composed of unpaid invoices has been largely a success story. They are structured to appeal to the sellers of the trade receivables, the funders and the investors.

The benefits of the structure include providing flexible funding for the seller, low risk and high reward assets for investors, and commercial products for banks that can be carefully managed to mitigate risk and maximise profits.

Key components of trade receivables securitisation are: the unpaid invoices are legally separated from the seller; the securities are bankruptcy remote; the value of the securities are independently rated by credit rating agencies; and, the assets that back the securities come to fruition relatively quickly compared to other assets.

It is clear that while emerging markets are taking advantages of trade receivables securitisation, the facilities of the local banks to monitor and adjust the portfolio of assets are lacking. Already 20% of securities use trade receivables as assets, this figure will increase as developing countries enhance their banking systems.

Tags: ABCPasset backed commercial paperbenefits of trade receivables securitisationcollateralised notesemerging marketsLetter of Creditspecial purpose vehicle
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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
    • UK Brokerage Firms
  • Factoring Firms
    • Europe
      • UK
      • France
      • Germany
      • Italy
      • Spain
      • Holland
    • North America
      • USA
      • Canada
    • Australasia
      • Australia
      • New Zealand
  • Hi-Tech
    • Digital Platform/IT/Software Providers
    • UK Fintech
    • Articles
      • The 7 Types of AI and Their Implications for the Future
      • Transforming Trade Finance: The Role of AI
      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
  • Rating Agencies
  • Securitisation
    • Deal Arrangers
    • Book Runners
    • Articles
      • The Roles of Deal Arrangers and Book Runners in Securitization
      • What is Trade Receivables Securitisation?
      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
  • Legal
    • Law Firms
    • Articles
      • A Guide to Accounts Receivable Purchase Agreements and Invoice Discounting Agreements
      • The Challenges of KYC and AML Checks
      • What is The Model Law on Electronic Transferable Records (MLETR)?
      • Snapshot of Factoring Legal Schemes in England and Wales
      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
  • Rates
  • Economy
    • Economic Indicators
    • Articles
      • The Current State of the UK Economy
      • Economic Forecast for the UK in 2023
      • Economic News for 2022
      • Financial Crisis or Not?
      • Credit Suisse Bailout
  • Credit Insurers
    • Credit Insurers
    • Articles
      • Credit Insurance in Trade Receivables Financing
      • The Benefits of Credit Insurance in Invoice Finance
      • Eligibility Requirements for Capital Relief by Using Credit Insurance
      • What are Export Credits and Country Risk Classifications?
      • How the War in Ukraine Affects the Price of Credit Insurance for Trade Finance
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    • Ripple (XRP) Wins Latest Battle with SEC
    • UK Passes Financial Services and Markets Act 2023
    • Latest about the UK Regulatory Proposal for Crypto Assets
    • How will MiCA (Markets in Crypto Assets) Regulation Affect Trade Finance and the Banking System?
    • Markets in Crypto Act (MiCA) Becomes EU Law
    • An Introduction to EU’s Markets in Crypto-Assets (MiCA) Law 
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    • The DeFi Revolution
    • How DeFi Fulfils the Functions of Finance
    • Taxonomy of Crypto Assets
    • Crypto Currencies
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    • Interview with Orbian
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