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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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      • USA
      • Canada
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      • New Zealand
  • Hi-Tech
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    • UK Fintech
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      • Enhancing Fintech Interoperability: Digitalizing Trade Documents for Efficiency and Security
      • 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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      • What is The Model Law on Electronic Transferable Records (MLETR)?
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      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
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      • Financial Crisis or Not?
      • Credit Suisse Bailout
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      • 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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Home Securitisation

What is Trade Receivables Securitisation?

Nick Chiara & John Goodden by Nick Chiara & John Goodden
February 16, 2023
in Securitisation
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trade receivables securities
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What is Trade Receivables Securitisation?
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Download file | Play in new window | Duration: 3:53 | Recorded on August 23, 2022

Trade receivables securitisation is a more complex financial instrument than invoice factoring. Trade receivables securitisation takes illiquid existing and future receivables and converts them into tradable debt and equity obligations.

To turn trade receivables into securities unpaid invoices are sold to a SPV (Special Purpose Vehicle). The value of the invoices does not change when they are transferred to the SPV.

The SPV then collateralises the portfolio of receivables and refinances itself by issuing various classes of asset-backed securities. These securities will vary in their risk to investors.

Once the outstanding invoices are bundled together and turned into securities their value increases because these financial assets are worth more to investors once they have been legally separated from the company who has originated such receivables (the originator).

This is because the securities are scrutinised by rating agencies and classified by risk. They are also underwritten by a pool of sponsoring banks. The underwriting by a bank makes taking on securities composed of outstanding invoices far more attractive to a potential investor.

Factoring or Securitisation?

Whereas factoring is a form of credit finance, securitisation is capital market-based finance. This has the key advantage of allowing companies to improve liquidity without increasing their liabilities. Factored invoices stay on a company balance sheet (this is the case with recourse factoring and invoice discounting). In contrast, invoices turned into securities are no longer legible for the company’s balance sheet.

Also, since securities are underwritten by banks, they reduce a company’s reliance on unsecured debt.

When to Opt for Securitisation?

A key metric for a company when it comes to making a decision about whether to offer a credit line to debtors, apply for a bank loan, factor trade receivables or securitise trade receivables is liquidity ratio:

LIQUIDITY RATIO = Current Assets/Current Liabilities

This is calculated by taking a company’s most liquid assets (i.e., current assets, those easiest to convert to cash) and dividing that monetary number with the amount of short-term liabilities (current liabilities) that are on the books. Thus, a high liquidity well over 1 means that a company is in good financial health and can pay its debts. A liquidity ratio below 1 means that the company may experience a liquidity crunch. Furthermore, if the debt-to-equity ratio, an indicator of a company debt leverage, is high than both factoring and securitisation should be considered.

DEBT-TO-EQUITY RATIO = Total Liabilities / Equity

Securitization normally offers sellers broader access to capital at a lower rate, especially if the seller has a credit rating worse than their customers. In such instances there is an opportunity to do credit arbitrage. A well-structured securitisation can achieve an investment-grade rating even for a seller that is not investment-grade rated. Sellers are able to leverage their receivables by credit insurance, appropriate structuring, effective servicing and standardised underwriting so as to gain access to attractive capital markets financing.

Most of the times, large companies with high volume of receivables use securitisation as an effective tool for funding their short-term working capital.

In Summary

Trade receivables securitisation takes outstanding invoices off a company’s liabilities. Via a Special Purpose Vehicle, the invoices are bundled together and sold as securities to investors. Changing receivables to securities creates attractive income streams for investors because they are rated by independent rating agencies and also underwritten by banks.

The downside of securitising trade receivables is the legal and administrative costs involved in their creation. However, if a company has a debt-to-equity ratio higher than 2 then securitisation makes good financial sense.

Tags: asset backed commercial papersasset backed securitiesinvoice financesecuritisationspecial 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
      • Enhancing Fintech Interoperability: Digitalizing Trade Documents for Efficiency and Security
      • 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 Collapse of the Russian Rouble: An Historical Analysis and Current Implications
      • 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 Legal Aspects
      • 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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    • How DeFi Fulfils the Functions of Finance
    • Taxonomy of Crypto Assets
    • Crypto Currencies
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    • Interview with Crossflow
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