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Secure Performance, Secure Future Despite the bad press over securitisation as a whole during the financial turmoil, trade receivables securitisation (TRS) has actually fared relatively well compared with other securitised asset classes.

Secure Performance, Secure Future

Performance and outlook for the trade receivables securitisation market in Europe – research amongst Europe’s top 30 banks

by Phillip Kerle, Chief Executive Officer, Demica

The demise of securitisation has often been mooted, and it is indeed true that many of the more exotic pre-financial-crisis instruments have disappeared, never to return.  However, a number of securitisation types, based on solid, high-quality assets, have not only weathered the storm, but look set for a revival and growth; one such is trade receivables securitisation (TRS).  This year has seen the Basel III rules on securitisations eased from their initial punitive levels,[1] a boost to all high quality asset securitisation classes. The evidence for a healthy interest in TRS can be found in a range of key analyses and initiatives in this area from the last 12 - 24 months[2].

Even though data from the ECB indicates a turning point for easing of commercial credit terms, and an uptick in demand, relationship lending across the regions remains lack-lustre, with indications of a shift in mindset towards alternative means of raising working capital, such as receivables finance.[3] Diversification of working capital sources seems to be the new flavour.

So, despite the bad press over securitisation as a whole during the financial turmoil, TRS has fared relatively well compared to other securitised asset classes, not least because of its self-liquidity nature, short maturities and its ability to provide sub-investment grade (SIG)/non-rated companies access to the capital markets. At the same time, TRS allows financial institutions to make the most efficient use of their capital and to provide broader financial support than they could in a conventional revolving credit facility. TRS also presents a less risky profile to banks than other forms of unsecured lending, making it a good, stable alternative product for banking organisations.  

This qualitative research report seeks to provide an overview on the latest developments in the TRS market, informing securitisation market players about its current and future growth, opportunities and challenges and strategic importance for both corporates and banks. Input for the report has been gathered through an in-depth research project conducted amongst Europe’s largest 30 banks by assets, combined with a small selection of US-based global banks.

 

Growth of TRS market

Judging from the aggregated responses, the TRS market has developed relatively positively over the course of the last 12 months.

Judging from the aggregated responses, the TRS market has developed relatively positively over the course of the last 12 months. More than 80% of the respondents confirmed growth of TRS at their banks, or at least an increase in customer enquiries about the facility. To give an idea of the range of experiences canvassed, a US banking behemoth registered a TRS growth rate of 10% in this period, similar to another Scandinavian bank. Growth was higher still at one continental bank – between 20% and 25% – and a UK-based bank saw up to 30%. According to a French financier, his bank has seen the number of deals rising to 60 last year from 50 in 2011. Contributing to this expansion was possibly a heightened level of interest in TRS originated from medium-sized corporates, opined the financier. This view is by no means an isolated observation; another respondent noted that growing demand from the mid-market has resulted in his bank working with more BB-rated companies on TRS deals. A similar comment was made by one financier, whose institution has witnessed a fair increase of interest from large corporates that have yet to tap the TRS market as well as SIG and medium-sized enterprises. A German respondent noted increased interest from factoring companies in particular as they look to transfer risks off their books.

There were, of course, a couple of dissenting voices.  Contrary to the majority view of stable and positive TRS performance in the past 12 months, two commentators had expressed more measured sentiment against what they described as a “rather flat” development at their banks. One of them reasoned that achieving off-balance sheet treatment very much remains a main goal for companies using TRS. However, for those that do not regard this as their key priority, TRS might present a less compelling alternative than other available financing options such as high yield bonds.

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