July 2022 by Finacity
Rapid growth in trade receivables securitisation (TRS) volumes has been accompanied by an apparent change in perception of the asset class, from being overly complex to now being widely considered as an important funding instrument for the real economy. Through the pandemic – and ever since – TRS has been embraced as a flexible solution for corporates seeking to release working capital, as well as by investors in search of low-risk investments and good returns.
Adrian Katz, president and ceo of Finacity, has never taken the view of the TRS asset class being either risky or complex. “We’ve been securitising trade receivables for 22 years and we have not had any difficulty with the asset class. In fact, in many ways, trade receivables have been viewed as being better than many others that we have securitised.”
He points to the resilience of trade receivables in the securitisation marketplace versus other assets, including mortgages. “Even during the great recession, where a lot of long-duration assets were not able to be securitised, trade receivables continued to perform well and continued to get securitised. We continue to see the asset class perform well and have had continued access to the securitisation marketplace – unlike many other asset classes that have been securitised that have had the market shut down on them from time to time.”
Indeed, trade receivables have demonstrated relative stability in recent years – although Katz notes that companies with liquidity “have been put under some pressure to accommodate suppliers and/or customers.”
Many have attributed the reduced concerns over the complexity of the TRS asset class to the introduction of EU regulatory updates at the beginning of 2019 and the supplementary STS structures. While TRS have grown since then to become an important asset class in respect of STS compliancy, some do not agree this changed the transactions in actuality.
“I don’t think the introduction of structures like STS have meaningfully moved the needle in a good or a bad way for trade receivable securitisations; it has just created some necessary, additional work,” states Katz. “Trade receivable securitisations have been done pretty much the same way for a long time – unlike MBS – and it has not really needed to have been changed.”
Katz credits the short duration of the collateral for enabling Finacity to avoid any problems from both an issuer and investor perspective over the years. Going forward, and especially for investors, the asset class is likely to continue to prove beneficial for those seeking to fund the real economy due to the collateral’s typical 30-, 60- or 90-day maturity.
He explains: “For longer-duration assets – where you are stuck with whatever the attributes are – if your subordination is wrong, you’ve got a problem that is not easily fixable. Whereas in trade receivable deals, you can keep adjusting the advance rates and the maths is just very flexible because the assets themselves are shorter in duration.”
Due diligence is of importance to both the securitisation of trade receivables, as well as rising confidence in the asset class itself. Although technological innovation has increased the availability and access to information for investors over the years, many warn that new data- based solutions cannot replace hands-on due diligence in the TRS space.
As a fintech firm, Finacity tracks and reports on its receivables every day, for an approximately 60 million total individual receivables every year. “We’ve never taken the view that you can simply be comfortable relying on technology alone for due diligence and we believe very intensive due diligence before, during and after a deal is launched is very important,” explains Katz.
Despite the rising demand for TRS throughout the pandemic, that period also served as a sobering reminder to many of the dangers of depending solely on technology for conducting due diligence. “There is a lot of fraud in the trade receivables space – the most recent iteration we saw of this was surrounding Covid-19, where companies were soliciting funding for PPE and medical-related things. The fraud was for things like nitrile gloves that weren’t approved by the regulator and were never actually able to be sold,” Katz observes.
He continues: “Everyone was in a big hurry to import into the western world, and a lot of people were falsely promising the assistance of their technology platforms for things that their technology platform was not designed for. Fraud is a very real issue and continues to be a very real issue. But I also think that good fintech can actually help you avoid the fraud, if you carefully monitor the details.”
Investors are expected to continue turning to TRS to find opportunity in the real economy. “There are companies now that no longer have all the liquidity they need, which is very good for us because we are able to show up with a solution that works on both rainy days and sunny days. So, while we have been able to grow more or less every year for the past 22 years, we are currently in an environment where we think growth can be more robust,” says Katz.
He concludes: “We don’t see any scale constraints to growth. We tend to be a countercyclical business model – and by that, I mean when conditions are more difficult raising liquidity, it’s usually good for us.”
This article was published in Structured Credit Investor on 21 July 2022.