Citigroup and Santander are rolling out the first large-scale, rated collateralized loan obligation backed by dollar denominated trade finance loans. There have been synthetic trade loan CLOs, but this is the first one of its kind to be a cash securitization. While the deal, called Trade MAPS 2013-1, is more of a curiosity than a significant market development at this point, such loan securitizations could add some additional liquidity to the trade finance lending world, which could be especially welcome as banks re-evaluate lending as part of their struggle to meet regulatory capital requirements.
According to IFR, this is particularly important since some jurisdictions are particularly tough on trade finance loans under their application of Basel III liquidity rules.
The structure will be a revolver, meaning it will be able to process the typically short-tenor trade finance assets (TFAs), as the loans are called in the CLO documents, on an ongoing basis. The TFA portfolio that Fitch used to rate the securities had a remaining term of 43 days and a weighted average risk factor equivalent to BBB-/BBB.
The loans will be originated and serviced by Citi and Santander. Fitch has rated the largest, $847.44 million class A tranche AAAsf (the sf denoting a structured finance rating). It says it based the rating on the originators’ retained equity: “At closing, Citi’s and Santander’s equity will be 2.88 percent and 5.00 percent of their respective pool balance.”
There is other credit enhancement including excess spread and ratings triggers, the rating company said. In addition, the loan portfolio will have a weighted average life of no more than 150 days and a maximum tenor of one year.
The structure of the transaction involves a eight regional sub-entities, which allow it to overcome the traditional problem with securitizing trade loans: that they come from a very large number of jurisdictions. The sub-entities pool the loans and then make loans to the CLO entity itself. Another issue is that there are few borrowers but very many loans in this market. According to IFR, the deal involves only “175 obligors behind 7,336 loans.”
With regulatory capital rules threatening to tighten the trade finance market, it will be interesting to see if this product takes off and is replicated by other banks – leading, perhaps, to more liquidity in that market.