By John Hintze
There’s a growing market enabling companies in a variety of industries to monetize their receivables and relieve pressure on working capital.
International Trucks has been a regular participant in the asset-backed securities (ABS) market for decades, securitizing assets including dealer floor plans and customer loans. In May the maker of trucks and other heavy vehicles completed a securitization of trade receivables in an early example of what bankers foresee as a growing market enabling companies in a variety of industries to monetize their receivables and relieve pressure on working capital.
The Lisle, IL-headquartered company, a subsidiary of Navistar Financial, has used other types of third-party financing to fund its receivables before. However, ABS pricing has dropped dramatically for receivables-backed deals in recent years.
“We have seen spreads for trade receivables securitization ABS bonds tighten significantly over the last 18 months,” said Philip Nuelle, managing director in originations at trade financing firm Finacity, which focuses on trade-receivables financing transactions globally. “We continue to see an economic benefit for trade receivables securitization compared to bank loans—especially for non-investment-grade companies.”
Spreads have tightened across most fixed-income investments, but the ABS market provides a couple of additional advantages. For one, said Mary Ellen Kummer, assistant treasurer at Navistar Financial, which executes the International Trucks transactions, purchasing the receivables from the company and securitizing them, the advance rate on financing from securitization is better than alternatives such as public bond deals or asset-based loans. In addition, term securitizations maturing over a defined period tend to be more flexible, enabling the financing to accommodate Navistar’s “chunkier” receivables from customers with large balances.
“We may have a couple of hundred customers with very large balances, and with a securitization it’s easier to accommodate those and work out any special needs; for example, if they want to pay in 60 days instead of 45,” Ms. Kummer said.
they’re back
Receivables backed by trade receivables were seen fairly regularly before the financial crisis, after which much of the securitization market largely ground to a halt. Since then deals have been sparse, with most receivables assets being put into short-term asset-backed commercial paper (ABCP) conduits. There have been fewer than a handful of term deals aggregating independent trade-receivables pools from numerous companies, and sometimes from more than one bank. A string of single-seller deals, such as Navistar’s, have mostly been arranged by Finacity, which also provides technology to capture companies’ receivables-related data that supports daily reports used by sellers and investors.
good for corporates
Receivables-backed ABS deals are potentially a boon for corporates, which can monetize those assets.
“In the past, receivables were typically a fixed part of a company’s working capital, and with the pressure on working capital metrics they had become a demand on liquidity,” said Paul Johnson, senior product manager, global trade and supply chain finance, Bank of America Merrill Lynch. “From purely a balance-sheet management standpoint, clients now have the opportunity to monetize these receivables on demand, which is a huge attraction for treasurers.”
The aggregated transactions tend to be larger and sold to US investors through the Rule 144A market, which is private but often functions similarly to the public bond market, since offerings are usually rated and sold to a broader swathe of institutional investors. Navistar’s $100 million receivables transaction placed in the traditional private market, where issuers pay a premium in terms of the coupon but save on regulatory filing and credit rating fees. And because investors in the private market are accustomed to analyzing deals in detail, the terms can be highly customized.
Ms. Kummer said Navistar’s 364-day deal was purchased by a single bank, which is likely to extend the deal another year.
helping with bank capital
Another avenue to fund trade receivables has been to put them into ABCP conduits that mature in typically a year or less. Banks have taken this route to minimize regulatory capital requirements, but those conduits tend to have very defined maturities, rates and terms, limiting the receivables that can be placed in them.
Although Navistar’s deal was still relatively short, the bank chose to keep the investment on its balance sheet. In fact, the relatively rich yields of receivables ABS deals, as well as their lesser correlation with the overall financial markets, has made them attractive investments for investors to hold on their balance sheets and prompted sponsors to stretch out maturities.
Even shorter term deals are aggregating trade receivables that are typically 30 days to 45 days in length and so must turn over continuously throughout the life of the deal. Those short-term assets are attractive from a risk standpoint and, in fact, receivables ABS deals performed well even throughout the financial crisis, Mr. Nuelle said.
Finacity announced arranging a MXN1.2 billion offering for Vitro S.A.B. de C.V. last November that holds a maturity of three years and was sold to Mexican private and institutional investors. The Stamford, Connecticut-headquartered broker announced completing a EUR280 million global trade receivables transaction for Archer Daniels Midland Co. in March; terms of that offering were not disclosed.
Global Demand, Good Cash Management
Trade finance has mostly been driven by the needs of globalization and also by banks and their ability to offset the risks inherent in cross-border transactions. Corporations, both international and local, are seeing the benefits of extracting value from their supply chains. They also look at it as good cash management.
Those benefits include creating a situation where a company almost cannot lose. That is, all sides can benefit from the transaction. Indeed, the mantra of trade finance these days is what can be called a “win/win” in that the buyer, the seller and the bank can all gain (“a win/win/win”); each link in the chain obtaining significant improvements and operational efficiencies. Notably, new products are not necessarily replacing more traditional forms of trade finance—letters of credit (L/Cs) et al—there are just more tools in the trade-finance tool box (see “New Trade Partners, New Thinking About Trade Finance in Latin America,” iT May 2014).
yield-seekers take note
Mr. Johnson said there’s been increasing interest from fixed-income investors, hungry for yields, to participate in the market, and that he anticipates at least one more sizable conduit transaction by year end. “Securitization is a way to reach a broader investor base, such as hedge funds, insurance companies and pension funds,” Mr. Johnson said. He noted that the National Association of Insurance Commissioners approved insurers investing in receivables ABS early this year, a move that broadens the investor base and potential demand for the paper. Insurers are already significant players in the private placement market and typically have the resources and expertise to analyze more bespoke transactions, which securitizations backed by receivables tend to be, even when issued in the Rule 144A market.
Citibank and Banco Santander teamed up to do a $1 billion, three-year trade finance securitization last December that aggregated receivables from both banks. Last August, BNP completed at $131.6 million term conduit deal last August. And in 2011, Standard Chartered issued $180 million in credit-linked notes that were ultimately backed by trade receivables and enabled the bank to achieve regulatory capital relief for $3 billion in assets.