A new research report from Demica has revealed that trade receivables (TR) securitisation has matured into a mainstream financing tool for top US and European corporates. In terms of the number of leading firms that have utilised this financing technique over the last decade, Europe is not as far behind the US as is commonly assumed. Moreover, this report was confined to publicly quoted companies only, and hence resulting figures represent a somewhat conservative view of the market as they exclude the increasing number of private equity-backed companies, who are increasingly turning to TR securitisation as a means of easing the pressures of senior debt.

The research, conducted by trade receivables securitisation specialists Demica during January 2006, analysed the top 500 companies of both the US and Europe, (excluding financial organisations), to conclude that 17% of these top US organisations had employed TR securitisation during the last decade. At 11%, Europe’s growth clearly shadows that of the United States, already representing two thirds of the US level in terms of number of organisations, although somewhat less in asset volume.

Notably, the research revealed that 67% of the firms who were using, or had previously used, TR securitisation were currently investment grade. This tends to counter the generally held view that TR securitisation is mainly undertaken by companies whose access to conventional borrowing is either restricted or excessively expensive. The report concluded that the technique is as often used by less pressurised corporations (financially speaking), to extend their access to liquidity, as by organisations who are using securitisation to isolate a highly rated asset (the receivables) from their own (lower) credit rating. Evidently, sub-investment grade companies (defined as S&P as BBB- or below) continue to find the technique immensely beneficial for providing low-cost liquidity. Notably, the broad technology sector (including all high tech sectors through from air-conditioning to IT) represented 47% of the total of sub-investment grade firms.

A minority of TR securitisations are issued as publicly rated term instruments, the large majority being issued through conduits (and therefore privately rated). In Europe, Standard & Poors identified €5bn of rated notes, estimating some €31bn in issuance via conduits. This may change with the advent of Basel II, which has been identified by expert commentators as a factor that will lead to increased attractiveness of issuing publicly rated notes.

Private equity activity has seen a major upsurge in 2005 which is expected to continue throughout 2006. This also masks a further tranche of TR securitisation activity, as private equity owned companies use the technique to carve out elements of senior debt which could potentially restrict rapid growth strategies and investment. There is substantial anecdotal evidence that many large private companies (particularly in Europe) have securitised receivables, including a significant number of post-LBO names, which although are rated sub-investment grade, are increasingly using TR securitisation to optimise their capital structures to reduce their weighted average cost of debt. These transactions are typically financed through bank conduits and are AA rated. This is achieved through a combination of innovative transaction structuring and high frequency reporting (daily) which allows for proper segregation of assets from the company. This higher rating is the appeal that TR Securitisation holds for the big LBO firms.

The advent of regulatory pressure (Basel II, IFRS) which is a result of the quest for increased transparency and risk management, as well as investor requirements for monitoring their assets, is increasing the reporting requirements from TR securitisations. Daily updates – which have the capability to drill down to item level – are typically a component of the administrative process.

Phillip Kerle, Chief Executive Officer, Demica, comments, “It is reassuring to see that that there is a balanced geographical spread to this kind of transactions and that Europe and the US are more aligned than perhaps is commonly perceived. Not only is the technique now mainstream in both the US and Europe, but is also mainstream for investment grade firms as an extra line of liquidity to fund future growth. Naturally, the portfolio of working capital management techniques varies geographically, however it would appear that a substantial proportion of large companies are exploiting the value of their invoices as real assets, to the fullest extent. In the quest for growth (both in US and Europe), senior financial managers and their advisors are keen to apply the broadest possible range of complementary working capital tools.”

Demica is a market leading provider of specialised working capital solutions providing consulting, advisory and technology services to a diverse range of multi-national clients. Demica works with the world's leading investment banks, private equity sponsors and global corporations to implement innovative solutions to their securitisation and supply chain finance requirements.

Demica’s technology is used around the globe running in excess of €10.5 billion of invoice-based transactions on its Citadel® platform. Demica is a wholly owned subsidiary of the J.M. Huber Corporation, one of the largest privately held companies in the United States. Demica has offices in London, Atlanta and Tokyo.

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