H1 2023: Five Trends in Receivables Securitisation

It has been a turbulent year. The hangover from COVID-19 coupled with Russia’s ongoing war with Ukraine has kept inflation persistently high in many countries, with millions of people suffering with not just increased living costs, but also persistent rate rises which continue to cripple borrowers.

As traditional forms of financing become less attractive for corporates, driven by the highest interest rates we’ve had in a generation, treasurers are looking at smarter alternative forms of finance to keep the cost of their credit lines down. Unsurprisingly, this has had considerable knock-on effects for receivables securitisations. In turn, the willingness of funders to provide these solutions also seems to be growing.

In Demica’s Distribution Team, we are at the heart of trade receivables securitisation transactions, connecting corporate clients with our network of over 200 funders globally. This gives us a clear view of some of the trends impacting the market.

According to a report published on 22nd March by the AFME, trade receivables securitisations made up 61% of all private securitisations as of June 2022 – that’s up from 59% in January and 56% over the previous year. The asset class has had 14% year-on-year growth despite challenging marketing conditions, with the market now estimated to be almost $100bn in size. It’s clear that this is a growing space.

Despite market conditions, banks are proving eager to participate in these transactions.

Demica recently went to the market for proposals fortwo receivables securitisations – totalling $1.8bn in size – and received no fewer than 30 different proposals from banks looking to provide the financing.

At a time when there is heightened caution in traditional lending markets, from what we’re seeing here at Demica, receivables securitisations seem to be the exception to the rule. As treasurers have looked to implement receivables securitisations in greater numbers, banks – perhaps attracted by the strong risk profile of the products – have risen to the challenge to provide the funding needed.

Despite the volatile backdrop created by the recent failure of many US regional banks, most notably Silicon Valley Bank, spreads have not widened meaningfully. This comes in spite of the rising cost of bank funding.

Banks are facing funding costs of up to 50bps higher than this time last year, but funding proposals for receivables securitisations for Demica’s corporate clients are only up by between 5-15bps over the same time period. The competitive tension created by Demica’s distribution process is vital to achieving these outcomes for our clients.

While we have only seen limited widening of spreads in offers from banks, we are seeing a very wide range of pricing proposals for the same transaction from different funders.

We recently put two receivables securitisation transactions into the market to garner proposals – and the responses from even the most well-established banks were so varied that the highest pricing proposal was more than double the lowest.

This stems from a few different factors, including differing cost of funds and capital models. Another important consideration is existing bank relationships, with some banks willing to provide very competitive pricing for key customers. The variation here goes to show just how vital it is to be talking to a lot of banks.

• Seller rating
• Geography
• Asset Class
• Historical Data Quality
• Market Share of Seller
• Deal Structure

*Based on transactions Demica has worked on, discussions with market participants and publicly available data ​

A final major trend that we are seeing in the market on the funder side is a growing preference for shorter length facilities. In a recent distribution process, a majority of banks were willing to provide terms for three years, with just two being prepared to commit for five years. Several banks even preferred just a one-year transaction. In conversations we’ve had, banks have anecdotally expressed to us that the caution around longer commitment periods stem from their own funding curves steepening.

Despite challenging market conditions, or maybe even due to them, the trade receivables securitisation market is growing. Treasurers are now starting to see it as a key tool in their armoury, and funders are happily facilitating the transactions, admittedly for shorter commitment periods. While pricing in this highly opaque market remains varied, successful funding proposals for Demica’s corporate clients are only coming in 5-15bps higher than 12 months ago.