Funding – A Changing Approach by Adam Barrett, Head of Distribution, Demica
Bank funders have undoubtedly become more selective as they prioritise relationships and key targets, with opportunistic lending mostly frowned upon. Even for long-standing clients, the approval for a given transaction takes much longer than it did before, requiring borrowers to allow for this in their horizon planning.
Certain sectors are out of favour; these include commodity trade finance for other than top tier names. Several banks have withdrawn from financing even existing clients in sectors affected by COVID-19, such as physical retail and air travel that have become difficult, even at a very high cost of funds. We expect caution, and for the relationship banking model to remain important post-COVID-19, given the extended recession that is likely to follow.
Banks are also going to be motivated to distribute risk to others on deals they originate both to manage risk and drive returns. At Demica, we see increased demand for such functionality from our platform clients who use our technology to monitor and administer receivables and payables financing transactions.
The rise of non-bank investors in the asset class is much talked-about but still nascent. Whilst there has been activity in supply chain finance, this is mostly restricted to deals with full credit insurance. In receivables securitisations they are still active in mezzanine tranches. In more vanilla receivables financings, there is growing appetite both from factors, insurers and private equity-backed operators, but total Assets Under Management (AUM) is still relatively modest.
There are grounds for optimism. Banks are now actively investing in new products and platforms through which they can more efficiently deliver working capital solutions. The range of products available is evolving as the mix of trade finance shifts from traditional trade finance to the funding of open account trade.
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