Trade Receivables Securitisation market unveils itself at last

For the first time, the extent of this financing technique is uncovered and it is huge.

• Perceived as complex and shrouded with mystery: a group of industry bodies led by AFME have revealed that securitisation is used by hundreds of medium and large corporations in Europe and shows no signs of abating.
• The reasons of this success: many advantages for the corporates
• Facing competition and regulatory challenges, banks are adapting the product

A financing technique more popular than anticipated

Last December, three industry bodies, the Association for Financial Markets in Europe (AFME), the European Data Warehouse (EDW) and True Sale International (TSI) published a report on the private cash securitisation market in the EU and UK based on information provided by 12 major banks.

What is securitisation and why is it relevant for the economy? In a securitisation programme, the operating entities of a corporate sell without recourse their receivables to a special purpose vehicle or SPV (or to a financial institution fronting this SPV), which in turn raises financing on the capital markets based on the credit quality of the receivables pool (and not, as opposed to a bond, on the credit worthiness of the corporate originator).

For the first time, this report provides some light about the extent of the use of Trade Receivables Securitisation by corporates in the EU and the UK. It was often considered that only a small number of large well rated companies were using securitisation. On the contrary, the report demonstrates that this tool is used by hundreds of companies and that the vast majority of them (84%) are rated BBB and below.

A challenged form of financing

In recent years, securitisation has faced tough competition from other sources of financing, such as Factoring and Receivables Financing programmes, which are often easier and cheaper to set up, as they don’t involve SPVs and rely on simple advance calculation and, often, credit insurance lines.

After the global financial crisis, the securitisation industry has also had to comply with new EU and UK regulations published in 2018 (European Securitisation Regulation or EuSR) that attempted to clarify the capital and reporting requirements but also generated significant uncertainties. This regulation, primarily aimed at the securitisation of financial assets, was not well suited for corporate securitisations and was unintentionally creating the risk of rendering this technique inapplicable or unattractive to corporates. For these reasons, very large receivables finance programmes and factoring programmes have been arranged by banks outside the securitisation framework. Market participants have reacted by overwhelmingly adopting the new STS (Simple Transparent Standard) label, by which a transaction benefits from better capital treatment if it complies with due diligence requirements (EuSR Art. 5), discloses detailed information to investors and regulators (EuSR Art. 7), and includes minimum risk retention requirements by the originator (EuSR Art. 6). Conscious of the potential impact of these measures, in 2021 regulators launched a series of consultations. Market participants have highlighted the importance of this tool to finance the real economy as shown by this new report and reiterated the benefits corporates get when they securitise their trade receivables.

What makes securitisation attractive

As a stable source of financing, a securitisation facility typically benefits from a two to five-year financing commitment from investors. It also enables access to deeply liquid capital markets at a cost generally significantly lower than raising corporate debt, and allows access to many different investors, banks and non-banks. The set-up costs, that can be significant in the case of large international programmes, are typically amortised over several years. A securitisation programme also provides a single facility for all operating companies: the pooling of receivables (across operational entities, currencies and countries) enables the treasury team to have a global view on the receivables’ performance, reduces operational burden and the “basket effect” optimises the amount of financing. Subject to legal requirements, securitisation programmes are therefore scalable: new operating companies & investors can be added over the life of the programme. Last but not least and subject to auditors’ validation, a number of these programmes allow the required transfer of risk for favourable off-balance sheet treatment under most accounting principles.

With Trade Receivables Securitisation, Factoring and Receivables Financing programmes, Corporate Treasurers now have a complete set of products at their disposal to finance their working capital. With the support of technology to provide better risk management and flexibility, these products are now well suited to meet the needs of corporates and investors.