Understanding Trade Receivables Securitisation

Trade receivables securitisation (TRS) is a resilient funding option that has much to offer corporate sellers and investors – so what is TRS, what are the benefits, and which challenges do corporates need to address when implementing a programme?

The rise of trade receivables securitisation

Bridging the gap between corporate financing needs and investor demand, trade receivables securitisation (TRS) offers a valuable source of funding. It enables sellers to manage risk, grow their businesses, and improve their financial performance. Investors, meanwhile, appreciate the strong, risk-adjusted returns offered by TRS.

The higher interest rate environment has prompted corporates to look outside their standard credit lines in the quest for additional liquidity, making TRS an increasingly attractive proposition. Meanwhile, the market for TRS transactions has grown steadily in recent years: according to the Association for Financial Markets in Europe (AFME), European TRS represented €46.8bn of reported commitments as of December 2023, up from €42.5bn in December 2022.

Banks, meanwhile, recognise the growth potential of TRS. Demica’s 2024 Benchmark Report for Banks in Trade Finance polled the views of 169 supply chain finance professionals around the globe, with 12% citing TRS as the product which had the highest growth potential within their organisations – ahead of factoring (9%), asset-based lending (7%) and dynamic discounting (5%).

How does trade receivables securitisation work?

In a nutshell, TRS involves selling receivables to a special purpose vehicle (SPV) using a limited-recourse structure in which the seller takes the junior tranche. This process typically works as follows:

1. Receivables are sold to the SPV, often at par, and in some cases at a discount for tax, legal or structural reasons.
2. The purchase is funded by the SPV through the issuance of notes to senior funders – typically banks that provide funding through their specialised conduit vehicles.
3. The corporate seller repays the SPV from the collection of sold receivables. In some programmes, debtors settle receivables directly into the SPV bank account.

The term ‘trade receivables’ is loosely defined. When talking about trade receivables securitisation (TRS), it refers to invoices that have been issued to clients, but not yet paid. In order to be eligible for TRS, invoices will need to be transferable and enforceable, and payment will not be conditional on any future events.

Invoices are often sold in batches. Most programmes will include all invoices from corporate entities participating in the securitisation, other than specific exclusions. The performance of the receivables is assessed on a portfolio basis, and while there is a preference for well-rated debtors, this is not a necessary condition.

Benefits of trade receivables securitisation for corporates and investors

For corporate sellers, TRS presents a way of accessing competitive, tailored funding. Compared to other forms of corporate debt and receivables financing, TRS programmes offer significant benefits: they are typically committed for longer terms, and can be tailored to clients’ needs. They also provide greater flexibility and are more commercially competitive, with fewer operational requirements than other forms of receivables financing.

On another note, corporate sellers can use TRS to deconsolidate receivables from the balance sheet. In this situation, the TRS programme will include additional features, such as including a loss discount on the sale, or an insurance wrapper.

For investors, securitisation transactions can provide strong risk-adjusted returns, with various structuring features available to mitigate risks. Most transactions funded by banks and bank conduits can achieve implied ratings of A or AA under S&P Global’s trade receivables criteria.

TRS programmes also allow investors to invest in an asset class that is directly exposed to the real economy, and to contribute to the growth of medium-sized companies.

Addressing the challenges of implementing a trade receivables securitisation

Alongside the benefits, TRS does present some unique challenges that need to be addressed when implementing a programme. For one thing, TRS programmes need to be tailored to the specific requirements of different sectors, corporate sellers and receivables types. Challenges can also arise due to the large volume of data, reporting obligations and cash dominion challenges associated with TRS.

As such, a successful programme will require support from a wide array of third parties and partners. These can include corporate service providers, security and data trustees, cash managers, and a reporting agent such as Demica.