Outlined below are some of the main legal considerations with regards to a TRS, which we have discussed with Jeremy Levy, Partner at Baker McKenzie, a leading international law firm.
Trade Receivables Securitisation (“TRS”) is the sale of a company’s receivables to a bankruptcy remote special purpose vehicle (“SPV”) which funds its purchases by issuing notes or other debt instruments to investors such as banks, ABCP conduits, asset managers or specialist investors. In short, TRS allows a company to monetise its trade receivables. TRS facilities are generally committed for 3-5 years (although longer terms are possible) and can be structured to achieve off-balance sheet treatment.
TRS Investors & Execution Timeframe
Over recent years there has been an increase in interest in TRS from non-bank sources including private debt funds and institutional investors. As banks often limit their participation to transactions involving existing clients and familiar jurisdictions, TRS provides the market with new capacity to underwrite transactions in the middle market given the focus on asset performance. Pricing for more complex issuers with jurisdictions outside of the main European and North American markets tends to be at a premium to traditional ABCP conduits but still within the pricing parameters highlighted above. This can often work very well for middle market firms without pre-existing bank relationships.
Typical Transaction Timeline
Execution of a TRS will typically take 3-6 months from the point in time that the Seller receives the detailed performance of the receivables portfolio eligible for financing. Detailed Term Sheets can be procured within a 4-6-week period with documentation typically completed within a further 13-15 weeks (although it can sometimes be sooner).
This timeline makes it more challenging to incorporate a TRS at the point of acquisition of a company, but it can be worked into a refinancing exercise to accommodate diversification of funding sources and a reduction in borrowing costs.
Advantages of Technology
Many corporates will elect for their transactions to be arranged by a third party able to source the optimal investor mix and where the receivables are managed through a third-party platform post close. Using a third-party provider to facilitate a TRS transaction can reduce administration costs for all parties to the transaction, as Accounts Receivables files are drawn directly from the corporate’s ERP systems; the issuer is able to include multiple selling entities into the perimeter of the transaction and rely on straight through processing thereafter. This results in minimal resourcing required from the corporate to produce daily, weekly and monthly transaction reports, with reduced risk of human error or negligence in the reporting process which, all in all, reduce the associated risk for the investor.
The increased flexibility of using automated technology for the corporate also allows it to be able to add new operating companies or refinance existing investors over time should requirements change; this is particularly useful for highly acquisitive organisations or those experiencing fast growth.
Primary Legal Considerations
1) Existing Debt Restrictions – the Seller or its parent will often have existing debt e.g. in the form of loans from banks or bonds issued by the Seller to capital market investors. It is common for debt documents to restrict the activities of borrowers and connected companies and a Seller may be restricted from disposing of its assets or incurring “indebtedness” (which can be drafted widely and may cover even the sale of receivables). It is therefore important for a Seller, together with legal advisors, to establish at an early stage whether a proposed TRS is restricted by existing debt documents or not. Often debt documents will have general restrictions but allow for specific carve-outs e.g. “permitted indebtedness”.
These carve outs will generally not have been drafted with the particular TRS in mind, so it is important to structure the TRS in compliance with the existing restrictions. If the TRS is not permitted under existing debt documents, it may be necessary to obtain specific consent or waivers from the existing lenders in order to allow the TRS.
2) Legal due diligence – as part of the due diligence process investors, together with the lawyers engaged on the project, will usually consider the legal status of the relevant receivables. Some common items to verify are:
– Are the receivables documented under written contracts?
– Do the contracts restrict assignment without the customer’s notification or consent?
– Do the contracts have a specified governing law?
– Do the contracts create clear and enforceable obligations of the customer to pay the relevant amounts?
– Are there set off rights which would allow a customer to pay reduced amounts in certain circumstances?
– Do the confidentiality provisions allow for information to be provided to the TRS investors?
It is often possible to structure a TRS to mitigate issues that the legal due diligence may highlight. If a Seller is considering a TRS however, it is helpful if the above issues are addressed in advance. For example, adding a few paragraphs into standard terms and conditions may expressly provide a governing law for the receivables and allow for their assignment.
3) Cross Border Issues – if a Seller operates through affiliates in multiple jurisdictions, generates receivables under multiple governing laws and/or sells its goods or services to customers based in multiple jurisdictions, there are likely to be many legal frameworks that apply. It is helpful to establish these as early as possible in the process so the TRS can be structured accordingly.
4) Contractual provisions – the TRS transaction documents are likely to require the Seller to make some representations and warranties about its business and the receivables as well as undertaking certain obligations as part of the TRS e.g, to provide information to investors. By engaging with the drafting of such provisions, Sellers are generally able to tailor these to meet the Seller’s day to day business requirements.
Demica is one of the largest independent global providers of working capital solutions helping companies grow by unlocking cash trapped in working capital using its receivables, payables and inventory finance solutions.
No information in this publication should be construed as the provision by Demica of financial, tax, legal, regulatory or other professional advice.
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