Is Trade Receivables Securitisation right for your organisation? Tom Huntingford sets out the possibilities –
Trade receivables securitisation enables companies to access committed financing by selling their receivables, at an interest cost that compares favourably to many other forms of funding
– as long as certain criteria are met. So how can businesses decide if this route is a competitive form of financing for them?
Trade receivables securitisation: an overview
Securitisation is the issuance of securities based on underlying assets. In the case of trade receivables securitisation, the assets are trade receivables – in other words, invoices issued to clients that are fully payable and enforceable, but not yet at their due date. While trade receivables securitisation comes in many different forms, broadly speaking it involves transferring receivables to a special purpose vehicle (SPV) on a true sale basis. The corporate remains responsible for collecting payment, with underlying customers unaware that securitisation has taken place.
With the receivables sold to the SPV, the company applies a methodology to determine the advance rate, which can be up to 90% of the value of the receivables, depending on the transaction capital structure. The advance rate will be determined by factors like the number of late payments by customers, the number of dilutions or credit notes offered, and the extent to which receivables are concentrated on specific debtors.
Invoice terms can go up to 90-120 days – and in some cases, 180 days – depending on the sector and funder requirements. Invoices are normally sold on a daily basis with settlement out of collections daily/weekly and out-of-funder drawdowns monthly or multiple times a month, depending on client requirements. The SPV then issues a note to the senior funders – typically via a conduit set ut of collections daily/weekly and out-of-funder drawdowns monthly or multiple times a month, depending on client requirements.
The SPV then issues a note to the senior funders – typically via a conduit set up by a bank. Drawdowns or repayments of notes happen generally monthly, but can be structured to happen more frequently where required. The bank, or the vehicle supported by the bank, typically funds itself by issuing asset-backed commercial paper. (The assets that support the bank conduits asset-backed commercial paper are the senior notes that are issued by the SPV, which in turn are backed by the receivables held at the SPV.)
Who can use trade receivables securitisation?
Trade receivables securitisation is most likely to be adopted by non-investment grade or non-rated corporates. Investment-grade companies will likely already have a low cost of funding – so the lower the company’s rating, the more attractive this approach becomes. That said, companies which are in a very precarious financial position may not be in a position to undertake securitisation.
Securitisation will typically be used for a portfolio size of $80m-100m – but companies that opt for a simpler structure may occasionally be able to use this approach for a $70m or even $50m portfolio, depending on funders’ appetite.
Other considerations are as follows:
• Enforceability. The receivables should be enforceable once the due date comes, without any further action needed by the company.
• Contracts. Some contractual agreements with customers will stipulate that receivables cannot be transferred or financed, although this may not be insurmountable.
• Carve-outs. Highly levered companies will also need to make sure there are carveouts in place in their existing facilities allowing for the sale of receivables or that these can be waived by existing lenders.
• Portfolio performance. Companies should consider whether the receivables portfolio has a historical performance of at least 12- 18 months, and preferably 36 months. They should also ascertain whether the portfolio shows low defaults and low dilution levels and whether the portfolio is highly concentrated.
• Location. If the seller of receivables is in a nonOrganisation for Economic Co-operation and Development (OECD) jurisdiction, the sale of the receivable to the SPV may be complicated. Likewise, for debtors based in nonOECD jurisdictions, it may be difficult to determine whether receivables are enforceable.
Advantages of trade receivables securitisation
For companies that fit the criteria, the benefits of trade receivables securitisation can be considerable. If companies are selling in multiple countries, securitisation tends to be a much better tool than traditional asset-based lending or factoring facilities – not least because it is easy to add new countries, new debtors and new sellers. In addition, factoring and other facilities are typically uncommitted, or committed for only 12 months. With securitisation, companies can generally get a commitment of three years for most programmes. What’s more, funding is not dependent on the performance of specific debtors – provided the portfolio’s performance continues to be good, the company will continue to access funding.
The transparency associated with securitisation is another benefit. A company that sets up an SPV will know at any given point what the costs will be and how much funding it will receive. The ability to tailor a programme also makes it straightforward to assess optimal accounting treatment.
Last but not least, the cost of funding will be substantially lower than for other forms of funding, such as corporate funding including a direct corporate loan or public bond issuance and asset-based lending – and although factoring can be very competitive in certain markets. In other cases, securitisation is likely to be a cheaper option.
In conclusion, trade receivables securitisation won’t be the right solution for every company. But for organisations that meet the criteria outlined above, the benefits can be considerable.