Taking the next step

As supply chain finance programmes grow in size, scale and geographic coverage, banks are looking for ways to diversify risks and attract additional liquidity. Liz Salecka reports.


Increased capital requirements, coupled with liquidity issues and credit constraints, have brought opportunities presented by supply chain finance syndication into the spotlight for leading global banks.

Many of them are looking to spread the financing, and risks inherent in ever-growing individual supply chain finance deals among other players – most commonly banks.

Moreover, they are seeking to achieve balance sheet efficiencies with syndication structures that enable the true sale of the supply chain finance assets they hold.
The extent to which banks have got involved in syndicated supply chain finance deals over the last year has varied, depending on their need for liquidity, the limits they face on the credit lines available to them, and their desire to diversify risk.

JP Morgan, which has been originating buyer-led supply chain finance assets since 1994, has been actively sourcing liquidity on a funded basis since 2005.

“There are a number of features driving the need for increased distribution activity within the buyer-led SCF market, including the increasing size and scale of buyer-led programmes, which now cross into multiple regions, currencies, and buying entities,” explains Andrew Betts, global head of supply chain finance.

“The change in credit appetite within banks also makes it less likely that banks will allocate those types of sizeable limits to a single product within a client relationship.”
Meanwhile, Adnan Ghani, head of global trade finance, RBS, explains that although RBS enters deals with other banks, these are largely risk participation agreements.

“We do get involved in syndicated deals where our clients need them, and in these instances, participants are always fully disclosed. These include club transactions, where similar fees and conditions are applied to all banks in the syndicate,” he explains.

But he adds: “The supply chain finance product is relatively early in its lifecycle and, therefore, we can only anticipate that demand for supply chain finance will grow. This will increase banks’ requirements to share the risks involved so that they can provide bigger facilities.”

“Some banks are active in selling down supply chain finance assets via syndications for liquidity purposes,” adds Donata Invernizzi, director in the distribution and emerging market loan trading team, global transaction banking, Deutsche Bank.
But she adds: “At Deutsche Bank, we did not see a significant number of supply chain finance transactions which needed syndication in 2011. We have the capacity to do these deals on our own, and can accommodate them within our limits.”


Scale is the driver

Many leading global banks agree that the growing scale of individual supply chain finance programmes today is the single biggest driver of syndication.
According to Betts at JP Morgan, not one bank today has the limits to manage truly global programmes, which may reach US$500mn-US$1bn in outstandings.

Moreover, he believes that programmes with outstandings in excess of US$150mn are likely to exceed many banks’ internal limits and therefore, require distribution.

This is confirmed by Anurag Chaudhary, managing director, global head of trade risk distribution, Citi, who believes that for regional and smaller banks, even a deal valued at over US$100mn is likely to require syndication.

“For global banks this threshold is more likely to be in the bracket of US$300-US$500mn. Certainly, once a programme is valued at above US$0.5bn, banks will look to share it, and run it as a partnership, rather than take on its size and complexity alone,” he says.


Demand from buyers

SCF syndications are also being motivated by large corporate buyers themselves, who want to spread their SCF assets across their relationship banks.

“Corporates are already approaching their relationship banks regarding syndicated loans and bonds so it makes complete and logical sense for them to talk to banks regarding syndication of their supply chain finance programmes as well,” says Chaudhary.

“In this way, corporates can ensure a successful syndication of the deal, optimal pricing, lower structuring fees, and also keep their relationship banks happy by allowing them to participate in SCF programmes.”
Syndicated deals have also caught the imagination of small and medium-sized banks, which want to build and strengthen relationships with corporate clients.

“Smaller banks do not have the ability or the willingness to establish truly global supply chain finance platforms and provide the overall capability needed to structure a programme, manage the day-to-day distribution and onboard suppliers across the world,” says JP Morgan’s Betts.

“However, they know what the account payable means for a corporate and are increasingly comfortable financing it. Eventually, this may lead to other business opportunities with that corporate.”


Is syndication enough?

However, questions have arisen over whether the arrangement of syndicated facilities, which most commonly involve only banks, will ensure the liquidity and risk diversification needed to meet demand for supply chain finance facilities in future.

This has drawn attention to the role that institutional investors such as hedge funds, pension funds and insurance companies could play in this market.
Betts points out that institutional investors are interested in SCF assets, but involving them in syndicated deals can prove challenging.

“If they come into a programme, they are likely to want a sizeable chunk – in the range of US$150mn or more on an ongoing basis – since this is an investment, not a relationship play,” he says. “The number of programmes where you have the ability to distribute that level of assets on a regular basis is relatively limited.”

He notes that many institutional investors are also restricted by charter to investing in rated securities, which is not the case with supply chain finance assets.

“Different investor classes have different requirements, and this calls for different structures. A retail bank may be satisfied by participating in a secondary market syndication that is structured similarly to the deal at origination,” adds Deutsche Bank’s Invernizzi.

“Other investor classes require more complex structures, which enable them to benefit from an enhanced return. There is a growing interest in this market from non-bank investors such as hedge funds and pension funds, which are not really set up to participate in syndicated financings.”

At Bank of America Merrill Lynch, Paul Johnson, director, senior product manager, global trade and supply chain products, believes that ensuring adequate liquidity is already becoming an issue in supply chain finance syndications.

For this reason, he is convinced that the securitisation of trade finance assets, which enable non-banks to get involved as investors, will become much more prominent in 2012.

“Given that syndication is primarily a bank-to-bank market, one way to tap into new investors is via securitisations,” he says. “We want to reach out to investors that are not regulated as banks and do not have to comply with Basel III. They have the capacity that many banks don’t have right now.”

Deutsche Bank, which completed a private placement of a securitisation of part of its trade finance portfolio in May 2011, also anticipates doing more securitisations in the future.

“Securitisations are revolving in nature, because they require the underlying assets to be replenished on an ongoing basis so that investors benefit from longer maturities. The return offered is also usually dependent on the structure of the securitisation and, in most cases, these enhanced returns are of interest to non-bank investors,” says Invernizzi.


Challenges to securitisation

While supply chain finance securitisations are considered appropriate for deals of US$100mn or more, arranging such financings does bring challenges because they require a diversified group of underlying assets and are complex to put in place in terms of legal structure, thereby incurring high set-up costs.

“For a securitisation to work, a bank needs to bring together a diversified pool of assets, covering numerous supply chain finance transactions across numerous obligors, based in various countries,” explains Chaudhary.

He adds: “Supply chain finance assets typically have maturities of 30-60 days so banks also need to keep replenishing the assets held in the securitisations.”
RBS is one bank that considers the cost of securitisation to be too high.

“We have looked at securitisation structures in the past, but the cost benefits did not stand out for us, and we have consciously decided that this is not the right time to do this,” says Ghani. “The costs of setting up such structures can be significant and these structures always tend to have long maturities, which means that you have to keep putting new trade finance assets in.” For banks interested in securitisation, there are other options. Some of the issues surrounding the scale and diversity of assets required can be resolved if banks pool together a wider range of assets.

“If the diversity is not there, banks are likely to consider pooling together supply chain finance assets with other assets, such as trade finance assets, to create a general pool of assets for securitisation,” says Citi’s Chaudhary.

Another option is to take advantage of other banks’ multi-bank trade platforms, such as Citi’s multi-bank trade programme.

“A trade securitisation can be complex because it brings significant documentation issues, and the seller needs to ensure the true sale of assets, as well as full disclosure to all participants,” says Chaudhary.

“Multi-bank platforms represent a viable solution here because they bring multiple banks together – for the securitisation of their trade assets – which can share the costs involved and achieve a common goal much more easily.” Johnson at Bank of America Merrill Lynch believes that this may be the best route forward: “Unless you are a global bank that can originate assets across risks, instruments and geographies to create a pool of diversified assets, you are most likely to use multi-bank vehicles for securitisations,” he says.  GTR