A judge in London has ordered a trade finance asset manager to hand over documents to a private Italian bank which has developed doubts over the contents of securitised trade receivables it holds €344mn in notes for, some of which have rapidly lost value.

Banca Generali argued in a High Court suit filed earlier this year that CFE Finance, a Swiss-headquartered firm specialising in trade finance assets, had provided “inaccurate information” and was refusing to produce documents relating to receivables contained in four trade finance securitisation structures.

In two of the structures, the bank was a senior notes initial subscriber, and in the other two was a placing agent for notes purchased by its clients. The receivables all concern exports from Europe to emerging markets.

In a June 15 judgement, Justice Sarah Falk granted the bank access to the documents – including guarantees, indemnities, security documents and letters of credit – with some limitations on their use in order to satisfy CFE’s confidentiality concerns.

Banca Generali said in its March filing that it required the documents to understand the true nature of the receivables and make accurate reports to its regulators and clients, after losing faith in the accuracy of CFE’s quarterly reports.

The lender says CFE’s description of the receivables contained in three of the securitisation structures began to change in November last year.

For example, the bank says in its evidence that until August 2021, CFE reported that one of the structures comprised 10 sovereign letters of guarantee, 11 letters of credit and one “commercial facility”, all of which were between 85% to 100% backed by an export credit agency (ECA) guarantee “from an identified agency”.

However in CFE’s November report, the contents of the same structure were listed as 13 loans/leases, five letters of credit, two sovereign debts and one promissory note. Instead of total ECA cover, only five of the 21 receivables were backed by a guarantee, “with no indication of the identity of the guarantor or of the nature and amount of the guarantee”.

Then in the February 2022 report, the description changed again, with the sovereign debts described as “under restructuring” and three term loans added, among other changes. The five guarantee-backed exposures described in the November report had been altered to explain that the ECA guarantees had “already been enforced” on two of the exposures and the remaining three had only “some political and/or economic risk cover”.

According to the judgement, the largest receivable in one of the structures had been described by CFE in its August report as being a sovereign letter of guarantee from Sudan, with a principal amount of €10mn, 95% of which was covered by an unidentified ECA.

But by February, the judgement notes, the debt was described as distressed and with a principal of only €3.3m, “said to have followed a write-off of debt owed by Sudan”.

An even bigger surprise to the bank was CFE’s letter in March this year which, according to the judgement, disclosed “that an ECA guarantee had been enforced before [CFE] acquired the receivable, such that there had been no security at any relevant time”.

“It was also subsequently clarified that the debt was written off in July 2021, that is before the report as at August 31 and well before the report as at November 30, which had described the debt as sovereign debt with a guarantee, without reference to a write off,” the judgement recounts.

The bank also said Cuban receivables with a nominal value of over €40mn, acquired between October 2021 and January this year, were sold in April for about 20% of their nominal value, which CFE described as “the best offer at the time”. Other Cuban receivables had also been sold for less than a quarter of their nominal value.

CFE said the receivables collapsed in value partly due to Cuba’s support for Russia’s invasion of Ukraine, although the bank countered that Cuba has long been heavily sanctioned by the US and that the receivables were purchased despite a previous “default in respect of other receivables with the same originator”.


Investments were ‘high-risk, high-reward’

The judgement says Banca Generali sharpened its scrutiny of the receivables following a separate case last year in which the bank was forced to make an €80mn loss provision on notes it purchased from CFE for securitised healthcare receivables, after “repeated issues” with their value.

The judgement shows the healthcare receivables are subject to an “ongoing criminal investigation” in Italy, alongside probes by the Bank of Italy and Consob, the country’s financial services regulator.

The investigations are not related to CFE’s conduct. The company’s position, described by Justice Falk, is “that they are just as much the victim of what they say is the limited wrongful activity that has been uncovered in relation to those transactions as [Banca Generali]”.

The notes from the first securitisation structure, TF I, were not fully redeemed in October last year as scheduled and the bank claims that a report prepared by law firm Dentons found “that inaccurate information had been provided to the bank in respect of the underlying exposures in that securitisation”. Those outstanding notes are worth €42mn, according to Bloomberg.

The legal proceedings relate to outstanding notes, worth €297mn, for the three remaining structures.

The maturity date of the second structure, TF II, fell in April but the notes were not redeemed. The judgement says the bank, as a senior noteholder, has demanded immediate payment and the parties are waiting on a third party to independently value the receivables.

CFE says the changes made to its quarterly reports were “to report in accordance with the forms mandated by the European Securities and Markets Association” (ESMA), according to the judgement. It says that the EU regulator’s ongoing development of technical standards and templates for securitisation reporting was disclosed as a risk factor in its prospectus.

The asset manager says “teething problems” transitioning to ESMA’s format have been mended and that “the problems were historic and that there is no requirement to provide underlying documents”.

In addition to fears that disclosing the documents could breach confidentiality clauses it has signed, CFE also argued that Banca Generali’s requests would be an unreasonable burden on the firm because the relevant team is made up of only four individuals, and the bank’s previous information requests have already caused delays to its regular reporting schedule.

According to the judgement, CFE is prepared to continue to co-operate with the bank, but its case is that “the bank placed high-risk notes with its clients, some of which have not performed as might have been hoped due to circumstances that include Covid-19 and the war in Ukraine”.

“The senior notes were high risk, high reward investments that were unlisted and unhedged, underpinned by receivables from high-risk counterparties in developing countries,” Justice Falk summarised CFE as saying. “The significant degree of risk that existed, including the risk that amounts invested would not be recovered, was clearly disclosed in the prospectuses.”

The company argues that Banca Generali, faced with losses, is now “attempting to blame [CFE] by making unwarranted insinuations as to their integrity, and making overblown and self-serving assertions”.

CFE’s website says that since it was founded in 2001, the firm has arranged more than €3.5bn in trade finance transactions and over 25 “bespoke securitisation vehicles”, collectively worth more than €1.5bn, for clients such as asset managers, family offices and banks.

The company did not respond to a request for comment from GTR.

Banca Generali’s general counsel Carmelo Reale welcomed the court ruling, saying that it confirmed standards “which arrangers must comply [with] in order to give greater transparency to customers with regard to products by their illiquid nature”.

On a May earnings call, the bank’s chief executive Gian Maria Mossa said that Banca Generali has no current need to buy back the notes placed with clients. Trade finance is an asset class “that can be subject to market volatility” and CFE has confirmed that the problems are restricted to Sudanese and Cuban receivables, he added.

A spokesperson for the bank tells GTR that the notes formed part of diversified portfolios held by professional investors, which have continued paying dividends.