Natexis Banques Populaires and credit management specialist Coface – a subsidiary of the bank – have joined forces to create a telecoms receivables insurance and guarantee facility for Londesborough Finance (LFL) of the UK.
The facility supports cross-border telecoms traffic receivables generated by LFL’s “secure route finance “(SRF) system, which is the world’s first secure payments structure along the entire value chain of the deregulated global telecommunications wholesale interconnect market.
Until now, telecoms receivables have been open to both error and fraud – preventing receivables financing solutions being offered. In a major breakthrough, however, the LFL SRF solution has been structured to overcome this.
“LFL’s view is that the true value of the cross-border interconnect market is in the call minute, as evidenced by the “call detail records “or CDR,” says Guy Jackson, CEO of LFL. “And through a proprietary verification system, we have achieved what no company has previously managed – the creation of CDRs with the fraud and error risk removed – thus turning them into a financeable commodity.”
Via the SRF solution, LFL is able to act as a receivables conduit and issue on-demand guarantees or letters of credit from Natexis Banques Populaires on behalf of the buyer to satisfy the security requirements. The bank is starting with an on-demand guarantee line to LFL sufficient for the first three months “traffic. As payments increase through the SRF structure, however, the bank will extend its support, as well as bring in external bank appetite. Expectations are that the structure is scaleable within six months to a level requiring issuance of guarantees to a value of around US$55mn of issued security per month.
“Receivables financiers have struggled to break into the telecoms market because of the lack of a trustworthy receivable,” says Rodney Ballard, head of structured trade finance at Natexis Banques Populaires. “Yet the SRF structure offered by LFL may at last allow the sector to fulfil its potential – which for LFL alone is estimated at perhaps US$900mn of secured receivables per annum by year three.”
The structure went live in February with a US/UK-based contract likely to produce 50% of the first year’s projected receivables revenue of US$127mn. Natexis has been assigned this contract as part of the security package to issue the guarantee.
Coface UK was the originator of the transaction for the Natexis Banques Populaires group, and is also playing a vital role in the structure by securing the credit risk at the beginning of the value chain – between the customer or originator and the buyer.
“While it helped that Coface is a subsidiary of Natexis Banques Populaires,” says Ballard, “the depth of partnership was by no means a given. Nor was the efficiency of the major parties, which was demonstrated by the fact the structure was signed in January after a Q4 2005 introduction by Coface.”
“LFL needed an on-demand bank guarantee to support their financial commitments to the seller – taken over from the buyer – and a credit insurance policy to cover the payment risk from the originating customer,” says Sarah Winstone, commercial manager at Coface UK. “The deal is therefore remarkable not simply for the fact it offers a route for receivables financiers to tap the telecoms market. It is also the first time a private credit insurer and a trade finance bank have cooperated in such a way.”
LFL originally approached Marsh Advanced Risk Solutions – a division of Marsh South Africa – through its Swiss office. Marsh developed the structure and solution to fill this gap in the market, before identifying key parties to bring on board.
Dave Sandeman, vice-president of Marsh Advanced Risk Solutions notes: “When we were first approached this it had never been done before, so there was a risk that an efficient solution would prove evasive. However, we believed this was achievable and we set about developing potential solutions and structures with various capital markets, captive management companies and domiciles, as well as insurers and banks, across a range of countries.”
“It became clear as we became more intimately involved in LFL’s business model that a conventional solution was not going to achieve the securitization that LFL needed to drive their business vision into the marketplace. After two months we had a possible solution, and approached Coface and other credit markets,” continues Sandeman.