With securitisation markets abandoned by investors, Helen Castell investigates whether there is any appetite at all for securitised, high quality trade assets.

With capital markets in crisis, once-lauded risk-sharing structures have never had it so bad. Shouldered with a large share of the blame for the current financial mess, securitisation suddenly finds itself a dirty word. But for higher-quality trade assets, is the slander justified? And while corporates rely on invoice discounting to partly plug the gap, don’t banks need trade securitisation more than ever?
Bloomberg figures show the global securitisation market – including all assets – had slumped by September to a tenth of its size a year previously. And though the odd big deal has trickled in – most notably from names like Standard Chartered and Citigroup – going on the public information available, the market has all but stopped.

“The securitisation market, even for good traditional assets, has basically dried up,” says Cristina Roberts, global head of commodity finance at Fortis Bank in New York. “It’s the contagion effect.”
“I have not seen that much in the way of deals getting done,” she says. “It’s a market in suspended animation – waiting for the next turn.”
While a number of corporate clients have had to bring securitisation programmes back onto their balance sheets, Roberts adds: “the liquidity for that structure has gone away. Most banks are now concentrating on keeping the investors they already have happy, rather than chasing new deals.”
“Conditions are pretty dire,” agrees Avarina Miller, senior vice-president at Demica in London. And lack of confidence in the banking sector is partly to blame. “When an investor’s buying asset-backed commercial paper, they pay an awful lot of attention to the bank that’s sponsoring the conduit,” and even more so in these uncertain times, she explains.

Deutsche Bank for one has not been involved in any trade securitisation over the past year, simply because – compared with other options on the table – yields were not attractive enough, says Klaus Michalak, global head of structured trade and export finance in Frankfurt.
Other banks with no recent trade securitisations include Santander, although it continues to put together receivables programmes.
The securitisation slowdown is not from lack of demand, says Federico Papa, global head of trade, export and commodity finance at Santander in Madrid. Struggling with constrained balance sheets, and less able to fund, or even syndicate, in the primary market, many banks would like to set up a securitisation, he explains.
“The demand from clients is there, and in times of turmoil these products can do well,” he says. “The problem is that investors’ money is at this moment very shy and on the sidelines. And therefore the ability of banks to package and sell is not what it used to be.”
But was trade securitisation ever that big a business, and is there no one keeping the flag flying?
Trade finance assets have not historically been used much as the basis of securitisation deals, at least in the UK, says Celia Gardiner, partner at Watson, Farley and Williams in London.

Just before the credit crisis hit, and while commodity prices were still seriously buoyant, “noises were being made about the beginnings of what was called ‘commodities investment banking,” she notes. “Investment banks were beginning to express an interest in this area – but it’s not something that ever really took off.”
Commodity producers too – including those that had never been anywhere near capital markets – were also rumoured to be looking at securitisation, she adds. “But then the credit crunch came along and those markets dried up.”
For some international players however, it’s business (almost) as usual, and the need for securitisation is if anything bigger than before.
The “dramatic” shift for many banks from classic trade finance business towards working capital solutions, combined with the weight of Basel II on their balance sheets, means they are under more pressure than ever to securitise their assets, says John Ahearn, managing director at Citigroup in New York.

Trade securitisation programmes put on hold
Citi already has one trade securitisation – Cabs 1 – in the market and is preparing to do a second US$400mn version of that, called Cabs 2, says Ahearn. It has also secured investors – including insurance companies and equity, hedge and pension funds – for a mammoth US$2bn synthetic CLO called Trade Winds, but because of current market conditions “hasn’t decided to pull the trigger yet.”
In mid-September, Citi viewed Trade Winds’ launch as imminent, but with the market mayhem that ensued, the bank now wants pricing to settle before it funds through MTNs. “You don’t want to launch one of these things at the wrong time and then have an artificially high cost of funding for a significant period of time,” Ahearn notes.
Larger banks like Citi are better able to achieve the economies of scale needed to tap the securitisation market, says Ahearn, and this may explain the dearth of deals making it to market.

“Securitising trade receivables continues, no question about it,” says Adrian Katz, CEO at Finacity in Stamford, Connecticut. “There are fewer funding sources that are strong and able but there are enough to continue to do what we do.”

“The pace [of business] is actually faster, because what’s happened is there are more companies that need our product offering,” says Katz. “So we’re actually sitting on more mandates now than has historically been the case. Deals are harder to execute but we’re finding them easier to win.”

Getting investors on board has indeed been difficult, but by casting the net wider and doing more legwork, it can be done, Katz adds.
“I might make ten phone calls to find one, when in the past I made three and had a three-way competition,” he says. But, “it doesn’t really matter how many say no, as long as we find one that says yes and we are still finding capital.”
The investor base has certainly changed, with smaller regional institutions taking a bigger chunk than large multinationals, and European investors tending to have better appetite than their US counterparts, Katz adds.
For a trade securitisation Finacity is currently doing in Mexico for example, “we’re not even looking for multinational money – we’re just going to look at local investors such as pension funds.”

Another Finacity deal, this time for Northwest Airlines – then rated just B-plus and currently on negative watch – still succeeded in pulling in an investor: the commercial paper conduit of German landesbank NordLB. “They don’t manage one of the largest commercial paper conduits – they’re not a Bank of America, an RBS, a Citibank or a JPMorgan Chase,” says Katz. “But our clients don’t care.”

“If you’ve got a legitimate bankable deal, we’re finding funding sources,” he notes. “The fact that we’re currently doing a deal for an Israeli company and a Mexican company – from relatively weaker credit countries – is a statement in itself.”

Trade assets perform well
One problem trade securitisations now face is the ‘guilt by association’ that commercial securitisation programmes have heaped on the structure. How justified is this?
“Securitisation is totally a dirty word – which is a shame. Because it’s actually a way for alternative investors often to get involved in the market place,” says Roberts.

“When you have USA Today talking about securitisation, you know things are bad. They always say the bubble is about to bust when your shoeshine man starts giving you stock tips,” she notes. “It’s a little bit the same with securitisations – you know their reputation is damaged when everybody, whether financially oriented or not, starts saying they’re bad things.”
“The whole securitisation world has become kind of tainted,” says Ahearn. “And some investors are tarring any kind of asset-backed commercial paper with the same brush.”

However, “with the help of banks and ratings agencies talking to investors, they are beginning to understand and discern between the sorts of conduits and the sorts of securitisations that have unattractive assets, and those that have attractive assets,” says Miller. “That’s why in the future, banks that are doing securitisation are going to have to concentrate on this plain vanilla aspect that investors still feel comfortable with.”
“Trade receivables are very attractive,” she notes. “They have a perfect alignment to a short-term funding source.”
As well as being high quality, trade assets are better suited to securitisation than some consumer-related assets, argues Katz. “When conduits were originally set up to operate, they were intended to facilitate the sorter-duration assets,” he says. “Many would argue they drifted from their purpose when they ended up with 30-year mortgages. You shouldn’t find 30-year mortgages with 30-day paper.”
“One of the nice things about the trade business is that the underlying assets are very transparent,” says Ahearn. “There’s not a lot of trancheing of the asset pool. So from an investor’s point of view it’s a much easier conversation, because they know what they’re getting.”
And trade securitisations have certainly performed well to date. Govco, an older Citi securitisation for its ECA business, “has been doing very well in this market,” says Ahearn. With an average US$7bn to US$8bn outstanding, “it continues to fund itself at very competitive pricing.”
“If you look at our history, we’ve never had an investor lose any money, and we’ve never had a downgrade. That’s more than most financial institutions can say,” adds Katz. “These deals have all performed.”
“The underlying problem with securitisations were related to a lack of transparency in a lot of respects,” he notes. “Our deals provide daily transparency.”

Repricing required
The higher quality of trade assets is however a double-edged sword, leading to pricing levels that don’t attract all investors.
Pricing on trade securitisations has typically lifted 50 to 75 basis points since the credit crisis began, says Katz. But “if you look at consumer credit securitisation they’re trading, in some cases, several hundred basis points wider.”
The market does however need repricing, to reflect the cost of liquidity, says Roberts.
While investors recognise the superior quality of trade assets, to justify any investment they also have to meet their yield targets, says Michalak. “This is the most challenging aspect for trade,” he notes. “Because everyone in the market knows that trade assets have a superior quality. However, this is also known by the obligors. So that means trade assets are still comparatively finely priced.”
With current market turmoil transforming the financial landscape though, the continued high demand for trade finance may create new forms of well-known tools like securitisation, Michalak says. “Once the dust has settled and pricing of trade assets has reached an appropriate level, then we may see more securitisation of trade assets.”
The fact that pricing is already starting to move upwards is however persuading some investors to wait out for the highest possible yields before buying asset-backed paper, notes Ahearn. “Everyone realises that price is at a premium right now. And a lot of them are trying to get significant returns.”

One difficulty with pricing securitisations now is that the bulk of the asset pool is coming out of emerging markets, where pricing hasn’t moved as dramatically as in the OECD, but most of the investor pool is coming out of the OECD, Ahearn notes. “So you have a negative arbitrage going on.”
Alternatives to capital market securitisations are meanwhile finding favour amid the fallout, with a shift back to traditional trade finance solutions such as receivables finance and invoice discounting. But how much can they plug the gap for corporates, and how much more pressure are solutions like these putting on banks’ already strained balance sheets?

Return to simplicity: invoice discounting business grows
As one of the most common ways of raising short-term liquidity this decade, the drying up of capital markets securitisation has left corporate clients “casting around for ways to source liquidity in a way that is good for them – and trade instruments are ideal for this purpose,” says Peter Sargent, head of working capital, Europe and America at ANZ in London.
For many, a return to invoice discounting has been the answer. Through its ability to take debt off a company’s balance sheet, this is the “most simple and basic form of securitisation,” he argues. Although securitisation funds through the capital markets, and invoice discounting through a banks’ balance sheet, “the underlying purchase sale of the asset – ie, the invoice – is exactly the same.”
Private placements also inch closer to securitisation, giving banks the same off-balance sheet effect, Sargent says. “If a bank found a flow of business into say India, as well as an investor with an interest in India, it could get that investor to enter into a private placement – the result being an off-balance sheet instrument for the bank.”

The way solutions like these are structured has also changed significantly post-credit crunch, he notes. As well as being priced over cost of funds rather than over Libor, banks’ uncertainty regarding their ability to fund themselves means that more are undertaken on an uncommitted basis, he says.
And however useful, the above solutions rarely make it into the media, he notes. “Corporates are very reticent to put these sorts of things in any public form and I’ll tell you why – it smacks of factoring. And factoring smacks of lack of cash flow, financial difficulties.”
“What you’re seeing is the return of ‘back to basics’ finance,” says Papa. “In our world of trade, export and commodity finance, that means we’re seeing a lot of business with ECAs, with multilaterals. We’re seeing more of the old pre-export finance structures coming back to the market. And we’re seeing a lot of difficulties with anything that’s related to some sort of credit derivative, or anything that entails capital market risk.”
On-book receivables purchase, as practiced by GE Commercial Finance, has enjoyed an “increase in demand” over the past year, says Inwha Huh, the programme’s executive director in Norwalk, Connecticut.

While part of this is due to more large-cap corporates looking for alternatives to the rated securitisation market, another big driver is that large corporates are now focusing on better management of their balance sheets, she says.
The increasing importance of overseas operations to many corporates’ bottom lines has also fuelled growth, Huh adds, noting that one GE study found new geographical markets drove more than 70% of large corporates’ growth over the past four years. This trend, she says, has played well to GE’s “multi-jurisdictional capabilities” – the ability to do a global facility consisting of various tranches under different local sales jurisdictions aligned with each client-subsidiaries’ receivables.

GE has also seen an increase in demand among larger, investment-grade companies for the receivables purchase structure, in addition to steady demand from more leveraged clients.
Huh believes that one outcome of the current global credit market disruptions will be that alternatives, like receivables purchase structures that do not run market risk, can play an even more important role for large corporates.
If and when rated securitisation markets do pick up pace however, will this mean another gravitation away from those very forms of finance that are now benefiting by the shift back to basics?

Even if securitisation does recover to previous levels – which Huh doubts it will in the short term – “corporates are already thinking differently in terms of their treasury management. I don’t see that going away.”
Also, once the global network of receivables purchase programme is in place and “it’s very hard to unwind – it’s very entrenched in the corporates’ operations by that time,” she says.
“What trade deals do is give you at least a level of flexibility, so I think you will find that [invoice discounting] is a market that will remain, albeit not quite at the same level as it is today,” adds Sargent.
“A lot of customers have said to us that they quite like the flexibility of these types of deals,” he adds. “I think they found securitisations to be quite a strait-jacket in the sense that you could only put certain assets in and you had to be very careful about the structures of the deal.”
The fortunes of invoice discounting specialists are at least to some extent inversely linked to the trade securitisation sector. So the question of when, if and how well this market can get moving again is something everyone wants answers to.

Problems with securitising trade
Trade securitisation faces some obstacles that are more than simply cyclical, and this could delay growth, argues Michael Kenny, partner at Watson, Farley and Williams (WFW) in London.
By their nature not as easily securitisable as some other assets, trade deals “tend to be quite short term, structured in a way which is particular to that transaction, and often with deal-specific security that isn’t so easily treated as homogenous and uniform in the same way as for example residential mortgages can be,” he explains.
“If you’ve got a mortgage on a house you pretty much know what you’re getting – compared with goods in transit on a railway truck passing through different jurisdictions.”

The high political risk often associated with trade deals also makes securitising them difficult, Kenny adds. Around four years ago WFW was working on a securitisation of cocoa beans receivables from Cote d’Ivoire. “We actually spent quite a lot of time working on this project,” he says. “But unfortunately it all cratered spectacularly when the Ivory Coast descended into civil war. That wasn’t on the business plan!”
Financial institutions more dependent on the health of the sector are unsurprisingly more upbeat. Although whether trade securitisation emerges as the same animal it once was is one question, as is the issue of its dependence on the overall securitisation market.
“I think it will recover,” says Papa. “The fundamentals for structures that package assets and sell them to investors – they’re still there.” In the future however, “they will be with lower leverage, they will be a lot simpler and I expect them to be more heavily regulated.”
Not big enough to operate under its own dynamics, the trade securitisation market won’t fully recover until the rest of the asset-backed commercial paper market does, argues Ahearn. “It’s going to continue to be locked in with the other securitisations, and until that market clears up, this market will not clear up.”

Given the attractiveness of trade receivables, the securitisation market for them could recover “some time next year, when there’s a bit more stability in the market,” predicts Miller. However, “it’s going to take the alignment of a number of different stars.”
As this year ends, trade securitisation activity could start to resurface, thinks Roberts. “You’ll probably see people looking to get their money working first quarter” – a time that lots of investors enter the market to ensure their money is working for the full fiscal year, she says.
“That may be just the thing that brings liquidity back in – the need to invest. They can only sit on the sidelines for so long.”
“I don’t think the market has gone away,” concludes Katz. “The market’s gotten tougher. It’s definitely had some players step to the sidelines for the time being, until they can sort out their own capital mess. But there is still a viable market.”