Why companies are flocking to the TRS market
With a sustained period of rate hiking, and the broad consensus that there may be further increases ahead, traditional forms of financing remain less attractive for corporates looking for additional liquidity to their businesses. Many corporates are now looking to the trade receivables securitisation market as a source of competitive finance.
TRS provide tailored funding for corporate sellers, with the added option of deconsolidating their receivables from their balance sheet. Securitisations can be tailored to client requirements and are committed for longer terms. Further, they are more commercially competitive and less operationally involved than other receivables financing.
And according to fresh research covering the European market, TRS saw a healthy 9.1% year-on-year growth (based on committed amounts). The product now makes up approximately 60% of all private securitisations, making the overall estimated market for TRS roughly €115 billion in size. This far outweighs the size of securitisations of auto loans or leases, and consumer loans - the second, third and fourth most popular forms of private securitisation.
Many banks and other finance providers are gearing up to support the market. According to the Demica Benchmark Report 2023, which took the pulse of 190 trade financiers across the globe, 15% believe TRS will have the highest growth potential within their organisation, outpacing more typically user-friendly services such as factoring (11%), asset-based lending (9%), and dynamic discounting (6%).
An exciting new asset class for investors
How do TRS programmes work? They are structured similarly to other securitisations with a sale of the receivables - on a non-recourse basis - to an orphan special purpose vehicle (SPV) that is funded through the issuance of a note to senior funders. The risk adjusted returns are driven by a wide array of structuring features that help to mitigate defaults, as well as corporate seller and operational risks. Most transactions funded by banks and bank conduits can achieve implied ratings of A or AA under the Standard & Poor's trade receivables criteria.
TRS programmes allow investors to invest in an asset class that is directly exposed to the real economy. They also directly contribute to the funding and growth of small- and medium-sized companies – frequently as suppliers of the corporate sellers.Set up as rolling programmes, where receivables are sold to the SPV using collections from prior sold receivables to fund these purchases, TRS have significant structural differences compared to other asset classes. These include the short nature of the assets, unique and diverse servicing risks, the corporate nature of the originators and debtors, the multi-jurisdictional and cross-currency portfolios, the rolling nature of programmes with variable funding structures, and the simplified tranching.
The who's who of a successful TRS programme
The key way in which to manage the complexity of a TRS programme is to understand the roles that different parties play in each transaction. With these roles assigned, the complexity can be managed smoothly, and the programme, a success.
There are 12 separate roles that need to be undertaken in a TRS programme. Often these roles can be performed by the same entity, but they each have a distinct part to play in the success of a transaction. These include a corporate services provider, that can provide the skeleton around which the whole transaction can take place. Security and data trustees, registrars, cash managers and reporting agents all need to be appointed, along with an SPV bank, counsel and auditors.
There are also certain reporting obligations that are required from each party. These include portfolio performance, showing the evolution of the portfolio at all levels, as well as concentrations and relevant stratifications. Advance rate calculations, asset base and required funding, and funding drawdowns or repayment requirements need to be collated. Further, there is a need to report performance ratios and assessments against agreed triggers as well as the calculation of funding costs and other transaction expenses.
Co-ordinating all the parties in a transaction so that they can provide the right data for the reporting, is the role of a proven expert in this field.
Overcoming challenges
To ensure a successful TRS programme, there are some common obstacles that need to be overcome. Firstly, receivables books are frequently made up of a large volume of items - not only invoices but also credit notes, adjustments, offsets and other item types that need to be factored in calculating the performance, advance rates and funding available. Successful programmes need to automate - as far as possible - the transfer of information from the corporate seller ERP.
At the same time, each TRS programme needs to be tailored to the specific sector, corporate seller and receivables type in scope. Each one of these categories can have wide variations, making it difficult to replicate previous transactions even if they are in the same jurisdiction and sector. Issuers need to understand and document the different characteristics of each sector, working with funders and counsel to adapt the transaction structures and documentation to meet the objectives - as well as the legal, tax and regulatory requirements.
TRS transactions will frequently have multiple jurisdictions, selling entities and collection methods. This creates a complex web of collection flows and arrangements. Being able to monitor these and put in place risk mitigation measures, such as a pledge or control agreement, is complex and will require the right monitoring and reporting tools. This will include a roll forward, ageing, balances across the different levels (total, eligible, etc.), performance metrics, triggers, advance rate calculations, funding amounts and required drawdowns and repayments.
However, these are challenges that can be overcome with the right advice, structure and partners.
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