In September, experts from across the industry gathered at the Secured Finance Network’s Annual Cross-Border Lending Summit to discuss Cross-Border ABL.  As we know, common-law jurisdictions such as the UK, Canada, and Australia are a well-trodden path for ABL lenders.  However, other jurisdictions in Europe and wider can be more problematic, and clients of asset-based lenders are looking for liquidity outside of traditional ABL markets.  Some ABL lenders are able to get comfortable with this, but, even then, advance rates are less than optimal and structuring is difficult.  An alternative solution exists:  Trade Receivables Securitization.

Trade Receivables Securitization to Complement an ABL

Trade Receivables Securitization allows corporates to sell their receivables to obtain committed financing, which can be structured to achieve off-balance sheet treatment.  Receivables are sold into a Special Purpose Vehicle, which issues notes to bank and non-bank investors.  The product allows for a more diverse investor base and a lower cost of capital.  Due to diversification of risk and investor cost of capital, the Receivables Securitization market is priced much more competitively than ABL in many jurisdictions. 

A securitization of international trade receivables can be put in place alongside a domestic (U.S., Canada, or UK ) ABL.  Subject to specific arrangements and approval by its auditors, the selling corporate can receive off-balance sheet treatment for the securitization, thereby minimizing leverage while accessing a cheap cost of funds on a committed basis.  In some instances, where international receivables are already pledged under an ABL facility, a conversation can be had with the lender about the relative merits of the two facilities.  Often, they are happy to carve out the niche of international receivables to allow the corporate to find a cheaper cost of funds. 

Implementing Cross-Border Securitization

Many banks offer trade receivables securitizations.  International securitizations often require the involvement of a third-party technology provider, because various selling entities are involved, meaning that data must be consolidated from a variety of accounting platforms.  Technology platforms connect to the ERPs, meaning that corporates with selling entities in various countries and on different accounting platforms are able to put together a single facility with automation and transparency for treasurers and funders.

Due to the complexity of structuring and the data issue mentioned above, international securitizations traditionally had a high up-front cost, meaning that only very large facilities were practical.  To extend the reach of this product, ‘standardized’ offerings are being introduced with parameters already pre-agreed with investors.  Such programs allow for implementation of international Securitizations for suppliers/sellers with an outstanding receivables book of as little as $30m. 

In summary, cross-border receivables offer corporates an opportunity to access committed, off-balance- sheet funding in jurisdictions that are underserved by the ABL market.  When presented receivables in such jurisdictions, we recommend that lenders think of securitization solutions as a complementary product, which can help bring more value to corporate borrowers. 

Demica is the leading global platform provider for Trade Receivables Finance and Supply Chain Finance solutions with $15bn AUA. Demica advises and supports corporate originators in the set-up of cross-border trade receivables securitization transactions and manages them on its proprietary technology platform. Its securitization services are provided by Demica Finance Limited, which is regulated and authorized by the UK’s Financial Conduct Authority.