Basel rules have created new opportunities for institutional and corporate investors in trade finance.

Author: Anurag Chaudhary

For the past few decades, banks have sold trade finance assets to each other. Most banks understand trade finance structures and are open to deploying their surplus liquidity and unutilised credit facilities to buy secondary market trades. But they have been hampered in selling to institutional investors due to trade finance’s relatively low liquidity.  

The advent of new Basel guidelines raising liquidity ratio requirements for the banks raises an interesting question: “Can banks find a way to sell trade finance assets to institutional investors who have short-term liquidity?”

Indeed, banks faced with new Basel liquidity ratios have no option but to find alternate channels of selling-down trade finance assets. At the same time, institutional investors have surplus liquidity, especially toward the shorter end of the curve (up to one year) and are exploring different avenues for deploying their liquidity to improve yield and reduce cash drag. In this environment, fintechs have been more agile and dynamic in developing technology to help support institutional investors moving into trade finance than banks. Banks have some catching up to do.

Changing Market Environment

Some critics don’t believe institutional investors will buy trade finance assets, since the idea has been floated before and hasn’t been terribly successful during the past decade.

However, it’s important to take a step back to get a full picture of the market environment’s changing conditions and how these changes could facilitate bringing institutional investors into trade finance. Such recent trends include:

  1. Securitization of Trade Assets: Securitization of assets is one of the first issues that comes to mind when bankers think about selling trade finance assets to institutional investors. There have been a number of securitization structures undertaken in the past like MAPS (Santander and Citibank) or synthetic structures like TRAFIN (Deutsche Bank) or Sealane (Standard Chartered bank). However, adoption/creation of new securitization structures has slowed a bit given the new Basel requirements and inability of banks to sell-down large ticket individual trade transactions under these structures. Currently, some fintech companies and banks are exploring customized securitization structures for their supply chain business (especially receivables portfolios). These securitization structures are on tap and separate for each client-receivable portfolio deals (usually around $200mm-$500mm). First 10% portfolio, first-loss default guarantee is usually provided by some non-bank providers and then outright sale to both institutional investors and other banks.

  2. Tradable Notes/Securities: There is a constant need to sell large-ticket trade transactions instead of portfolios of trade assets in the industry. A number of fintech companies that are offering open-account structures like supply chain and/or receivables finance are repackaging the underlying trade assets into securities structures with ISIN or CUSIP numbers. Some of these securities/notes are listed on exchanges (e.g. Luxembourg) for ease of trading. This gives these fintechs the ability to undertake larger programs for their clients while the institutional investors are able to identify the underlying obligor(s) individually under each security/note.

  3. Technology Platforms: Buying and selling of trade assets via Master Risk Participation structures (MRPAs) is paper-intensive and time-consuming process. There are a number of firms introducing technology platforms for electronic distribution of trade finance assets under MRPAs. While so far the majority of the participants on these technology platforms are banks, when the operational processes become automated to click-of-a-button simplicity, it will be an opportunity for institutional investors to dabble in trade finance as an asset class as well.

  4. Customized “Trade-Funds” via Technology: The next wave of innovation will be new technology platforms providing end-to-end customized solutions to institutional investors. Institutional investors pre-define their investment criteria like types of obligors, diversity across industries/geographies, average individual transaction size, overall portfolio yield, and put funds into an escrow account with a bank for a period of 2-3 years.

These new technology platforms are capable of sourcing trade assets according to investment criteria, credit analysis, due diligence, and automation of cash settlement, to name a few functions. From there, institutional investors can monitor their investment portfolio in trade assets on the technology platform and sharpen their pencils for adjusting it.

Corporate Treasurers/CFOs

Most non-bank investors are either cash investors, at the very short end of the curve (up to 90 days), or on the investment side – thinking longer-term (usually two years or more). In the 6-12 months bucket, there are very limited debt issuances (except for secondary market trades).

Trade finance assets can help bridge the gap between 90 days and two years for corporates and banks to create a better credit yield-curve for their liabilities. Also, institutional investors will see these obligors issuing regular debt for different tenors than on sporadically every 2-3 years for medium-term notes/bonds only. Corporate treasury teams can use short-term trade financing structures to test the waters before other, longer-term issuances. This approach usually makes investors more familiar with the credit risks; that in turn helps bring down pricing in the long run.

Way Forward

New rules bring about new ways of doing business. This could be an opportune time for banks, fintechs, corporations and institutional investors to come together regarding trade finance assets and help create a new path.

About the Author:

Anurag Chaudhary is the CEO of Pinnacle Trade Finance Limited, United Kingdom. Prior to that Anurag was working at Citibank as Managing Director and Global Head – Trade Distribution & Syndications and Regional Head – FI Trade Origination/ Sales team based out of Citibank’s London Office.