There have only been a handful of trade finance securitizations, but some bankers are predicting many more in the coming years.
There are four obvious options available to banks looking to distribute trade finance exposures, according to Dermot Canavan, head of trade product for EMEA at RBS: an outright or synthetic securitization, or a direct sale of the loan or credit insurance.
“An outright sale of the loan is the simplest solution for banks looking to offset risk from their balance sheets,” he says.
However, banks are looking at whether they can securitize these exposures and sell them on to investors. A handful of such deals have been done, and RBS is known to be working on one such transaction. However, there have been too few deals to make them relevant in the context of the broader trade finance business.
It is not clear how much appetite banks have to offload their trade finance exposures, especially the banks that dominate the business.
“We have the balance-sheet capacity for it and our footprint means we can help our clients on both sides of a trade,” says Luiz Simione, global head of forfaiting and risk distribution at HSBC.
“Distributing risk won’t be the right option for every bank. National or regional banks that help clients with one leg of a trade may not have the necessary economies of scale.”
There are a number of regulatory and tax considerations that are complicating banks’ efforts to find the best structures into which to package these assets. This is especially challenging in Asia, where the patchwork of regulations and tax regimes is especially complex.
There is also the question of whether the client is comfortable with the loan being distributed in this way, and some might have documentation that explicitly prohibits it, says Canavan.
The spectre of 2008 also looms large in any debate concerning securitizations.
“Regulators pay legitimate attention to these structured instruments,” says Simione. “Every dollar we lend for trade finance business goes to the real economy, we have all the documentation and we know where it has been spent. Once you start structuring securitizations, CLOs [collateralized loan obligations] and syndications, you may introduce leverage and that changes [things].”
The cost of securitizing trade finance exposures might also be prohibitive.
“The short tenors make it complicated if you are structuring a note with a duration of a year or so,” says Canavan. “The best comparable would be credit cards rather than mortgages, but managing a portfolio of such short-dated loans will require very active management and an associated cost, especially if you need to maintain a product within a given credit rating.”
However, if these operational challenges can be overcome, there is a feeling trade finance assets could be well received by investors, offering potentially better returns than some other assets of a similar duration.
Banks have a lot of work to do educating investors about the intricacies of trade finance assets before that can happen. And although there is an active secondary market for trade finance assets among banks, other investors might initially be reluctant to spend time on an asset class they are not familiar with.
However, once they begin focusing on trade finance, their familiarity with credit products should help them in understanding the dynamics of the same, says Rakshith Kundha, head of structured trade and export finance, and trade risk distribution for Asia Pacific, at Bank of America Merrill Lynch.
“Several banks have begun exploring various structures,” says Kundha. While there have been some securitization structures based on underlying trade assets, “if you look at the details you will find that different structures achieve different objectives,” he adds.
The growth of a secondary market for structures based on underlying trade finance assets will be important in driving demand. “Exit options are generally quite important to money-market investors,” says Kundha.
However, this remains some way off. He adds: “For now, only a small portion of trade finance assets are distributed through securitization or repack structures. While banks are increasingly focused on tapping non-traditional appetite, it is likely to be a gradual rather than a sudden shift.”
It is too early to say what impact the trend would have on trade finance more broadly. Investors might have less appetite for exposure to less-well-known borrowers than banks do, leading to increased bifurcation in the market. Or it might have the opposite effect, making it easier for smaller borrowers to access capital.
“Securitization structures value both diversity and quality of underlying,” says Kundha. “So it’s too early to say what it will mean for different classes of borrowers.
“However, as the trade distribution function evolves to tap non-traditional sources of appetite, it will continue to bring more efficiency into the business. This will benefit the end-customer and global trade, and to that extent may help reduce the effects of increasing costs of capital and liquidity due to changing regulations.”
Others are less convinced.
“I am sure the debate about distribution will continue, but this will not necessarily convert into many deals,” says Simione. “It depends on what drives the banks.
“If this is about removing these exposures from the balance sheet it may make sense. The cost might be high, but this could be outweighed by the impact on the balance sheet. However, if it is about reducing risk, the cost may be more prohibitive and there may be better ways to do it.”