The Future of Trade Receivables Securitization in Europe

Abstract

This article reviews Demica’s research in 2011 and 2012 among Europe’s top 40 banks on the growth trends in trade receivables (TR) securitization. It also provides an update on legal issues around the subject, drawn from research work at the University of Oxford. As other sources of distribution and risk-offloading have disappeared, European bankers have seen increased appetite and demand from corporations for accounts receivables securitization. TR securitization provides banks a safe, secured way of allocating capital while allowing them to continue to provide funding through revolving bank facilities. From the corporation point of view, the main factor that makes TR securitization an attractive alternative source of funding is that the underlying portfolio rather than the balance sheet of the originator is the key risk factor. In other words, financing is predicated on the debtor risk profile rather than the creditor’s rating, which often results in lower-cost financing for the corporation. TR securitization not only appears to have survived the financial markets crisis and its aftermath, but it is also predicted by financiers to grow in coming years, as a result of (maybe permanently) squeezed relationship lending and a desire from corporations and their banks to diversify company sources of finance. This review of the legal framework for trade receivables notes a number of potential risk exposures that need to be taken into account. However, these areas of risk do not fundamentally hinder the TR securitization process; they simply need to be accommodated in the legal structure and the pricing of the instrument.

TOPICS: Fixed income and structured finance, legal/regulatory/public policy, developed