With the growth in scale of the leading global commodity trading companies, we are seeing an increasing number of them turning to receivables securitisation as a basis for fulfilling their working capital needs. Their scale and more solid equity base is allowing these players to replace their traditional modus operandi, of systematically discounting letters of credit, by a credit insurance and receivables securitisation model. TFG hear Frederic Bourgeois , Managing Director for CoFace for UK and Ireland, about the importance of specific insurance policies for the securitisation of trade receivables. He spoke about the trends and changes in the insurance of trade receivables.
Featuring: Frederic Bourgeois, Managing Director, UK and Ireland
Host: Deepesh Patel, Editor, Trade Finance Global
Frederic, hello and welcome to Trade Finance Talks TV. So if we can start off with who are you? Where are you from? And what do you do?
Thank you. My name is Frederic Bourgeois. I’m the managing director of Coface UK and Ireland. My background is capital markets and reinsurance. I joined Coface 15 years ago, and I’ve been the managing director in the UK for the last seven years.
Insurance and Receivables Finance
So what’s the role of insurance and the context of receivables finance?
Well, part of the role actually doesn’t have to deal with insurance per se, but with the underlying condition for entering businesses which is the provision of information, so we do support our clients who are invoice finance companies with the provision of information to help them source new business, originate and also just manage data because we’re a massive provider of data. The insurance business actually relies on data fundamentally. And then there is the insurance part which is providing cover so that some invoice finance companies can gain some form of capital relief. Some others will just insure because they want to manage their counterparty risk or their credit risks and they rely on insurance to take the excess risk which they don’t want to carry on their balance sheet. So, effectively support is two things on the insurance part, its capital relief and really pure credit risk.
So, at a high level, what is securitization and where is this used?
Securitization at a high level is very much taking assets from the balance sheet which would be sitting idle otherwise, making sure that these assets are put in a vehicle, polled together and as collateral effectively for financing and usually the traditional structure means these assets are purchased by a special purpose vehicle. The Special Purpose vehicle then will issue notes to conduit and these conduits are placed in a commercial paper market. And this is a very cheap and efficient way of financing for corporates generally.
Are specific policies required for securitization and if so, why?
Usually what we tend to advise to our clients is to have a base policy and an SPV policy and the two being linked which means that the same credit limits can be applied across the two policies so our clients will choose which invoices they want to send to the vehicle for which they will get a refinancing and which invoices they can keep without any form of financing and they can play at all time between what they want to finance and what they don’t want to finance. So that’s one of the main specifications for securitization. And after that, there are a few others, but which completely depend on the client, the location, or the jurisdiction and a few other bits. It’s on a transaction per transaction basis at the end.
Insurance Policies on Receivables Structures
How do insurance policies differ on different types of receivable structures?
They tend to differ with securitization on one aspect, which is that that there cannot be any form of operational risk taken by the funders or the funder ultimately. So they’ve necessarily got some levels of cure periods in there, which means that contrary to the traditional mechanisms of credit insurance, the funders can always step in and remedy any form of breach by the sellers or the seller of the underlying receivables. Other than that, it’s really as I mentioned on a transaction by transaction basis, there’s no specific rule and we’ll adapt ourselves to the conditions of all of our clients ultimately.
And what changes have you seen in the receivables market when it comes to different types of insurance and also securitization?
Recently it’s mostly linked to pricing. What is very interesting is that pricing levels are not necessarily even across the globe. So we will tend to see some fairly significant differences between geographies, which will be surprising at first sight but this is also a reflection of how much securitization has been used in the past and is established as a tool. And so this ultimately drives competition. Other than that, the main differences will tend really to be linked to geographies, jurisdictions, applicable law etc. Not so much on the underlying process itself and more around the conditions to adapt the structure to a specific company.
Great. Frederic, thank you for joining us on Trade Finance Talks TV.
Well, thank you very much.