The rising costs for banks to hold even low-risk, short-term loans — courtesy of Basel III — is a powerful incentive for them to offload their trade finance receivables into securitizations and move beyond the synthetic deals that were more common in the past.
But panelists at an ABS Vegas talk pointed out that the sector has a dizzying array of moving parts.
The upshot: structuring deals can take a very long time.
On the other hand, with global trade in 2012 estimated at $18 trillion it is easy to understand why the painstaking process might very well be worth it.
Clifford Chance Partner Lewis Cohen said he was involved in a few deals and in a couple of cases the work has taken more than a year.
Other participants at the conference who have worked on a completed transaction said that it took two years.
Just looking at it from the tax perspective, it’s easy to understand why building a cross-border deal in this asset is a process that’s more laborious than for most other securitizations.
Anna-Liza Harris, a partner at Katten Muchin Rosenman, said that because a deal would draw assets from around the world, it would have to tackle withholding — and possibly a host of other - taxes from a large number of jurisdictions.
Differences in bankrutpcy law are critical as well, as putting a bank originator bankruptcy in Hong Kong could be very different from doing so in Brazil. “It’s also likely you’d need local law bankruptcy opinions,” said Harris.
And, then of course, there is the host of other risks associated with transactions that have an array of originators from countries that have different levels of sovereign risk and a variety of regulatory regimes.
All the same, given the sheer enormity of the universe of trade finace, the asset class has an inarguably “sleeping giant” feel to it. And it may be coming out of its slumber.
Only last December, Citibank and Santander launched an inaugural $1 billion deal off a joint program called Trade MAPS, saying regulations were a catalyst.
And in August, BNP Paribas issued a $131.6 million deal, Lighthouse Trade Finance, that securitized commodity-linked loans. The impetus, again, was reportedly regulatory in nature.
Lord Capital Managing Partner Stephen Ceurvorst said that 30% of global trade — about $6 trillion in 2012 — is in commodities, split into three main families — energy; metals and mining; and “softs,” which includes many well-known agricultural commodities such as grain, corn and wheat. These are sectors that typically use trade finance.