A new study released by securitization research provider Demica plc revealed that 17% of America's top 500 nonfinancial companies have conducted a trade receivables securitization in the last 10 years.
The study also revealed that 11% of the top 500 nonfinancial firms in Europe have used this financing option.
Trade receivables securitization has become a mainstream financing tool in Europe.
"The assumed gulf between the securitization levels in the U.S. and Europe is far less evident between top companies in the two regions than is commonly supposed," said Demica CEO Philip Kerle. "In terms of the number of leading firms that have utilized this financing technique over the last decade, Europe is not as far behind the U.S."
Trade recivables securitization is used by the top 500 nonfinancial companies in both the U.S. and Europe to access greater liquidity with which to fund growth.
Standard & Poor's published a report on this asset class in January. According to the report, the total amount of outstanding rated notes exceeds 5 billion ($5.9 billion), which accounts for 2.4% of European ABS issuance. Many of these deals still tend to get done via asset-backed commercial paper conduits, and these trade receivables are expected to continue to form a large part of ABCP programs.
"A minority of trade receivable securitizations are issued as publicly rated term instruments [while] the large majority [are] being issued through conduits and [are] therefore privately rated," Kerle said. "In Europe, S&P [estimates] some 31 billion [$37 billion] is issued via conduits. This may change with the advent of Basel II, which has been identified by expert commentators as a factor that will lead to increased attractiveness of issuing publicly rated notes."
German and Austrian activity
The loss of state guarantees for Landesbanks (German state banks) last year meant the low interest rates typically offered to medium-sized corporates in traditional bank loan financings has disappeared. These medium-sized corporates have seen banks increase their rates and reduce the funding lines they offer.
Demica conducted a study on the future of German medium-sized corporates and state banks in June 2005. Among major banking institutions active in the German corporate finance market, the average cost of finance for German companies large and small increased 12.5% over the prior two years.
"The most obvious solution to the increasing cost of finance is to use the capital markets to provide a financing shortfall, disintermediating the banks' balance sheets," Kerle said. "If assets such as trade receivables are securitized, then the bank becomes a finance arranger rather than a direct lender. Capital requirements are reduced because the bank has demonstrable access to comprehensive and sensitive payment data, allowing it to show greater control over the asset status and, therefore, improved risk management."
In 2006 and 2007, Demica expects 39% growth in German trade receivables over current market issuance.
In Austria, where medium-sized corporates still benefit from advantageous rates offered by state banks, the motivation to access the capital markets is different. Corporates are looking to diversify their funding base. Investkredit Bank AG began arranging securitizations of trade receivables via ABCP conduits last year.
"In Austria there are not that many large global corporates, but there are still a number of successful smaller corporates with a consolidated turnover of 100 million [$119.5 million] to 500 million [$597 million], with trade receivables in the amount of 15 million [$18 million] to 50 million [$60 million]," said Matthias Neumuller at Investkredit. "Compared to large multinationals from Germany, France and the U.K, which typically would use ABS programs, the trade receivables volumes of such Austrian companies may seem very small. Traditionally these companies would not have access to securitizations."
Continuing growth
The Demica study highlighted an upsurge of private equity activity in 2005 that is expected to continue through this year. It could provide further fuel for trade receivables securitization activity as private equity-owned companies use the technique to carve out elements of senior debt that could potentially restrict rapid growth strategies and investment.
"There is substantial anecdotal evidence that many large private companies - particularly in Europe - have securitized receivables, including a significant number of post-LBO names, which although [they] are rated sub-investment grade, are increasingly using trade receivables securitization to optimize their capital structures to reduce their weighted average cost of debt," Kerle said.
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