Securitization specialists Demica plc completed a new research report focusing on trade receivables securitization and the role it can play for the German small-to-mid sized companies (or Mittelstand) and banks in a changing banking environment.
The report found that factors such as an economic slowdown and tightening credit policies along with the removal of the state guaranty for German Landesbanks (see ASR 8/8/04 ) have contributed to a 12.5% rise in bank finance costs. The capital markets provides a solution to this financing shortfall. When trade receivables assets are securitized, the bank becomes a finance arranger rather than a direct lender thereby reducing capital requirements because the banks have access to comprehensive and sensitive payment data, allowing for greater control over the asset status and therefore improved risk management, according to the report.
"Many of the Landesbanks currently offer ABS programs to the Mittelstand, however only the market leading minority has the required level of expertise and specialized technology solutions to market their ABS product offering widely enough to generate substantial revenue," said Demica CEO Phillip Kerle.
Moody's Investors Service reported that German conduits financed 21 trade receivables transactions last year, totaling approximately 1.7 billion ($2.06 billion) accounting for approximately 9% of German sponsored conduit issuance. According to the European Business School the total stock of securitizable trade receivables is 126 billion with approximately 44 billion of Mittelstand-originated trade receivables that are securitizable. Demica reported that German banking institutions estimate that trade receivable securitizations will grow by 30% over the next two years.
But German banks that do not have the systems in place to get these deals off the ground face mounting competition from foreign banks that are already looking to address the shortfall in financing the German Mittelstand face. "The important issue to watch is the length of time that the remainder of the Landesbanks will take to catch up, or indeed whether they will be able to protect their market shares from the larger global players," added Kerle. "The larger players are more likely to have a solution for pooled trade receivables securitization programs already and more likely to be better equipped to extend their activities in this area."
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