Regulations are making trade finance CDOs more attractive, but recent press buzz surrounding the market's potential appears to be overhyped and maybe a little amnesic.
Trade finance is broadly defined as the capital that is necessary for the international flow of trade and it can take many forms. One common instrument is a bank-issued letter of credit, which could be used by an importer to guarantee that its payment will be received by an exporter on time and for the correct amount. Exporters and importers also use short-term bank facilities to lubricate the trade of goods.
"Although these are extremely short-dated facilities, in the Basel risk weight they will be deemed to be a one-year facility," said Olivier Renault, head of structuring and advisory at StormHarbour Securities. "Also, in trade finance, at least one party - importer or exporter - is typically based in an emerging market, and EM loans tend to have higher risk weight attached to them."
The Financial Times estimated the size of the trade finance market at $10 trillion in an article about its securitizable prospects. The story also mentions the potential of transferring the risk linked to export credit agencies - which guarantee trade loans - to investors via CDOs.
While the trade finance market is undoubtedly colossal ($10 trillion is larger than the GDP of China, the world's third largest economy) and even if the actual figure were in the ballpark of that number - it depends on how broad a definition of trade finance one uses - sources pointed out that the trade finance CDOs that have been planned or completed have turned out to be a tiny fraction of the referenced portfolio.
A case in point is Tradewinds, a $75 million synthetic CLO readied in the summer of 2008 by Citigroup but never issued. The deal referenced a portfolio of Citi's trade finance balance sheet exposures. The referenced portfolio was $2 billion - 26 times the size of the deal - and consisted of about 30,000 reference obligations and 3,000 reference entities. Moody's Investors Service had preliminarily rated the three-tranche transaction 'Aaa', 'Aa2' and 'A2'.
In addition, CLOs giving investors exposure to credit rating agencies is not exactly new. Having issued a few tranches since 2005, SovRisc is a program that purchases loans that carry a guarantee from an export credit agency. These agencies have the full backing of their respective sovereigns, which, at least in the past, often meant triple-A risk. The loans in SovRisc are aircraft finance.
Market sources said the talk of a new wave of trade finance CDOs is unlikely to have much to do with export credit agencies. The chief reason is that offloading this sort of highly rated agency risk would offer banks little capital relief under Basel III.
Tradewinds would seem to offer a possible guidepost, although sources declined to venture into exactly what the structures might look like.
"[Securitization] is a rational development we're anticipating, but we aren't anticipating exactly what form," said one analyst familiar with the sector.
Officials at Standard Chartered, which has done these deals in the past, declined to comment for this article.
StanChart issued a transaction called Sealane in 2007 for $175 million. It was a synthetic CLO referencing a pool of 1,596 entities, with a weighted average maturity of 64.84 days. The deal had four tranches, initially rated between 'Baa2' and 'Aaa' by Moody's. Two years later, the three non-senior tranches were downgraded to between 'Ba1' and 'Aa3' due to increased risk in the corporate exposure of the transaction. In 2009, many of the referenced obligors were operating out of countries that had country ceilings under 'Aaa'.
BNP Paribas, one of the biggest players in the trade finance market, appears to be interested in giving trade finance CLOs a try, although it is unclear whether one of its employees jumped the gun in describing some ambitious plans.
An article in Bloomberg in late March quoted Jacques-Olivier Thomann, then the global head of structured finance at BNP, saying the French bank was planning the securitization of trade finance loans linked to the commodities trade as "a new asset class." He estimated the size of the market at a few billion dollars. Since then, Thomann has left the bank and could not be reached for this article.
A press official from BNP said it was too early to give more details on this subject.