Treasurers lukewarm on Deutsche trade finance securitisation
An initiative by a major bank to hedge its trade finance portfolio using securitisation has met with scepticism from treasurers.
Treasurers are lukewarm on the move by Deutsche Bank to free up additional trade finance lending capacity by tapping the securitisation market. In an announcement on 3 December, Deutsche said it would refinance a 2015 synthetic collateralised loan obligation called Trafin with a new $3.5 billion deal, Trafin 2018-1. Under the terms of the deal, a $216 million first-loss tranche will be sold by Deutsche to institutional investors, who will hedge the bank’s trade finance exposure in return for a higher yield.
Deutsche Bank, which has €57 billion of trade finance assets on its books, said that the transaction would provide “increased amounts of trade finance funding for our clients”. Such an increase would help the German lender’s transaction banking business, which is seen as one of Deutsche’s few growth areas. However, treasurers at companies that use trade finance have mixed views about the merits of their credit being transferred to investors in this way.
At one end of the scale are multinational investment-grade companies with large existing supply chain finance programmes, such as Fortune 500 food company Kellogg. Such companies were likely to be sceptical about innovations like Trafin, according to Giorgios Tryfinopoulos, senior finance project manager at Kellogg in Ireland.
“The pricing or technology should be superior to justify any change to the existing solutions, to which treasury units of large corporates have already committed”, he said. “The market is very competitive, and treasury units like to own their banking relationships.”
Strong companies with easy access to capital are likely to be cautious about accepting a new community of securitisation investors according to Tryfinopoulos, “We can raise funds through and directly from the capital markets. Hence, those investment communities should serve the overall objective of a supply chain finance program.”
He warns that the introduction of securitisation could attract regulatory scrutiny of large scale SCF schemes. “If a large company had its SCF programme funded not through a major bank but a pool of investors, that could create social pressures if pension funds were involved or other funds who do not fully comprehend the dynamics or mechanics of SCF”, he said.
Kellogg currently has around a dozen banks participating in its SCF programme. Tryfinopoulos suggests that Deutsche might find more appetite for securitisation-driven trade finance from mid-cap or Fortune 5000 companies. “There’s more value and higher returns there”, he said.
An example of such a company might be Spanish office supplies group Adveo. This company has been through a two-year debt restructuring and had its banking facilities frozen during this period. According to Raul Unanue, group treasurer of Adveo, “This process is almost finished and we are planning to use SCF and securitizations in the near future as a key financing tool for the Group,” he said.
Unanue points out that many companies do not have the luxury that multinationals have of extracting favourable terms from their lenders. “Third party assignment is standard market practice and is usually included in factoring and reverse factoring contracts(SCF)”, he said.
Unanue cautioned that it would be hard to gauge the impact of Deutsche Bank’s deal on the availability of additional SCF liquidity without first understanding the German bank’s priorities for improving its capital position. “We would need to ask Deutsche whether this was aimed more at deleveraging rather than investing in trade finance”, Torres concluded.
Responding to the comments from treasurers, Jonathan Lonsdale, head of securitisation and repackaging for trade finance at Deutsche Bank said that the structure of Trafin mitigated concerns corporate borrowers might have about the product. In particular, the worry that the knowledge of leveraged CLO exposure could impact the market was unfounded, because Trafin investors were not told the names of companies in the reference portfolio.
“The portfolio is “blind”, i.e. the investors do not know, and never find out – even in a default event – the names of the obligors”, Lonsdale said. “At no stage does an investor interact directly with an obligor in any way.” As regards the suitability of potential investors in the CLO, such as pension funds, Lonsdale said “Deutsche Bank is highly regulated and only suitable investors are permitted to invest in the product”.
And Lonsdale confirmed that the deal was designed to increase trade financing by the bank: “Deutsche Bank is open about the fact that the transaction is an exercise in capital relief, but it remains the case that this exercise creates additional financing capacity that will be funnelled into trade finance”. Deutsche Bank declined to comment further on the impact that Trafin had on its capital ratios.