A brief Q&A with Thierry Sebton of Accola
On January 1, 2019, a new framework for European securitizations took effect. This article reviews the options issuers should consider on trade receivables securitization following the prudential rules (1/1/2019). These include obtaining simple, transparent and standardized (STS) status and program funding options. Selecting a banking partner is therefore particularly complex.
What trends have you seen in the trade receivables securitization market?
Trade receivables securitization recorded sustained activity over the past six months. New issuers are entering the market, both from the post-2008 financial crisis program renewal and new entrants. Major players in the commodity trading sector are taking note.
Securitization is less expensive than unsecured financing. The benefits are manifold. Companies can finance diversification and optimize balance sheets and financial ratios. Furthermore, organizations can choose to distribute ancillary business to competent customer-driven banks. Also popular is the deconsolidation aspect of financing in conjunction with International Financial Reporting Standards (IFRS).
Companies owned by private equity funds tend to focus on maximizing the amount of securitization, resulting in a lower price sensitivity relative to other issuers. Conversely, cross-over borrowers seek optimized financial conditions — and possibly deconsolidation — to manage their ratios. To each their own.
How are the conditions evolving when it comes to program maturity and pricing?
The programs, which were traditionally five years in length, generally had one-year liquidity lines. Since the 2008 crisis, issuers have demonstrated an interest in structuring liquidity lines with maturities of over one year. Issuers now have negotiating power with the newly created variable renewal mechanisms.
Securitization continues to be a very competitive form of financing, in spite of changes to capital costs for banks after January 1, 2019.
Can you tell us more about the consequences of the new prudential treatment of securitizations?
The new prudential regulation is making the situation more complex.
First, it favors transactions that will benefit from STS status. This acronym stands for “simple, transparent and standardized,” and investors view it as a certificate of quality. To obtain STS status, issuers must meet three requirements: provide sufficient historical data, ensure receivables meet specific criteria, and disclose information based on the method of financing.
Importantly, the assignor must pay an external certifier along with the various parties involved in the creation of the program. This is a worthwhile investment because STS commands significant savings.
More complex regulatory capital costs for banks came into effect after January 1, 2019. These costs vary widely depending on whether the program is an asset-backed commercial paper (ABCP) program or not.
While the STS status is important, issuers should consider program funding structure. For example, “STS ABCP” vs. “STS non-ABCP” is not related to the characteristics of the receivables, but to the program’s refinancing method. ABCP programs are mostly funded via commercial paper.
Post-2008, regulators aimed to make positive changes. Unfortunately, 10 years later, these changes are unnecessarily complicated. The provisions appear arbitrary and the distortions are significant. This is a stressful atmosphere for banks — the latest regulations to be implemented on January 1, 2019, came out during…Q1 2019!
During recent offers, we observed bank difficulties in interpreting the new guidelines on regulatory capital. For the same bank, the margin for a non-STS was twice that of an STS program! The introduction of these new securitization options — non-STS, STS ABCP, and STS non-ABCP — makes choosing a banking partner even more complex.
With this complexity, is receivables securitization losing its favorable competitive status?
Absolutely not — receivables securitization is still relevant! The formula for implementation is just more complex than in 2018.
Banks are still in the process of digesting the regulations. The European Securities and Markets Authorities (ESMA) only published the new rules in February. We anticipate further clarifications throughout the year as groups report uncertainties about interpretation.