Clarissa Dann: I’m Clarissa Dann and you’re watching Trade Finance TV. We will be discussing trade finance as an asset class. Please welcome Jason Barrass, Geoff Wynne, Ian Henderson, Ian Duffy and of course my co-presenter, Katharine Morton.
Katharine Morton: Thanks very much, Clarissa. Yes, we’ve been following this trend with interest at TXF, particularly now, the institutional investors and corporate treasuries are showing a lot of interest in well-structured trade finance funds. The appetite is definitely there, but the market’s a little bit interesting.
Clarissa Dann: The size of the private debt market in terms of assets under management is about 800 billion, isn’t it, with 4000 investors? So where’s trade finance in all of this? It’s a very small take, isn’t it? Geoff, can you tell us a bit more about the structure of the asset class and why we like it so much?
Geoff Wynne: The assets are very simple. A supplier like something manufactures it, he sells it, the buyer pays for it. What the supplier sells is his receivable. What the buyer pays is the buyer’s payable. That is trade finance, at its simplest. Of course, the twist in all of this is what are the terms of the sale? When do I get paid? Supplier wants to get paid quickly because he needs the money. Buyer wants to take his time to pay. There is that wonderful gap that can be financed and that creates the asset class that we can all now discuss.
Clarissa Dann: So self-liquidating is very secure. Ian Duffy, I’m going to ask you to update us on how it’s going your end.
Ian Duffy: Yeah. So I think there’s a couple of very significant changes over the last five or ten years in the market. I think firstly there’s a lot more alternative funders, which are largely FinTech companies bringing alternative financing options to small businesses. The second piece that’s changed significantly is technology and data. So we’re now able to track the transactions that Geoff referred to, the invoicing cycle effectively. We’re able to track that at a granular level, and that gives us a high degree of surety, therefore making it easier for us to finance.
Clarissa Dann: Banks Ian, Ian H, institutional investors and corporate treasurers, what are they telling?
Ian Henderson: Well, I think if we go back four or five years ago, most of the trade finance funds were owner managed vehicles. There were asset originators, largely in the commodity trade finance instructor, trade finance arena. Most of those have now been wound down. And the new arise of managers are institutional asset managers who are not originators. So this is where the FinTechs come in as originators and you have the likes of Artist Finance who originate assets for institutional investors. There is a demand. They’re looking for yield. But you have to understand the risks.
Clarissa Dann: Jason, You translate what this means to investors, don’t you, with your ratings? Could you tell us a bit more?
Jason Barrass: As a small credit rating agency, your role here is basically to look at this wonderful asset class, okay, which is self liquidating, which is vital for the economy, which will keep on replicating transactions as they go forward and try and turn it into the language that institutional investors will actually understand. If you go to investors and talk about payables and receivables, they’re going to be confused, right? But if you go and say, well, this is investment grade paper, it’s been independently rated by a regulated credit rating agency. They understand that.
Katharine Morton: And who are investor decision makers nowadays? I mean, who’s actually buying this stuff?
Jason Barrass: A lot of the clients that we’re talking to are actually portfolio managers, right? They’ve got an investor on the other end. They’re looking to basically get the deal a way whereby they can potentially get some capital relief. They see the value of a rating agency adding that to them, which can maybe facilitate that. But then we’re also talking to the more kind of like strategic balance sheet management teams, which are basically looking at a holistic portfolio and trying to get the benefits of a rating out of that.
Ian Henderson: With the rise of the institutional asset managers being the intermediary between the asset allocators and the originators, that education is a lot better. The rating agencies are working a lot more closely with the originators and rating more products, and you see more rise of securitization type vehicles and placing notes in debt, capital markets, securities in the markets. So fixed income investors or asset allocators from pension funds and life companies.
But on the other hand, you’ve got your more structured debt. As I said, trade finance could be private debt, alternative high yield or special situations. So it depends on the allocation bucket that you’re aiming for and what type of assets you’re setting them, where in the supply chain you are determined, the investor and the risks that they’re taking.
Clarissa Dann: There’s been some nasty things like Avantgardem there’s been Greensill, and those are the things that hit the headlines. Is that affecting appetite?
Jason Barrass: Naturally when you have a new asset class trying to break into mainstream, portfolio managers, asset managers and you have something go wrong, there’s a period of reflection whereby they want to understand why it’s gone wrong. And if you look at just one of the names you mentioned there, there were various members in that ecosystem who contributed to that asset going wrong. It wasn’t just, let’s say Greensill, it was the ratings going through there. It was different credit department, it was the asset manager, etc., etc.. So you then basically have a period of reflection whereby you look back and you can actually turn it into a positive because you then identify more of the risks associated with a trade finance deal. It’s not just credit risk, operational risk, it’s governance, it’s compliance, etc., etc..
Clarissa Dann: A lot of this classification as well, because the up and go on was about whether it really was trading at all. And then if it isn’t, you’ve got a little problem there.
Geoff Wynne: What the buyer is required to pay, he’s paying for an asset. He’s paying for goods, commodity, whatever it is. That is trade debt. And that’s what I want to see it classified as. Now, they don’t want to talk about parables. That terminology is not attractive. It is for me as a lawyer drafting it, because the magic that I want from the buyer is that irrevocable payment undertaking. So the buyer says, I am the buyer of these goods and I’m going to pay for them and I’m going to pay for them on a particular day. Now, how do we make that attractive to the investor class is we can wrap it in whatever we like.
Next time we talk, we will be talking not about paper, not about notes, but we’re talking about tokens. But ultimately we’ll get back to the guys paying for a trade asset that he gets and we need to be careful that we don’t over engineer, so we allow others to step in and then we’ll get into who takes what risks that Jason’s talking about.
Ian Duffy: I think Geoff points to the pertinent issue. For us and again, using technology, we are able to at a granular level, understand each individual transaction, understand the commitment from the buyer to pay. So that’s what we call verification, understand where those funds are going to be remitted to.That’s where we track the events. And actually when buyers pay the bank account, we control. So by being very specific and granular, we can eliminate a significant amount of the risks.
Katharine Morton: What we haven’t talked so much about is the pricing. We’re in an inflationary environment. What are your pricing concerns at the moment?
Ian Henderson: So think if you’re a commercial bank in trade finance, you’ve got deposit holders, you’ve got a low funding costs. If you’re not a retail bank or commercial banking, you’re in the wholesale space, but you’re raising money from the markets. You haven’t got that luxury. So you having to price your paper into the markets and the way rates are rising, are you pricing two years, three years, five years out, investors want certainty on their returns. They’re looking for capital preservation and real returns, which means in the alternative space today, without deposit holders, you’re going to pay three or 400 basis points of a swap rate. So Fed market rates. So where those were sort of sub 50 basis points a year ago, then output 4%, so money that costs 4% 12 months ago now cost 7%.
Ian Duffy: I think it’s about track record. Our whole mantra to our investors is to be able to prove that we can manage this asset class at the level that is capable of being managed at and at those levels impairment rates are very, very low, so by half a percent and well-managed within the cost base of the transaction. We have strong headwinds at the moment on macro inputs and that is leading to price increases in the market and the market will just have to bear those.
Jason Barrass: I think the industry per say has to adopt some of the skill sets in the other asset class in banking. We can’t keep on just looking at this asset class how we used to look at it for the last 200 years. We need to recruit more people from other parts of structured finance, bring them into banking to embrace those other investment banking products. And when we start to do that, it’ll open up a whole new liquidity market for the product. And as we do other things such as digitize, which is really important, learn the lessons from all the failings, then that will give a lot more confidence to the product to investors going forward.
Clarissa Dann: I’d like to take this opportunity to thank all of you for your time today for coming and talk about this very exciting asset class.
Geoff Wynne: Thank you.
Ian Duffy: Thank you. Thank you.