FX International Payments
By Karen Lynch
But now, secondary markets for international trade finance assets are developing, according to a May 2018 report from the International Chamber of Commerce (ICC) titled Global Trade: Securing Future Growth. “As this market develops and more players enter, the market capacity is likely to increase and there is potential for the current unmet demand for trade finance to be met,” according to the report.1
Unmet demand has been calculated by the Asian Development Bank at $1.5 trillion worldwide, defined as trade finance requested by importers and exporters, but rejected by lenders.2 “This gap … is one that the banking sector is unlikely to be able to meet, given credit appetite risk and balance sheet constraints,” the ICC report said. “Certain market leaders acknowledge the need to attract non-bank capital to the financing of international commerce, including through the distribution of trade finance assets, which allows banks to underwrite additional business.”3
U.S. small and midsize enterprises (SMEs) and their counterparts around the world would benefit if trade finance securitization increased the flow of available funds. More international trade finance would be more readily available to them, for example, to bridge cash flow gaps between shipment and payment on “open account” sales. Today, SMEs attempt to do that via other means, including export working capital financing, factoring (selling receivables at a discount to a bank or nonbank finance provider), and other forms of supply chain financing.
However, trade finance securitization is proceeding gradually, with many obstacles to surmount, according to some of the pioneers in the market. For example, international trade finance is seen to be poorly understood by most investors.4 Transparency is an issue, the ICC report said, since “it is difficult to disentangle trade finance from a product and pricing perspective, due to its integrated nature in a company’s working capital cycle.”5 Other issues hindering trade finance securitization include the lack of standardization in international trade finance terms and conditions and the absence of external credit ratings by the agencies that issue designations for corporate bonds and other instruments.
In the meantime, “the huge and persistent gaps in trade finance represent a significant barrier to trade,” World Trade Organization (WTO) Director-General Roberto Azevêdo said in mid-2018.6
Banks can and sometimes do repackage international trade finance exposures and sell them to investors, including institutional investors, private equity funds, family wealth offices, pension offices, insurance companies, and corporate treasurers.7 An example is receivables finance, in which accounts receivables are created by commercial trade transactions between corporate buyers and their suppliers, and the receivables are used to borrow bank funds while awaiting payment (typically over the following 30 to 90 days8). Investors can buy these bank loans individually or pooled into securities.9
Before the global financial crisis started in 2008, receivables were often used by banks as the basis of short-term commercial paper issued to capital market investors. However, the market for this so-called Asset-Backed Commercial Paper never recovered after the crisis, the ICC report said, raising the revival of this market as one option for developing international trade finance into an investable asset class.10
As it stands today, however, the market for international trade finance assets is a niche, “where a select few asset managers have built the skill set and made the requisite investments in resources and systems required to invest in trade assets,” the ICC report said.11
Monetary policy and regulation have created a challenging investment environment, particularly in the U.S. debt market, according to a November 2017 white paper from Fermat Capital Management, an investment management company. The paper’s title, “Trade Receivables: An Investment Alternative in a World with Low but Rising Rates,” summarizes the attraction trade finance securitization may hold for investors.12
That is, fixed-rate, long-term investments are losing favor as interest rates rise around the world, the white paper said. Short-term options are limited primarily to U.S. Treasury securities and money market funds, given a lack of diversity in corporate bond issuance. Investors are seeking to diversify, and international trade finance based on confirmed receivables offers a high-quality, short-term, floating rate product, according to Fermat.13
International trade finance facilitates 80 percent or more of annual trade in goods, the ICC report said. This includes traditional trade finance, such as bank-guaranteed letters of credit, funding by government export agencies and multilateral development banks, and, increasingly, supply chain finance.
Since the global financial crisis, "there has been a clear and decisive global shift to trade on open account terms," according to a separate ICC report.14 And in a related development, global supply chain financing grew by 36 percent worldwide in 2016 to $447.8 billion, according to the World Supply Chain Finance Report 2018.15
Supply chain financing market potential is much larger, according to the report, with nearly $3 trillion per year in receivables.16 This is the universe of assets that could someday feed into a more robust market for trade finance securitization.
SMEs face persistent challenges in attaining international trade finance, with the gap between demand and supply estimated at some $1.5 trillion worldwide. The flow of funds could be eased, if recently reported momentum in trade finance securitization gains traction.
Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.
1. Global Trade: Securing Future Growth, International Chamber of Commerce; https://iccwbo.org/publication/global-trade-securing-future-growth/
2. “$1.5 Trillion Trade Finance Gap Persists Despite Fintech Breakthroughs,” Asian Development Bank; https://www.adb.org/news/15-trillion-trade-finance-gap-persists-despite-fintech-breakthroughs
3. Global Trade: Securing Future Growth, International Chamber of Commerce; https://iccwbo.org/publication/global-trade-securing-future-growth/
4. “The Tower of Babel and Trade Finance as an Asset Class,” SpendMatters; http://spendmatters.com/tfmatters/the-tower-of-babel-and-trade-finance-as-an-asset-class/
5. Global Trade: Securing Future Growth, International Chamber of Commerce; https://iccwbo.org/publication/global-trade-securing-future-growth/
6. “Azevêdo Highlights ‘Significant Progress’ on Trade Finance, Outlines Further Actions,” World Trade Organization; https://www.wto.org/english/news_e/spra_e/spra224_e.htm
7. “The Tower of Babel and Trade Finance as an Asset Class,” SpendMatters; http://spendmatters.com/tfmatters/the-tower-of-babel-and-trade-finance-as-an-asset-class/
8. Trade Finance Guide, U.S. Department of Commerce; https://www.trade.gov/publications/pdfs/tfg2008.pdf
9. “Banks Look to Revolutionize Trade Finance through Securitization,” Euromoney; https://www.euromoney.com/article/b12kjzmtkt264n/banks-look-to-revolutionize-trade-finance-through-securitization
10. Global Trade: Securing Future Growth, International Chamber of Commerce; https://iccwbo.org/publication/global-trade-securing-future-growth/
12. “Trade Receivables: An Investment Alternative in a World with Low but Rising Rates,” Fermat Capital Management; http://cdn.txfmedia.com/assets/ckfinder/images/Events_assets/FCM_Trade_Receivables_Investing_201711_UNLOCKED.pdf
14. 2017 ICC Trade Register Report, International Chamber of Commerce; https://cdn.iccwbo.org/content/uploads/sites/3/2018/02/icc-trade-register-report-2017.pdf
15. World Supply Chain Finance Report 2018, BCR; https://bcrpub.com/publications/world-supply-chain-finance-report-2018