Markus Musielak, md, working capital structuring at Demica, argues that data plays a critical role in successful trade receivables securitisation strategies

Trade receivables securitisations (TRS) remain resilient and of an increasing focus following the end of low interest rate environments, as companies seek affordable financing tailored to their precise working capital requirements.

With expectations that the economies in the UK and the eurozone have avoided a recession of any significant depth (or even a recession at all), the TRS market remains strong. This makes it a good time for companies to assess their own balance sheets and determine what assets may be used as suitable collateral to attract even better working capital financing rates: a company’s trade receivables stand out as items to easily identify and finance through TRS programmes.

A distinctive characteristic of trade receivable assets is that, given their typically fast-turning nature, they generate large volumes of data. Where that data can be handled effectively, it can unlock the most preferential TRS finance structures. An optimal TRS programme depends on extracting and analysing historical data to help facilitate the structuring of a resilient working capital finance solution that can be tailored to the corporate’s needs.

The receivables data will indicate whether a funding programme is more suited to a receivables purchase programme (where there may be obligor concentrations) or TRS (where there is a granular and diverse pool). Such funding programmes are typically set up on a revolving basis, lasting many years.

The volume of data (and the complexity of reporting requirements for a TRS programme) make it advisable to appoint an external reporting agent with knowledge of the TRS market and reporting requirements, and the technology to streamline data implementation.

Data expertise is needed to set up TRS transactions
The data requirement in setting up a transaction can be substantial. It often starts with a detailed extraction of the corporate’s historic data (e.g. invoices, collections, credit notes, adjustments, offsets and other items), which is then analysed to determine the historic performance of the portfolio (e.g. dilutions, delinquencies, defaults, etc.) and to calculate the appropriate advance rate.

It is important to have experience analysing these large datasets at pace. The historic performance of the portfolio can provide pointers as to how the structure may be adjusted or enhanced to make any TRS financing programme as efficient as possible. Companies in different sectors often have different operational elements reflected in their data feed that often also need to be taken into consideration; for example, a telecommunications company with a very large, diverse pool of debtors (e.g. millions of line items per day) may require different data and structural solutions relative to a company in the commodity finance sector.

With a view of the historic performance of their trade receivables, companies can consider appropriate financing structures that would provide them with the most efficient financing solution. An experienced receivables finance advisor can help to find the most efficient structure, allowing companies to obtain the best solution for their working capital requirements.

Receivables finance has been a staple offering for many banks, and trade receivables financing has also attracted an increased numbers of non-bank financial institutions, including asset managers, hedge funds and other private credit lenders. The ability to have more granular views of data offers greater opportunities for funders to tailor products to a corporate’s business and financing requirements. With access to good data, funders can also make decisions with greater confidence and insight.

Streamlining data for reporting
Preparing data for TRS programmes is time-consuming, but automation can help streamline reporting processes, saving hours of data collation and periodic report preparation for corporates. Strong reporting capabilities are critical to TRS programmes’ functionality, as the reports allow parties to assess ongoing performance and calculate the amount of funding and required payments.

Typical reporting collates detailed line-by-line data into consolidated servicing and management reports setting out roll-forwards, ageing, balances across the different levels (e.g. total portfolio, eligible portfolio and so on), performance metrics, triggers, advance rate calculations, funding amounts and required drawdowns and repayments.

ESMA reporting is also required under the EU Securitisation Regulation. There has been an increase in the requirements for set-up and on-going monitoring of live transactions, due to the implementation of ESMA STS (simple, transparent and standardised) and SRT (significant risk transfer) strategies. Ensuring compliance and dealing with an additional transaction party adds significant time to the transaction’s preparation, execution and operation without access to reporting expertise.

It is often the case that the data processing required for use in a TRS provides a focal point for the company to ensure continued data integrity with close management of the trade receivables (e.g. closely monitoring aging profiles), which often leads to lower days sales outstanding (DSOs) and increased liquidity through the programme. This periodic reporting can also provide the corporate with reliable dashboards and alerts.

Ultimately, data has a critical role in TRS, enabling companies to obtain the most suitable and preferential terms possible while streamlining complex reporting requirements. Achieving this, however, depends on having the right partner capable of both providing good advice and processing large volumes of data to assist the corporate to achieve the most efficient financing structure.

This requires experienced professionals and advanced reporting technology, trusted by a network of banks and non-bank funders. With the right partnership, corporates can be reassured that they are using their data to gain the lowest-cost and most effective structures for their working capital finance solutions.