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Securitization and trade finance still worlds apart

By Joseph McDevitt
27 Aug 2013

BNP Paribas’s recent deployment of securitisation techniques in the trade finance world is another useful showcase of how banks can offset increasingly expensive trade finance capital requirements. For this type of deal to become more commonplace, however, investors will need to become comfortable with securitization and trade finance — both of which require enormous amounts of expertise.

BNP Paribas last week priced Lighthouse Trade Finance Issuer I, which was backed by short term loans to corporates to pay for commodity trading through ships and pipelines. The $131.6m of notes were sold through three tranches, ranging from a $100m triple-A rates senior tranche that was priced at 85bp over one month Libor to $5m of subordinated notes that yield double-digits.

The transaction is the latest example of banks trying to find ways of marrying trade finance with the capital markets. The trade finance world has historically been the preserve of banks, but the capital requirements for trade finance loans under Basel III has created the need for diversification — and a growing participation from non-banks.

Securitization certainly offers one way the trade finance and capital markets can be brought closer together. This has been tried sporadically in the past in both synthetic and true sale securitizations.

Standard Chartered, for instance, has extensively used synthetic securitizations backed by trade finance loans to lighten capital requirements. Investors essentially provide the bank with a credit default swap on a tranche of risk in the portfolio, freeing up capital.

Other securitizations can reduce companies’ need for bank lending altogether. RBS structured a deal for Trafigura last year that securitized invoices for shipments of oil, metals and coal and placed the notes with a handful of investors.

Whatever way securitization is used, there needs to be investors comfortable first with securitization structures and, secondly, with the underlying trade finance exposures. The short maturities of trade finance loans and the lack of long term data makes it very hard for traditional securitization investors to move into the space. Until a critical mass of investors emerges, securitizations of trade finance loans will remain a welcome but rare diversification play for all involved. 

By Joseph McDevitt
27 Aug 2013