Asset-backed securities as an alternative source of financing

Very few companies are able to finance their business entirely from their own equity capital. For that reason there is a constant need for external capital. The changing environment for company financing, not least due to the provisions of Basel II, makes it more and more essential to find alternatives to the classical bank loan. The securitization on the capital market of portfolios of trade receivable resulting from goods delivered or services rendered by the securitizing company to their customers is one such alternative source of financing.

Via the non-recourse sale of receivables to a special purpose vehicle created for this objective, companies are enabled to increase liquidity as and when they need it. This special purpose vehicle refinances itself by issuing securities on the capital market. By making use of this construction, those companies selling their receivables can profit directly from the conditions available on the capital market. They can use the additional liquidity gained in this way for investment purposes or to reduce their short-term liabilities, thus improving their balance sheet.

Euler Hermes – without itself being the issuer or buyer of the securities issued – has proved for over more than ten years to be a strong and reliable partner for banks and companies with an insurance policy against bad debts specifically tailored to the requirements of trade receivables securitization and with an excellent insurer financial strength rating. In insuring the payment risk involved in securities backed by trade receivables, Euler Hermes can draw on its long-standing expertise in the assessment of the default risk of companies as well as in every aspect of debtor management.

As with other capital market products, the default risk of the securities issued by the special purpose vehicle is analyzed and evaluated by the rating agencies. A crucial aspect in this is the credit quality of the portfolio of trade receivables to be securitized. The credit insurance policy specially developed by Euler Hermes for securitized trade receivables protects the financing transaction against the risk of non-payment of the receivables, thus enhancing the credit quality of the portfolio. In addition, this specially tailored credit insurance policy reduces the time and effort involved in the structuring and rating of the transaction, thus reducing the financing costs for the securitizing company while at the same time increasing their liquidity. This effect is underpinned by the excellent credit rating given to the Euler Hermes Group by the leading rating agencies.