The trade asset information investors really want

This month, we spoke to Dalia Kay, Senior Portfolio Manager at Federated Investors, to get a first-hand view of the standards investors really need to purchase trade finance receivables. Federated’s Trade Finance funds currently have close to US$1bn under management in this asset class.

“There’s a number of fields that you expect to see in any case when you look at receivables in trade finance,” Kay explains. “Borrower, country, currency, amount, signature date of the contract if relevant, the goods and their status, documents checked, in transit, delivered, etc, whether they’re insured, etc… Basically all things to do with the underlying receivables.”

We know that attracting non-bank capital is a pressing issue in order to close the US$1.5tn trade finance gap: in May 2019, ANZ added to the argument for trade finance asset distribution — and promoted the work done by the TFD Initiative —  in its insight paper, How to close the US$1.5tn trade finance gap (more on this report in the news section). But while most trade finance originators do provide the basic information described by Kay, it seems that few of them understand the need to display an asset price in the initial offer. “If I am considering buying something I like the selling party to tell me at what level they want to sell. Once we establish our risk / return level, if that price is not in line with our expectations, we start to negotiate on the pricing offered,” she points out.

The lack of transparency around pricing is a well-known issue in the trade finance world, not only on the secondary market. Already in 2014, the Bank for International Settlement discussed it in its paper Trade finance: developments and issues. “In general, there is limited transparency in the pricing of trade finance loans. There are no live screens or post-transaction pricing services for tracking trends. Leading banks appear to adjust pricing subject to perceived demand, as well as movements in hurdle rates taking into account the cost of funds and capital. From the national data, only three countries – Brazil, Korea and India – have some information to track price trends in their respective markets,” the BIS notes in the report.

It goes on to explain that the general lack of transparency in the sector is preventing the widespread distribution of trade finance assets to non-bank investors: “Several challenges, including agency issues and information asymmetries, would need to be addressed to put securitisation or direct distribution of trade finance assets on a sound footing,” adds the BIS.

So how can we as an industry improve transparency around trade finance asset price? If the pricing is not disclosed Kay’s suggestion is to either work from an external credit rating (if available) or based on financials provided to work out what the internal credit rating of the borrower is. This, when compared with other similar rated names in the same geography, can provide a guide to pricing levels.  But she adds that “every case is different and we look at each transaction on a case by case basis." As we wrote last year, artificial intelligence is also part of the solution: algorithms can be used to evaluate a client’s risk exposure and provide asset pricing and return predictions.

But what else can we do? What would make trade finance originators comfortable with sharing the pricing of their assets from the get-go? Why has this been so difficult until now? Join the conversation and tell us what you think.

Here are other highlights from our conversation with Dalia Kay:

“Be very conscious of the documentary cumbersomeness of trade finance.” Non-bank investors may not be used to so much paperwork, and need to be prepared.

“Centralised platforms help bank originators standardise the way they show the asset to not just one potential buyer but an entire range of potential investors, which is useful for the selling entities.” To add to this, we would comment that uploading assets systematically and giving visibility to everybody in the bank about what’s been uploaded is useful for originators, but also gives investors more granularity on what is on offer.

“Every fund is different in its selection criteria. The Federated Funds are diversified trade finance and / or project finance funds but we are global. Some trade finance funds can be geographically focused (looking at Africa only for example) or sector-focused.”