Over-collateralised assets protect securitisation investors from the performance of underlying trade receivables, a.k.a. portfolio risk. By the same token, trade receivables typically bear low portfolio risk because of their very short-term nature. That said, most trade receivables securitisations are structured with long or indefinite revolving periods, potentially exposing them to a long risk horizon.

An essential element of any credit analysis is to determine how well structural features such as performance-based amortisation triggers or amortisation triggers linked to a deterioration in seller quality protect noteholders against worsening credit conditions in the context of a revolving portfolio.

“There are several elements that investors need to take into account when assessing trade receivables securitisations,” said Antonio Casado, deputy head of the structured finance at Scope Ratings and co-author of a report out today. “First and foremost, collateral performance analysis should be transaction-specific and non-mechanistic, because the performance of trade receivables tends to be very heterogenous across industries, originators, and products.”

“Assessing the timing and likelihood of breaches of amortisation triggers is also key, since trade receivables securitisations tend to have very long or indefinite revolving periods and the timing of triggers critically impacts the time value of expected losses,” Casado added. In this regard, understanding where we are in underlying economic cycle is key.”

At a more micro level, having insight into the idiosyncratic risk of sellers is similarly paramount because revolving structures depend on their willingness and ability to maintain a sufficient borrowing base;

“Portfolio performance expectations during the amortisation period are conditional on knowing that a trigger will have been breached,” said Olivier Toutain, executive director in Scope’s structured finance team and co-author of today’s report. “The level of dependency between performance and trigger breaches depends on the nature and scope of transaction triggers, which can be very different between static-reserve and dynamic reserve transactions.”

As opposed to financial debt, trade receivable delinquencies capture more information about the balance of power between client and the supplier than about the credit quality of the obligor. Scope’s analysis found that trade receivables securitisations with early charge-off definitions typically exhibit high recovery rates on defaulted receivables, because delaying payment on received invoices is a common working capital management practice, and sellers exhaust all recovery possibilities before writing off receivables.

As such, a better estimate of credit risk in trade receivables is the proportion of uncollected receivables, which is the proportion of ultimate losses on receivables on the total receivables portfolio.

Download the full report here.