Most portfolio-wide receivables-backed working capital programmes operate today using a single series of fixed eligibility criteria, which produce a single pool of eligible receivables that are then either purchased at the same (daily) price or attract the same advance rate. Multi-collateral pool and cascading eligibility waterfall programmes are much rarer, due in part to their significantly higher set up costs, but also due to difficulties of operational complexity, control and visibility. Even though multi-collateral pool programmes often lead to higher advance amounts and more targeted pricing, parties to transactions have tended to stick to what they’re used to, ignoring the potential benefits in favour of simplicity and the status-quo.

But times change, and as we move into the 2020s, banks and trade credit insurers are under increasing pressure to innovate and offer more cost-effective solutions to their corporate clients. Their challenge, as ever, is to balance risk control, transparency and pricing against a desire for higher advance rates and larger borrowing base values. This balance is often difficult to manage.

Transaction cost cutting alone won’t solve the problem, indeed it could be counter-productive, so banks and trade credit insurers need to re-think how some of these programmes operate if they want to remain competitive. Multi-collateral pool programmes could well form a large part of the answer and this article demonstrates how these can be implemented.

Why aren’t banks and insurers already doing this?

Well, it’s largely been a question of economics, with the higher set up and operating costs of multi-pool programmes outweighing the potential benefits. But as technology and data analytics evolve, the economic and control concerns lessen, making multi-collateral pools an attractive option for many receivables-backed working capital programmes.

Solve the economics, and the benefits are compelling:

  • By dynamically recycling the ineligible receivables from one pool into another, then applying different eligibility criteria, pricing and advance rates per pool, it’s possible to create a higher overall borrowing base value while maintaining structural integrity.
  • By dynamically risk grading a receivables portfolio it’s possible to create risk-specific collateral pools for debtors, countries and sectors, against which pool-specific, risk-based pricing, risk transfer strategies and funding structures can be applied.
  • Risk-based collateral pools enable a single portfolio of receivables to be easily tranched between different insurers and banks.

How can banks and insurers incorporate multi-collateral pools into their funding programmes?

Within reason, the sky’s the limit, but practically, a multi-pool approach can be implemented in three ways:

1. Sequential Eligibility Waterfalls

A single pool of receivables is automatically cascaded through two or more independent eligibility waterfalls, allowing tranching of the receivables pool, which usually leads to higher overall borrowing bases.

Eligible receivables from each waterfall form their own collateral pools, and these pools can then be associated with pool-specific advance rates, pricing, risk transfer strategies and funding structures. Ineligible receivables from one pool automatically cascade sequentially into the next eligibility waterfall where they can be re-tested with different pool-specific eligibility criteria.

For larger programmes, sequential eligibility waterfalls allow different banks and/or insurers to seamlessly target specific segments of a single receivables portfolio, with advance rates and funding costs being directly linked to the risk profile of each collateral pool. In operation, we would typically see in these cases collateral pools being based on domestic versus export debtors, insured versus uninsured trade, short versus long tenor receivables, differentiation between one subsidiary or product line and another, etc.

2. Dynamic Receivable Routing

Sometimes, and usually for reasons of confidentiality, it is necessary to segment a single pool of receivables into different, independent programmes from the outset, thus ensuring that participants in one collateral pool have no knowledge of receivables flowing through other parts of the programme in related collateral pools. We achieve this by setting up dynamic routing rules.

Dynamic routing uses pool-specific rulesets to determine which receivables go where on exiting the pool. This is where technology becomes the critical enabler as rules can be set to define the destination, and Aronova’s system can be used to define those rules. Generally, we see rules based on debtor group, debtor country, receivable profile or a specific routing code provided by the corporate.

It’s worth noting that programmes featuring dynamic receivables routing can successfully be combined with sequential eligibility waterfalls to maximise eligibility within each “stream” of receivables.

Another variation we see is where a corporate has multiple funding programmes and can choose which receivables are offered to which programme, or which programme is prioritised over another, on a receivable-by-receivable basis. In this case, the corporate provides a routing code for each invoice that forces the invoice directly into a specific collateral pool for assessment against that pool’s eligibility criteria (and aggregation caps).

3. Mixed asset class ABL programmes

Multi-pool programmes can also be formed from mixed asset classes, where receivables-backed collateral pools could seamlessly combine with inventory or other asset-backed collateral pools to form a single, consolidated borrowing base. Again, each pool could have different eligibility criteria, different advance rates and different insurers and/or funders.

Our View

We first started solving problems for multi-collateral pool programmes in 2018. This originated when a North American corporate requiring a borrowing base facility featuring three collateral pools. The corporate provided a single file of receivables, updated daily. Each pool had its own eligibility criteria and advance rates, creating three independent collateral pools, and the borrowing base was calculated using a combination of these three pools. A single insurer insured part of the receivables portfolio, and a single bank funded a loan based on the combined borrowing.

  • Pool 1: Eligible Insured International receivables @ x% advance rate,
  • Pool 2: Eligible Uninsured North American receivables @ y% advance rate,
  • Pool 3: Re-tested Ineligible receivables from Pools 1 & 2, now Eligible @ z% advance rate

By moving from a single pool to a multi-pool structure, the corporate was able to increase its borrowing base value by 10-15%, and the bank was able to monitor programme compliance and receivables performance in real-time with much greater clarity.

In our conversations with banks and insurers, we see there’s a fundamental mind-shift required to design and operate effective multi-pool programmes. Moving from a one-dimensional, linear, eligibility waterfall approach to a multi-dimensional, multi-eligibility waterfall model opens opportunities currently unavailable to and unconsidered by most receivables backed structuring experts. All transaction parties must start to think differently in order to fully understand the opportunities and implications associated with a multi-pool approach.

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