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Trade credit insurance helps improve securitizations

Learn how trade credit insurance can help organizations securitize accounts receivable with fewer limitations.

08/19/2024

Organizations that want to raise cash by securitizing their accounts receivable may have limitations imposed by their investors or financial partners. Trade credit insurance can help minimize these limitations, leading to increased funding opportunities.

Securitization — the process of bundling and selling assets to investors — has become a popular process among organizations that want to convert their accounts receivable into cash. And considering the rise in interest rates, securitization is often one of the least expensive means to secure funding.

However, there are often restrictions regarding the types of receivables that can be put into a securitization’s special purpose vehicle (SPV), such as:

  • Customer concentration. To minimize concentration risks, a securitization may limit the amount of a client’s receivable balance as a percentage of the total portfolio, since diversified portfolios are typically preferred. This could mean that organizations that are heavily reliant on a few big clients may encounter difficulties securitizing the full balance of their customer’s account receivable.
  • Credit quality. Securitizations seeking a certain level of credit rating may limit the credit quality of the underlying accounts receivable. Organizations may not be able to include accounts receivable from businesses with lower credit quality in their SPV. 
  • Political risk. Often, accounts receivable from businesses operating in emerging markets with a higher level of political risk may be excluded from an SPV.

These restrictions, which may vary, can significantly limit the number or size of accounts that can be securitized, which, in turn, lowers the amount of funds that an organization can raise. Trade credit insurance, on the other hand, can raise their credit quality.

Using trade credit insurance to address limitations

Trade credit insurance can be used to provide coverage for potential default by debtors whose accounts are being securitized. Implementing a credit insurance wrap around receivables can provide financial partners with sufficient confidence about repayment that they may be willing to lessen or fully waive some or all limitations.

The team of trade credit specialists within Marsh’s Credit Specialties Practice have the knowledge and experience to help companies like yours understand whether the limitations of your securitization can be alleviated through credit insurance.

Our team of specialists works with you to identify insurance programs and solutions that can be beneficial to your SPV.

Credit insurance is currently readily available for most risks and typically can protect against the non-payment of accounts receivable for a wide range of reasons, including bankruptcy, insolvency, slow payment, and political risk.

By purchasing a trade credit policy on behalf of your SPV, it may be possible to counter the restrictions and increase the pool of eligible accounts receivable to put in your SPV and convert into funds.

For more information on how Marsh’s trade credit specialists can help secure credit insurance for your SPV, contact your Marsh representative.

Case study: Insurance enables energy company to raise US$60 million through securitized account

An energy company was using a bankruptcy remote SPV to raise funds by selling its account receivables to investors for attractive interest rates.

However, the securitization had concentration limits that limited the number of customers and foreign receivables that could be sold through the SPV. This meant that the energy company was not able to put receivables from its four largest international clients into the SPV to raise funds.

Marsh’s team of trade credit insurance specialists worked with the company to identify an insurer willing to provide coverage that allowed the lender to modify the SPV’s concentration limits permitting previously excluded receivables to be included in the SPV. As a result, the energy company was able to sell the receivables from its largest clients through the SPV. This allowed the client to sell an additional US$60 million worth of receivables and raise more cash.

Securitization: How Trade Credit Insurance Can Help

Our people

Michael Kornblau

Michael J Kornblau

Credit Specialties Practice Leader

Mark Regenhardt

Mark Regenhardt

Managing Director, Global Clients Group & US Trade Credit Corporate Business Development Leader, Credit Specialties

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