Why working capital continues to grow in attraction as an asset class
The search for yield is intensifying. Global interest rates are at historic lows with little prospect of significant rises in the short-term. Last week Euro zone borrowing costs fell, with Italian government bond yields arriving at an all-time low with the 10-year yield at less than 50bps. German government bond yields are even tighter with the 1year Bund at -0.65%. Meanwhile, across the pond, the 1year US government bond yield is at a lowly 0.06%. With short-term government bond yields and bank deposit rates in many cases negative, the traditional approaches to managing short-term liquidity are particularly unattractive. Faced with the choice between extending maturities or taking on greater risk to maintain yields, investors are seeking out alternative asset classes.
1 Year Treasury Rate - 54 Year Historical Chart
Step forward trade working capital. It is, by its very nature, short-term, self-liquidating and carries low credit risk. With significant positive yields available, it is becoming increasingly attractive to investors looking to generate value from liquid holdings. In stark contrast to the negative yields available elsewhere, a typical 60 day facility to a credit worthy counterparty could pay from 1% to 5% per annum. While the short-tenor of each individual transaction minimises risk, the underlying trade flows are often between Sellers and Buyers with long trading histories which require regularly recurring financing. Thus, trade working capital facilities provide stable, predictable returns for investors, often running for many years.
Providing trade working capital finance, however, is hard. Large transaction volumes, cross-border legal complexities and KYC due diligence on myriad Supplier/Buyer counterparties are just a few of the more difficult elements.
This complexity has prevented trade working capital finance from developing into an efficient asset class, to the detriment of not only corporates and investors, but also to specialist trade finance providers.
- Investors’ challenge is access. A working capital finance business requires deep knowledge of supply chains, industry dynamics and contacts within the Buyers’ and Sellers’ treasury departments and considerable investment in back office systems needed to process large volumes of transactions. Building or acquiring these capabilities has traditionally been feasible for only a relatively small number of trade finance providers.
- For companies wishing to tap into the vast pool of capital lying beyond specialist trade finance providers, the challenge is trust and efficiency. Working capital is their lifeblood. An unexpected loss of working capital finance causes serious trading disruption. Sellers and Buyers need confidence their access to working capital financing is as robust as possible. Diversifying funding sources through multiple bilateral relationships quickly adds complexity. Companies have thus traditionally turned first to the specialist trade finance providers.
- Individual specialist trade finance providers face difficult challenges, especially around KYC. Their clients trade collectively with hundreds of thousands of suppliers and buyers that are not existing clients of the finance provider. Often this prevents the financier from providing clients with simple trade working capital solutions. This is particularly true on the sales side of the client’s ledger, where the finance provider must take credit exposure to the client’s customers, most of which will not be clients of the finance provider.
Levantor solves the complexity associated with access to the working capital market. We use state-of-the-art technology to quickly and accurately process large transaction volumes. Our large multi-funder platform efficiently connects the right capital to the right trade flows. Our model makes it easy for Sellers and Buyers to access a large pool of credit, providing reliable financing from a diversified panel of funders. We offer investors and trade finance providers an easy way to select the trade flows that each is best placed to fund. These opportunities span multiple geographies and industry verticals. The process is simple, transparent and as no commitment is required, funders can increase or reduce their exposure on a weekly basis in line with their liquidity. The funders’ participation is fully disclosed to Sellers and Buyers, offering all parties valuable opportunities to create and build the relationships critical to successful short-term, but long-running recurring trade working capital financing.