Cash & Liquidity ManagementTrade FinanceHSBC and Allianz to open trade finance market to institutional investors

HSBC and Allianz to open trade finance market to institutional investors

Acceleration of investible market in trade finance to meet the rising demand for ‘real economy’ assets and help increase the availability of funding for trading companies.

HSBC, the world’s largest trade finance bank and Allianz Global Investors (AllianzGI), which manages more than €535 bn in assets, will create an investible market within the trade finance market by opening it for to the institutional investors.

The global trade finance market is worth $12trn annually, which is largely managed by banks and currently isn’t an investable asset class for institutions.

According to the ICC Banking Commission’s Global Survey report, banks collectively provide almost $10trn of trade finance to companies annually. The small secondary market for these assets – estimated at about $300bn – mainly comprises bilateral trading between banks. Unlike many other lending activities, trade finance is mostly needed for smaller companies, with relatively small loan amounts, short terms, and borrowers lacking formal credit ratings.

Trade finance contracts are typically short-term and self-liquidating, with default rates as low as 0.03%, as per ICC Trade Register Report 2017. They however aren’t standardised and so can be hard for investors to price.

Accessible funds

By creating an investible market for the trade finance market, HSBC and AllianzGI have pioneered a solution to make trade finance easily accessible to institutional investors such as insurers, pension funds and family offices. This solution allows HSBC to wrap a range of customers’ trade finance assets – from traditional products such as trade loans to structured solutions like supply chain and receivables finance – into notes that the newly-created Allianz Working Capital Fund (ALWOCA) will buy and offer to AllianzGI clients later this year.

Surath Sengupta, Global Head of Trade Portfolio Management and Distribution at HSBC, said: “We’re aiming for nothing less than a major reform of the trade finance market that will benefit exporters, importers and investors keen to buy into real economy transactions. We at HSBC provide over USD750bn of trade finance each year, and by distributing more trade assets we can support more businesses. Given that global demand for trade finance already outstrips supply by about USD1.5trn a year, we see huge potential for a thriving secondary market to stimulate trade in goods and services – the lifeblood of the global economy.”

Deborah Zurkow, Global Head of Alternatives at Allianz Global Investors, said: “Trade finance is a rapidly evolving opportunity for institutional investors. ALWOCA’s launch helps unlock a whole new asset class for our institutional clients, providing unique, short-dated, uncorrelated cash flows. Having pioneered infrastructure debt as an asset class, we are now putting that same entrepreneurial spirit to work to open up another new market, one that’s of significant interest to our clients and one that helps keep the wheels of commerce turning.”

Using European corporate trade finance assets

HSBC and AllianzGI will initially use European corporate trade finance assets for their notes before expanding to include other markets as demand increases.

Notes structured by the Global Banking and Markets team at HSBC, work by pooling a selection of trade finance assets originated by HSBC’s Global Trade and Receivables Finance business (GTRF) and selling them to a special purpose vehicle. These assets have different risk profiles and typically short tenors, such as 60-day Fixed Term Corporate Payables.

AllianzGI acts as Portfolio Manager for the special purpose vehicle selecting the transactions purchased. The SPV’s assets are then wrapped into notes that ALWOCA will buy, enabling the fund to take exposure to trade assets through a securities format. This model can flex to fit the supply of suitable assets and buyer demand, with AllianzGI aiming to invest a large portion of its ALWOCA fund into them. ALWOCA is seeking to have a duration of below one year and generate returns significantly in excess of those available in public markets for the same duration.

Recognising the need to increase access to liquidity for trade finance assets, HSBC’s GTRF business has built Trade Asset Distribution hubs in Hong Kong, Singapore, London and New York over the past three years. By working with alternative investors as well as banks, the team increased distribution volumes of HSBC trade finance assets from USD2bn in 2016 to USD32bn in 2018.

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