July 2016

When Deutsche Bank launched its trade finance securitisation, TRAFIN 2015-1, it was unveiling one of the largest deals of its kind in the market. Neil Fredrik Jensen talks to Guy Brooks about a landmark that shows the growing appetite for this asset class

Although it was the third synthetic Collateralised Loan Obligation (CLO) transaction to be carried out under what has been heralded as a highly innovative structure, Deutsche Bank’s TRAFIN 2015-1, launched last November, was something of a milestone. It underlined the growing demand for trade finance assets from institutional investors.

As well as appealing to these investors, the transaction also helped strengthen Deutsche Bank’s balance sheet in the form of risk-weighted asset relief. This type of structure is not simple to achieve and not every financial institution can bring it to market.

Guy Brooks, Head of Distribution & Credit Solutions at Deutsche Bank’s Global Transaction Banking, explains: “The barriers to entry for a deal of this kind are high for a number of reasons. First, you need the system infrastructure. Second, the internal dynamics of your organisation need to be aligned and able to work alongside each other seamlessly. For example, we have an in-house team that looks at securitisation and repackaging within our trade finance team, which is quite unusual.”

Brooks and his colleagues compiled a USD 3.5 billion portfolio of trade finance assets, including flow business, short-term trade finance, letters of credit, supply chain finance and documentary credit business.

“We place them all into a reference portfolio, so obviously we have very strict eligibility criteria that we must adhere to,” explains Brooks. “We agree with the investor(s) the type and the concentration caps of the products that can go in and those that cannot. And that is when we settle on the appropriate ratings.”

Securing buy-in

Where the TRAFIN structure differs from other regulatory capital transactions is that it is a pure trade finance portfolio, which facilitates optimal pricing. Equally, one of the big differentiators of this transaction is that it allows Deutsche Bank to hedge the portfolio via the sale of a first loss tranche, which the bank structured, arranged and placed in the market. Seven investors from Europe and the Americas took the deal.

“Given you are selling the riskiest piece of the deal – the first loss – it naturally has an inflated yield, which appeals to a broad range of investors. So, it was important to reformat the risk, slice up the capital structure and sell off different pieces. The response in the market has been impressive,” says Brooks.

Handle with care

Nevertheless, the distribution of trade finance assets, especially to new investors, requires some expertise. Brooks considers it as a specialist asset class in need of careful handling, not least because trade finance loans, for example, are invariably structured to mitigate key risks.

Surely, as a CLO, there were perception barriers to overcome? After all, the acronym is deeply associated with the 2008-09 financial crisis. Brooks explains that a trade finance securitisation is significantly different from the infamous sub-prime mortgage-backed securitisations.

“The market is more regulated today and rightly so. And CLOs continue to play a major role for institutions wanting to manage debt. One of the things that is different today is that regulators insist on the issuer – in this case Deutsche Bank – retaining some of the risk. In the past, this was not necessarily required.”

In addition, there are now greater origination responsibilities, such as more stringent proprietary credit processes.

The assets in TRAFIN are short term, which brings with it administrative challenges. “The term of the deal is five years, so for the life of TRAFIN, we have to continually replenish the assets,” adds Brooks. “So, we have to be confident in our pipeline and our ability to originate business over the course of the transaction. Some other firms have had replenishment issues on their deals, but this is not something we have experienced.”

A sign of things to come

Brooks sees further deals of this nature coming to market – they help the issuers with balance sheet management and they are also regulatory friendly. “We can expect greater demand coming from investors who are now much more aware of trade finance assets and their qualities, which means pricing will become more competitive for deals like TRAFIN,” says Brooks.

He also sees the success of TRAFIN as an indication of the strength of Deutsche Bank’s Trade Finance business: “This clearly demonstrates that investors have confidence in our business and risk management capabilities. With this model, we were able to tap into an investor base that would not usually consider trade finance as an asset class.”

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