HSBA Hsbc Holdings Plc

By Joe Wallace 

Money managers including Allianz SE and American International Group Inc. have found a window of opportunity to enter the business of financing international trade, long the domain of banks.

Banks finance trade deals by offering loans and letters of credit, as well as through more complex arrangements including the purchase of an exporter's accounts receivable at a discounted price. Such deals let lenders shoulder the risk that importers don't pay on time or exporters don't deliver the goods, greasing the wheels of international commerce.

Trade finance has historically been dominated by European banks such as HSBC Holdings PLC and BNP Paribas SA, alongside Citigroup Inc. in the U.S. But some powerhouses, including Dutch lender ABN AMRO Bank NV, have dialed back their operations. Others, under pressure from new capital requirements, are looking to sell their trade-financing deals, creating an opportunity for new types of financiers to enter the market.

The interest from some of the world's biggest money managers signals a potential revival for growth in global trade. In recent years, the disruption from global trade wars, marked by escalating tariffs, as well as sanctions triggered by geopolitical differences, have served to hamper cross-border flows of goods and services.

Investors finance only a fraction of international goods exports, which rose to a record $19.5 trillion in 2018, according to the World Trade Organization. Nonbank financial institutions bought about $100 billion in trade-finance assets in 2018, but that could reach $3 trillion in the coming years, according to Christoph Gugelmann, chief executive of London-based Tradeteq, which runs an exchange for trade-finance assets.

A $1.5 trillion "trade-finance gap" is holding back international commerce, the Asian Development Bank said in September, pointing to the Pacific islands as "an extreme example" of a region that risks being cut off from the global financial system if banks retreat from trade finance.

Asset managers say trade financing pays attractive returns compared with bonds, whose yields have plummeted in recent years as interest rates dropped to historic lows.

"These investors are looking for alternative asset classes," said Dimitri Kouchnirenko, director of Singapore-based Incomlend, another trade-finance exchange. "They're looking for yield, and finding yield is very difficult."

But the business can be both hazardous and expensive. Fund managers, more used to buying stocks and bonds, sometimes find themselves ill-prepared to assess the risks involved in financing a diverse and dispersed business that remains dependent on paper documents for record-keeping and contracts. The perils can include defective goods, damage to products during transportation, fraud, or external factors such as weather, tariffs and currency fluctuations.

To mitigate these risks, large money managers buy trade-finance assets that lenders have already originated instead of funding importers and exporters directly. Often these assets are wrapped up into asset-backed securities.

Allianz Global Investors joined with HSBC, the world's biggest provider of trade finance by revenue, to set up a fund with just under $50 million under management last year. Allianz buys securities backed by trade-finance deals from HSBC and other banks, via a subsidiary known as a special-purpose vehicle.

Some securities backed by trade financing pay barely positive yields and are bought by investors seeking a safe place to store money, according to Tradeteq's Mr. Gugelmann. Others yield around 2% and are typically bought by pension funds and insurers. Riskier securities, backed by trade financing originated by nonbank lenders, can yield up to 10% and are purchased by hedge funds.

HSBC has increased the trade financing it sells on to investors and other lenders from $2 billion in 2015 to $28 billion last year, said Surath Sengupta, head of trade portfolio management and distribution at the bank.

"Clearly, the more velocity you can get in terms of transactions, the more you can continue to grow your business and not increase your risk-weighted assets," said James Binns, head of trade and working capital at Barclays PLC. "The complexity is around investors understanding exactly what they're investing in."

AIG recently began to invest in trade finance after selling insurance to the sector for several decades. In September, the company bought securities backed by receivables as part of an $80 million deal with Cairn Capital Ltd., a fund manager in London.

"Fraud is your biggest risk," said Ihab Salib, a senior portfolio manager at Federated Investors Inc. One trade-finance deal that Mr. Salib invested in was secured against what appeared to be a stockpile of grain. "But when you put a 12-foot pole in the silo, it was filled with hay," he said.

Federated, which entered the market in 2006, buys trade-finance assets from banks in syndication deals without slicing them into securities. Mr. Salib worries that securitization allows banks to palm off riskier products they don't want to own themselves.

"I want to do deals banks are willing to hold on their own books," Mr. Salib said. "Someone else needs to have skin in the game."

Write to Joe Wallace at Joe.Wallace@wsj.com

(END) Dow Jones Newswires

January 22, 2020 06:18 ET (11:18 GMT)

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