With the cost of bank financing growing, the UK's Bibby Financial Services was left with two choices: become a bank or securitise its debt. It chose the latter, and the results so far have been encouraging.

Bibby Financial Services is the UK’s largest independent invoice finance provider, advancing money to companies against invoices or contracts they have submitted to clients. The service provides much-needed cash-flow to small and medium-sized enterprises (SMEs), helping them to expand and develop across economic cycles. A privately owned business, Bibby traces its roots back about 200 years and has traditionally been funded by banks’ own invoice finance subsidiaries. After the financial crisis, however, this funding became progressively more expensive and more restricted, so Bibby started to consider alternative avenues.

“Funding the business is absolutely critical for us and back in 2010/11, the banking market was becoming tighter and pricing was firming up," says  Bibby chief executive David Postings. "Originally, we had a facility with seven banks. We amalgamated our debts and they provided a funding line against them. But it’s all on balance sheet and it affects their risk weighting so four or five years ago the banks’ prices began to go up and they were imposing maximum deal sizes.

“We wanted to do more invoice discounting so we felt it made strategic sense to look at options, which would give us more flexibility, more quantum and a lower price.” 

The securitisation option

The company realised that it had two principal options: become a bank or securitise its debt. In 2011, Mr Postings chose the latter. “We decided to go down the securitisation route. We thought it would give us the same flexibility and pricing with less of a regulatory burden,” he says. 

“We worked on this transaction for almost four years. It is the first of its kind for an invoice finance company so it was quite difficult for the banks and the rating agencies as no one had ever done it before. It is particularly complex because they are not really rating us, they are rating our clients’ clients,” says Mr Postings. “We have more than 200,000 debtors and they are well spread out so there is no concentration above 1%,” he adds.

In other words, banks and the rating agencies had to assess the likelihood that a significant number of Bibby’s clients’ clients may not settle their invoices, ultimately affecting Bibby’s ability to service its debts.

The company performed well during the financial crisis and subsequent recession but the banks and credit agencies wanted more evidence of Bibby’s financial strength and resilience. “We provided data going back seven years, we stress-tested it with the banks and the rating agencies stress-tested it too to make sure that, if we went through another recession... we would have enough headroom. And we will. We went through lots of legal hurdles as well but in the end we received an Aa2 rating from Moody’s and DBRS,” says Mr Postings.

In credit 

The credit rating provided the foundation stone for Bibby’s securitisation deal, allowing the participating banks to allocate less capital to it than they would otherwise have to do. Four banks participated in the transaction – Bank of America Merrill Lynch, Barclays HSBC and Lloyds.

“Barclays has been a banker to Bibby one way and another for about 200 years and we’ve worked with Bank of America and Lloyds for some time. HSBC came in during 2015. It had an appetite and we thought it would be sensible to have a spread,” says Mr Postings.

Under the securitisation, all of Bibby’s current and future receivables are placed in a special purpose vehicle, from which the company can then make advances to clients. The structure is relatively complex but the outcome is clear: an increase in the amount of funding available to SMEs.

“Before the funding, we advanced about £480m [$720m] to UK SMEs. Now we have committed funds of £774m to these businesses, so we’ve increased our funding capacity by almost £300m. Essentially, we can lend more money to more companies at a better rate,” says Mr Postings.

Because Bibby’s business is dynamic, with money being lent and repaid daily, the group has to provide up-to-date accounts to the banks twice a day, whereas previously it completed internal accounts once a day. Despite the extra work however, Mr Postings is convinced the process has been worthwhile.

“We are now taking more responsibility for our decisions. Before, the banks capped the amount that we could lend. Now the decision rests with us. Also, this securitisation enables us to start the process towards issuing our own paper. Not  in the short-term but over time, I am hopeful that, as our credit rating becomes more established, we will be able to work directly with pension funds and life companies so we can diversify our source of funds and possibly get even better pricing,” says Mr Postings.


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