Pending Basel III regulations could move trade finance and its $9 trillion market into the sights of institutional investors.
Money managers and banking executives say trade finance fits right into the non-traditional credit arena in which investors are seeking yield.
But it's a tough sell, particularly in the U.S., where banks have not been big players in trade finance and many investors don't know what it is.
“Nobody knows anything about it,” said Robert Kowit, New York-based senior vice president at Federated Investors Inc., which runs a $500 million trade financing strategy. “The educational effort required is enormous.”
Basel III regulations would raise the amount of capital banks would have to have on their balance sheets to cover their loans, such as for trade finance, making it more costly for those seeking loans and making banks more likely to limit how much could be offered.
Trade finance can be provided through lending, letters of credit or insurance. It has been “providing absolute return since 1796 B.C.,” said Mr. Kowit, when lenders provided the bread-making monopoly in Babylonia with financing.
Researchers at Greenwich Associates think there is a market for institutional investors. In a report last month, the research firm said Basel III will “accelerate the development of alternative sources of credit — including trade finance funded by non-bank investors.” The report sees one potential source as institutional funds or structured products. “In the current era of historically low interest rates, investors hungry for sources of attractive returns could be enticed by the incremental yield, low volatility, low duration and diversification benefits of trade finance,” said Markus Ohlig, a Greenwich Associates consultant in Stamford, Conn.
It's a good time for investors to look at trade finance “because of Basel III and how that has caused (investors) to look at how it fits into their overall asset allocation,” said Adam Dener, managing director and head of trade finance at Conning, Hartford, Conn. Conning has $91 billion in assets under management, mostly for insurance companies. “Banks are no longer a sufficient capital resource, and the same holds true with trade finance.”
The market for trade finance hovers around $9 trillion, Mr. Dener said. “It's the largest form of credit worldwide.