CASE STUDY

Private Credit – Trade Finance

Bermudian Reinsurer | 2021

Engagement at a glance

Client Country/Type: Bermudian Reinsurer
Year: 2021
Asset Class, Geography: Global Trade Finance
Mandate Size: EUR 200 million (now expected to reach EUR 600 million)
Mandate Type: Pooled Fund or SMA
Service Provided: Manager Search
Investment Objective: To improve portfolio diversification and yield enhancement while maintaining investment quality and liquidity

Bermudian Insurer

Client-specific concerns

The client, a Bermuda-based reinsurance company, engaged bfinance to conduct a comprehensive review of global trade finance managers—including those with strategies focused on receivables or supply chain finance—with the goal of investing at least EUR 200 million (and possibly as much as EUR 600 million). Given the nature of its own business, the client needed to find a manager (or managers) capable of providing transparent ‘look-through’ reporting suitable for Europe’s Solvency II regulations. Although this client was not wedded to a particular strategic approach, it was looking for managers with demonstrable experience in the asset class. The client was seeking to increase returns on its regulatory capital without giving up liquidity (approximately 25% of the investments needed to be held in positions of less than 30 days’ maturity, with an average of less than 180 days’ maturity). Nor did the client want any significant increase in credit risk relative to investment-grade bonds. In response, bfinance focussed on identifying strategies comprised of short-duration investments with strong capital protections.

Outcome

  • Identifying strong, well-diversified ‘niche’ strategies: by providing access to an extensive open network of managers, bfinance was able to assure the client that its team had visibility across the full universe of possible solutions. As a result, bfinance was able to provide the client with significant ‘in-search’ education about available strategies and help its team select those most likely to fit the insurer’s risk appetite.

  • Parsing geopolitical exposure and market risks: trade finance can have touchpoints in many different geographies, ranging from strategies focused on emerging markets to those entirely directed towards developed market transactions. bfinance’s comprehensive analysis brought to life the various risks and rewards associated with different geographical and geopolitical exposures—while enabling the client to become extremely familiar with possible risk mitigation measures.

  • Assessing strategic ‘fit’ with the existing portfolio: the client had strong risk management protocols around its existing fixed income exposures and a good understanding of how trade and receivables finance might impact its portfolio; bfinance was able to help the client identify prospective managers capable of providing transparent risk reporting and separately managed account solutions to avoid the overexposure to any specific risk ‘hotspots’.

  • Ensuring adequate capacity: trade finance is a niche subsector of private credit, and the client was understandably concerned about deploying a significant amount of capital in this space. In response, bfinance sought to identify managers that had strong track records and scalable investment models that could accommodate additional inflows of client capital.

 

Our specialist says

  • Increasingly, insurers are worried because the rate of return on investment-grade bonds does not appear adequate to compensate for the risks of exposure, particularly in a rising rate environment. That awareness has piqued an interest in floating rate and shorter-dated assets, such as those found in trade finance. Although insurers have historically viewed trade finance as a niche asset class, they are now realising that they can use it to enhance returns—and realise better protection from interest rate exposures. Furthermore, the capital they are required to hold is negligible: trade finance can actually serve as a reliable secondary store of liquidity since the underlying contracts have an original maturity of 90-180 days or at most, one year. Insurers aren’t necessarily intending to access that liquidity, but they like to know that it’s there—and in the meantime, they can anticipate earning solid returns of 5%–7% net per annum on these investments with virtually zero mark-to-market risk on the capital values.

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