Receivables as asset and opportunity
Receivables as an asset are present everywhere in the business world. This is an asset which could be a problem for some, but at the same time an investment opportunity for others. The aim of this article is to consider how healthy and performing receivables could be used to obtain financing from investors and to discuss how non-performing claims serve as an investment in Poland.
Poland is a large and rapidly growing economy. There are large volumes of receivables generated every month: consumer and SME financing from bank and non-bank loan providers, mortgage loans, hire purchase contracts, leasing agreements, corporate financing, and last but not least trade receivables. These add up to a receivables market worth billions of EUR – to give you an example there is around 4 billion EUR of new receivables every month taking into account credits and loans for households only.
For the creditors that have such assets on their books, this may be a way to obtain financing and boost liquidity and development. For investors, on the other hand, those assets could present an opportunity and help secure position when extending financing. A useful tool to facilitate usage of receivables is assignment (sometimes referred to as a true sale). This enables transfer of receivables (or a whole portfolio) from the creditor to a third party. A transfer of this kind is generally allowed under Polish law, with a few exceptions. Restrictions on transfer include statutory limitation of transfer of receivables (there have been a few cases of this, e.g. receivables towards public hospitals) or contractual limitations agreed between the creditor and the debtor in the underlying agreement – these must be verified in each case as they depend on the underlying documentations.
As for receivables financing, this type of financing could be structured as a loan granted against the value of the receivables with security over those rights, simple recourse or non-recourse factoring, or as a more elaborate true sale securitisation programme where the funds advanced by the investors are used by the SPV to acquire, for a price, the receivables together with credit risk. SPV then repays the investors from the payments received from the underlying debtors.
For the creditors, this is an interesting way to obtain additional funds and convert illiquid receivables on their books into cash in their bank accounts. These days, a variety of types of receivables (secured or unsecured), types of debtors (consumer, SMEs, corporate) as well as some types of creditors (online shopping site, bank or non-banking lender, manufacturer) or even types of products (buy-now-pay- later vs. simple cash loan) attract not only large investment banks but also private equity funds and investors looking for better yields.
Servicing portfolios in Poland is generally unregulated, and notification of debtors about the assignment is not essential for effective transfer. Consequently, it is possible for a creditor who transfers the receivables to remain the servicer and maintain contact with their customers.
But what about the receivables that don’t pay? Those where the creditor has already tried and failed to recover the money?
Those assets could also represent value for entities with adequate know how and tools. So it’s still possible for a creditor to recover at least a portion of the debt by selling those claims to investors. Professionals who, by putting in effort and time, are willing to wait longer for the payment could turn such non-performing receivables into a performing asset. There is quite a well-developed market for management of non-performing receivables with professional providers of collection services as well as investors acquiring NPL portfolios of receivables from banks, non-banking lenders, telecoms, etc. The biggest and most active companies in this field manage receivables worth more than 25 billion EUR. The most popular asset classes include consumer unsecured credit and mortgage loans, but there are also SME and corporate portfolios or single tickets traded on the market.
As for the investment structures in NPL transactions, there are no instruments like GAGS, HAPS, or bad banks which you may have seen in other jurisdictions. Nevertheless there is a specific Polish form called a securitisation fund, which is often used as a purchasing vehicle.
In the case of banking portfolios, such vehicles are almost exclusive (which is driven partially by tax regulations applicable to banks). What is important about securitisation funds is their managing structure. The fund itself is just a collection of assets which issues certificates to the investors – it does not have employees or directors. It is managed by another company – a fund management company (TFI), which is a licensed and supervised type of entity. Recovery is carried out by a servicer, which is another supervised and licensed entity in this set up.
The investor is at the top, holding the certificates. Typically, the investor approves or makes decisions regarding the most important things for a fund, which portfolio to acquire, for what price, or which servicer to choose. Nevertheless, please remember that securitisation funds have specific rules regarding governance, which do not always resemble typical corporate governance.
What if one would like to service the portfolio themselves, using a company they already have say in other jurisdiction? It should be noted that without a license from Polish regulator it is impossible to manage a portfolio of the securitisation fund, but there is no such limitation on servicing portfolios acquired by other types of entities, be it a foreign SPV or Polish corporation.
We note that a proposal for a NPL directive has been prepared at EU level – when implemented, this may make it easier for foreign companies to service portfolios in Poland based on a single European license. On the other hand, there is a legislative proposal related to Polish securitisation funds and facilitating operation of EU securitisation regulation, so changes to this sector are on the horizon, and caution needs to be maintained.
Daniel Smarduch, attorney-at-law, Banking and Project Finance practice, Wardyński & Partners
The content of this article is a part of Episode 12 of the programme News from Poland – Business & Law. You can watch the episode here >>>