Photo of John McCarthy, VCNA.
The de-recognition of trade receivables under IFRS via a securitisation is not very common and only a handful of players in the industry have the capacity to implement and execute such a complex structure.
Chief Financial Officer
VCNA is the North American subsidiary of Votorantim Cimentos, one of the largest global cement, concrete and mortar companies, and part of the Votorantim Group, one of Brazil’s largest industrial conglomerates with a presence in more than 20 countries.
Four tranche structure delivers US$152m account receivables securitisation programme
The company was exploring alternative financing solutions as a way to expand its access to competitive funding sources. The AR securitisation offered competitive financing rates while also achieving IFRS off-balance sheet de-recognition of VCNA’s receivables portfolio.
Typical trade receivables securitisation do not achieve off-balance sheet de-recognition under IFRS, given that they require an important level of subordination to achieve the investment grade protection an investor seeks in such transactions. More often than not, this subordination precludes a receivables securitisation from achieving de-recognition and de-consolidation, as the originator has not substantially transferred all risk and reward under IFRS. John McCarthy, VCNA CFO explains, “The first major hurdle that required a solution to achieve de-recognition was to provide a quantitative analysis to VCNA’s auditors, which proved that a specific percentage (as determined by VCNA’s auditors) of the risk and reward variability had been transferred from VCNA to the second loss investor.” As the portfolio consists of cross-border trade receivables, VCNA’s auditors were also concerned with respect to the FX exposure and its implications for the transfer of risk and reward of the expected cash flows given that it is a multi-currency portfolio.
The second major hurdle consisted of identifying a second loss investor that could act simultaneously as the control party. The auditors requested that the control party and second loss investor were the same entity.
On 31st March 2016 Finacity facilitated the closing of a US$152m account receivables securitisation programme on behalf of VCNA, that also achieved off-balance sheet de-recognition by VCNA’s auditors using the International Financial Reporting Standards (IFRS). The de-recognition of trade receivables under IFRS via a securitisation is not very common, and only a handful of players in the industry have the capacity to implement and execute such a complex structure. In order to achieve VCNA’s off-balance sheet objectives, Finacity designed a four-tranche funding structure with a second loss tranche sized to capture sufficient variability of risk and reward.