Sunday, October 10, 2010

Expanding the Product Line

The Receivables Exchange announced a new initiative last week: a facility to be operated separate from but in tandem with its current on-line market for the receivables of small-to-medium sized businesses.

The new facility is called the “Corporate Auctions” program, as distinguished from the current “SMB” program. It targets Sellers in the Fortune 1000 category of size and quality.

This is yet another big step for TRE and has significant implications for both current and prospective TRE Members on both the Buy and Sell sides of the market.

At the time of its announcement TRE also announced that a Fortune 10 company has signed up as the first Seller in the Corporate Auction program.

The identity of that Seller was not made public but I can say that you can find multiple products of that company in every American household (and most households and businesses throughout the developed world, for that matter).

TRE Buyers on the SMB platform will have to be separately approved to buy on the Corporate platform; and the size, character, bidding methods and pricing parameters will certainly be different on the Corporate platform than on the SMB platform.

The average transaction size will certainly be significantly larger in the Corporate program. And the returns to the Buyers will be significantly lower; reflecting the credit quality and the reliability of the financial data available on the Sellers and Account Debtors in that program.

After all, the great majority of the SMB Sellers are private companies providing Buyers only internally generated, unaudited financial information.

In the Corporate program the Sellers will very likely be large public companies with complete, easily accessed, audited financial statements already studied and commented upon by professional financial analysts.

Clearly, these markets will appeal to different types of Buyers with different risk appetites, costs of capital and motivations for participating.

This is an unambiguously good thing for the Exchange. Especially with the announcement of a “whale” as an initial Corporate program Seller.

But it is also an unambiguously good thing for those Members of the Exchange that stick to the SMB program.

Why is that?

First, this is an additional revenue stream for TRE. Obviously TRE is still in the stage of its evolution when it is burning through venture capital cash as it aims for break-even operations. The added revenue stream of the new program presumably advances the date on which break-even can be projected and thus it reduces the risk of all current participants, whether owners, Buyers or Sellers.

Second, to the extent that some types of Buyers are unable, because of the character of the SMB receivables, to participate in that program, this new initiative provides the potential for those Buyers to enter the market. This will bring not only their cash and their names to the Exchange but it will broaden the universe of financial market participants with actual Exchange experience. The more broadly the Exchange is known and understood in the financial markets the better, in the long run, for us all.

Third, to the extent that there are Buyers now active on the SMB platform whose actual needs and motivations are more aligned with the Corporate-type risk/reward profile, those Buyers now have an option to get what they really want, leaving the SMB program to those whose appetite and objectives more closely match it.

Fourth, while this might be considered a “stretch”, I see no reason why TRE could not go searching down the Corporate program supply chain for additional SMB Sellers. If we know that there is funding moving down the supply chain from a Corporate program Seller, that knowledge affects the assessment of the risk of buying paper due from a third or fourth-tier supplier of labor or material in that chain.

Fifth, if TRE can cite the participation of some very high quality Corporate program Sellers, it will very likely help them to attract new SMB Sellers. Even though the programs are different, the impact of quality-by-association should not be ignored. The imprimatur of a Fortune 10 industrial conglomerate does mean something to the owner of a smaller, privately-owned business.

I am not sure when TRE will be able to make more information publically available about this new program. And until TRE makes it public, confidentiality agreements keep the rest of us from doing it.

But, from my point of view, this is as big a deal as the announcement of the Bain funding earlier this year.

Both events take TRE a big step closer to an assured future.

Both mean that evolution in the receivables finance market continues to advance.

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