Pardon the Interruption

I intended to complete the list of posts identifying sources of incremental risk assumed in trading on the TRE platform before either attempting to quantify a risk premium or suggesting risk-mitigating changes in practice.

So, pardon the interruption, but I want to pause here for just one post to make a suggestion. It’s one that I think would help mitigate risk from two sources: the lack of a personal guarantee and the lack of a full notification procedure.

First, let me acknowledge that I understand the reasons why TRE has adopted the policies in place.

As we’ve pointed out, almost all TRE Sellers would be asked to provide personal guarantees by other funding sources. The lack of that requirement by TRE is thought to be of significant help in attracting Sellers. On the notification issue, I understand that a true full-notification policy would require a very substantial commitment of additional time and manpower AND it would substantially slow down the process of bringing auctions to market.

I do get it.

But the fact is that the combination of these two issues produces a potentially tempting opportunity for Sellers who either fall on hard times , or who are simply dishonest, to post invoices for sale that do not meet the criteria set forth in the Master Program Agreement.

The lack of a full notification criterion undoubtedly increases the risk that invoices will be improperly posted for sale. And the lack of a personal guarantee reduces the risk to the Seller of doing so.

There is, I think, a fairly straight-forward way to mitigate (if not eliminate) this risk.

The principals of TRE Sellers could be required to execute a CONTINGENT personal guarantee agreement that would have no effect EXCEPT in the event that invoices not meeting the criteria of the Master Program Agreement were posted for sale on the TRE platform.

So long as invoices, even those that might become problematic, actually meet the specified criteria, the obligations to cure defaulted payments would remain corporate only. However, if the invoices were improperly posted, which is a condition under the control of management, TRE and the Buyers could look beyond the corporate assets of the Seller to the personal assets of the owners.

Obviously, such a change in policy would meet with Seller resistance and would likely cause some potential Sellers to fall by the wayside.

However, if the principals of a Seller are not willing to guarantee their own adherence to the invoice posting requirements; essentially assuring TRE and the Buyers of their own honesty; they might be Sellers we could all do without in the long run anyway.