ABFJ: Please describe your career and how it led to your current position.
BS: My capital markets career began at an investment bank, where I structured credit facilities on various investment-grade and asset-backed lending desks. This was during an era in which cash was abundant, and risk was undervalued. I observed issuers and investors alike embracing — if not demanding — ever more esoteric financial instruments. When the events of 2008 exposed the inherent risk embedded in over-engineered financial products, I and a few like-minded bankers realized that a tremendous opportunity existed in a return to the basics. If we could deliver more of what the credit markets value — liquidity, flexibility and transparency — without adding the high cost of complexity, our product would thrive, not only in the post-credit crisis world, but in any market environment.
In 2011, the opportunity arose, and I and other industry veterans began building a platform at RecX upon which large companies and financiers could realize the many virtues of electronic trading in the sale of accounts receivable. NYSE Euronext, through a formal marketing partnership, joined our efforts and together we took the RecX platform to market in December 2011. Almost immediately, the product was embraced by some of the largest companies in the world. RecX saw a billion dollars of volume in its first 18 months and continues to grow month-over-month.
ABFJ: How does RecX work?
BS: RecX is an electronic platform for the sale and purchase of accounts receivable. Sellers of receivables, including public and large private companies, post their receivables on the Exchange, so that a network of institutional buyers may review and place bids for such receivables. The assets are sold at a discount, and the buyers offering the lowest discounts are allocated the receivables (so long as the offered discounts are within the seller’s designated parameters). Buyers advance funds to sellers on the day following the auction’s close. Receivable remittances are collected by RecX and distributed to buyers.
ABFJ: Who is selling receivables over RecX?
BS: Most public and large private companies with B2B trade accounts receivable are eligible for participation on RecX. While we hold the names of our market participants in confidentiality, our active sellers have consolidated annual revenues ranging from $2 billion to $180 billion. At first glance, these sellers seem to have little in common, but whether public or private, domestic or foreign, investment grade or unrated, and regardless of the industries in which they operate, our sellers recognize that the cost of holding receivables often exceeds the cost of selling them.
ABFJ: What are the primary reasons cited for selling receivables over RecX?
BS: Our clients typically sell receivables in order to accomplish at least one of three objectives. The first, and perhaps most obvious, is to generate cash for the settlement of short-term liabilities. For highly levered companies on the platform, liquidating receivables can be the least expensive manner in which to raise an incremental dollar of cash. Investment-grade sellers, on the other hand, generally have liquidity options, including the issuance of commercial paper, which are less expensive than selling receivables. Nonetheless, CFOs at some of the strongest companies in the world are sellers of A/R because liquidating this asset in the capital markets can be less expensive than financing it with the right-hand side of the balance sheet. Finally, all sellers on the Exchange benefit from the transfer of the credit risk associated with the receivables’ obligors. RecX helps companies accomplish these objectives by offering a platform that lowers the costs and burdens typically associated with A/R finance.
ABFJ: What types of financial institutions buy receivables on RecX?
BS: Banks, specifically regional banks and foreign institutions with activities in the U.S., provide the majority of RecX’s liquidity, but we welcome the participation of most institutional investors and have family offices, hedge funds and other asset managers on the platform. Currently, our market does not rely heavily upon the major U.S. money center banks. Clients find RecX to be most valuable when it delivers assets to buyers to which they would not otherwise have access and liquidity to sellers that is truly incremental to existing lines of credit. As one might expect, our sellers already use the large domestic institutions as their primary relationship banks.
ABFJ: What are the benefits to financial institutions buying Receivables over RecX?
BS: Our buy-side clients are generally drawn to receivables by their attractive risk-adjusted returns. For example, a 30-day obligation of an investment-grade company purchased over RecX will frequently yield at least 50 basis points more than comparable commercial paper. The RecX platform lowers the barrier of entry into the receivables asset class by eliminating the traditionally high origination costs associated with building a diversified portfolio. Accordingly, some of our clients are using RecX to buy A/R for the first time.
ABFJ: Who are your primary competitors?
BS: Most sellers on our platform liquidate receivables through multiple channels. Receivable securitization vehicles and bilateral financing agreements with relationship banks remain an important source of A/R distribution for many of our sell-side clients and could certainly be viewed as competition to RecX. We have designed our product to sit comfortably within a treasurer’s toolkit alongside such tried-and-true forms of receivables distribution.
ABFJ: What differentiates RecX in the marketplace?
BS: RecX brings the core virtues of electronic trading, including simplicity, flexibility and transparency to a predominantly bilateral market. Contrary to what one might expect when engaging in the trade of A/R, our market participants establish multilateral relationships through the execution of a single master agreement, make no commitments to transact and pay fees only upon the conclusion of successful sales. Rather than contend with the limitations of individually negotiated bilateral agreements, our sellers post A/R when and in the amount desired, without regard to concentration limits or credit qualities of the underlying obligors. The network of institutional buyers, which stands ready to compete openly in an auction-based process for each receivable, enjoys near-zero cost asset origination in the build of a custom portfolio that includes only the specific credits they want, when they want them.
ABFJ: Please describe RecX’s organization. What is its company’s “culture”?
BS: Our senior leadership team is composed of banking veterans who have spent the majority of their careers in asset-backed and receivables finance. We maintain a flat organization, and we take pride in our collective ability to make quick decisions and rapidly adapt to ever-changing market conditions. Our company culture, while entrepreneurial, demands a level of professionalism and market expertise that one would expect from a partner of NYSE Euronext. We recognize that, as a financial intermediary, our first commitment must be to flawless execution. Accordingly, we are measured in our growth, redundant in our controls and laser-focused on meeting the distribution needs of our clients. We are united in our belief that unwavering confidence in our market is critical to our ultimate success. To date, we are proud to say that not a single seller has left our program.
ABFJ: What have been RecX’s biggest challenges in creating its marketplace?
BS: Without a doubt, our biggest challenge in the build of RecX has been maintaining market balance. As in any market, every transaction over RecX needs both a buyer and a seller. Because we are simply an intermediary and never take a principal position in receivables sold over our platform, we must always make sure that we have sufficient buy-side liquidity to meet the demands of our sellers. At the same time, of course, excessive buy-side capacity can repel buyers who are unable to accumulate sufficient inventory. Our solution has been to calibrate our own growth to a pace that we can reliably manage while meeting the needs of our clients. While it is exceptionally difficult to delay origination on one side of the platform while the other catches up, we must occasionally do so to ensure the quality of the customer experience.
ABFJ: What are your plans for RecX? Where would you like to see RecX in five years?
BS: We strive to become the leader of an industry-transforming movement in the trade of accounts receivables toward electronic execution. We see no reason why AR market participants should not enjoy the same efficiencies enjoyed in other capital markets.
Bos Smith is managing director, business development at The Receivables Exchange, a strategic partner of NYSE Euronext based in New York. He can be reached at email@example.com.
Howard Brod Brownstein is a Certified Turnaround Professional, the president of The Brownstein Corp. and a contributing editor of ABF Journal. He can be reached at Howard@BrownsteinCorp.com.