Trade Finance

Industry wide lowest default rate and highest recovery time

According to the International Chamber of Commerce, trade finance has the lowest default rates and recovery time relative to most asset classes. Default rates for a variety of trade finance products ranged from 0.03% to 0.24%, demonstrating the extremely low level of credit default risk. The research also found that time to recovery, the period it takes banks to recover their loans, is exceptionally short for trade finance products. The average time to recovery for trade finance products is 120 days, compared to 437 days for other asset classes.

Low correlation to all traditional asset classes

Trade finance has low correlation to other asset classes. Galena Asset Management computed the correlation coefficients between asset classes using monthly returns data observed between October 2007 and October 2013.

Trade finance correlation with; equities (S&P500 & MSCI Emerging Markets) is -0.06 & -0.08 respectively, high yield bonds (JPM Global HY) is -0.2, leveraged loans (S&P/LSTA Leveraged Loan Index) is -0.10, hedge funds (HFRX Global) is -0.1, and commodities (DJ-UBSCI) is -0.03.

Low correlation to volatile market cycles

Although global trade volumes may suffer during economic downturn, strategic commodities such as metals, energy and agriculture will still be produced, processed and consumed. The action of financing these flows, therefore, allows returns to be produced even during periods of recession. In fact, difficult market cycles or tighter credit environment would actually be beneficial to lenders as they would be able to enforce tighter covenants, lower LTV and/or marginally higher spreads on the loans.