The on-chain receivables pool with Clave and CESCE explained

Last week, we announced the first on-chain securitization of insured loans. In this blog, we introduce Clave, the originator, and a key Credix partner, then dive deeper into the underlying assets, the pool mechanisms, and the workings of the insurance features.

Who is Clave?

Clave is a pioneering asset originator in Colombia, established in 2019 by a team of former investment bankers from prestigious institutions such as JP Morgan and Goldman Sachs. The team is on a mission to revolutionize and digitize loan origination in Latin America by integrating cutting-edge technologies with sophisticated off-balance-sheet funding structures to enhance access to capital for businesses and individuals while redefining financial inclusion. Clave and affiliates currently operate in Colombia, Mexico, and Argentina, with ambitious plans to expand throughout Latin America in the near future.

Clave is proudly affiliated with Liquitech, a cutting-edge technology platform based in Colombia and also established in 2019. Liquitech’s innovative platform enables companies to effortlessly sell their receivables in a completely digitized process at a discounted rate to a third party in exchange for immediate cash flow. This process, also known as factoring, accounts for a remarkable 80% of Liquitech’s thriving business. Typically, Liquitech purchases invoices, or accounts receivable, from their small-to-medium-sized business clients at a competitive rate ranging between 85 cents and 98 cents on the dollar. The average term for these invoices is 45 days, ensuring a swift and efficient cash flow solution.

Let’s break down a theoretical example of Clave and Liquitech’s operations:

1. A Colombian fertilizer company sells its fertilizer to a distributor or local farmer, providing them with a 30-day window to make the payment. To formalize the transaction, the company issues an invoice worth $100 to the distributor, who sells to a farmer or farmers. (We’ll go with a farmer in this example.) The fertilizer company then visits the Liquitech platform and uploads the $100 invoice to the fully digital platform.
2. After carefully evaluating and assessing the invoice, Liquitech’s tech stack, mirrored in support of Clave’s, makes the decision to assume the credit risk associated with the farmer’s timely payment. They then proceed to acquire the $100 invoice from the fertilizer company but at a discounted value of $91.
3. Importantly, Liquitech facilitates the digital registration of the invoice within RADIAN, an initiative of the Colombian government that validates receivables electronically to enhance enforceability and reduce fraud risk.
4. After the 30-day period, the farmer will make the full payment of $100 to Liquitech, signifying that they have fully settled the invoice.
5. Since the payment was made on time, Liquitech will transfer $7 of the $9 discount back to the fertilizer company, keeping $2 of the $9 discount for themselves in return for the risk they took in bearing the credit risk of the farmer.
6. This entire process is monitored in real-time by Clave’s own technology, to verify the transaction is executed as intended, securely, and efficiently.

As showcased in the aforementioned example, the originator was compensated with $2 for assuming the risk that the farmer would make the full payment of $100 at the conclusion of the 30-day period, which, when extrapolated on an annual basis, computes to an impressive return.

Summarizing the key impacts of this deal structure, the farmer receives fertilizer to grow crops, the company has immediate cash flow on its invoice, and the originator generates a healthy return. All parties in this model come away with their desired outcomes.

Clave/Liquitech has already facilitated the origination of nearly $80 million in factoring receivables to date, collaborating with more than 30 sellers (like the fertilizer company mentioned earlier) and over 500 of their suppliers. Clave/Liquitech has ambitious plans to originate a staggering $500 million in 2023 alone. Credix aims to be a major part of this story.

To be clear, factoring and the origination of receivables are not new concepts. It’s routine in markets like the United States and Europe, where financial infrastructure, industry support, and regulatory regimes advance their development. Clave and Liquitech bring those same tools to Latin America. But these FinTechs supercharge factoring with innovative technology that reduces friction and increases access to capital. Moreover, they apply these technologies to loan strategies that offer additional levels of comfort, such as insurance. More on that below. This, in the end, allows folks like the farmer in our example or a small-business owner to expand operations and participate in the local economy.

Where does Credix fit into the equation?

The best way to answer this would be to start with a more important question: Why does Clave/Liquitech need a partner like Credix?

The solution is quite straightforward. Clave/Liquitech requires financial resources to acquire invoices from companies like the aforementioned fertilizer company. In order to expand their operations and procure a growing number of invoices from an increasing number of partners, Clave/Liquitech must seek funding from the debt capital markets. They have done so successfully with several traditional finance partners, from investment banks to asset management firms. But these FinTechs also see that dramatic growth will come from the DeFi ecosystem. At the same time, they realize that choosing the right partner in the DeFi space is of utmost importance. Technology advances daily. Regulations evolve constantly. Only a few firms have the proper know-how and governance to manage this fluid situation.

This is where Credix comes in as an ideal platform to provide assistance with efficiency and transparency. Not only is Credix itself best-in-class, but established and trusted partners, including Motive Partners, ParaFi Capital, Valor Capital, and others, place their faith in Credix and its exceptional talent to act responsibly and be at the leading edge of tech developments.

Credix has built the infrastructure to bring debt financing to LatAm and has a network of institutional investors actively seeking structured credit investment opportunities in Latin America. These credit investors are eager to provide capital to asset originators like Clave, especially with the protective deal measures and seamless Credix portal serving as the middleware.

So what makes this “Pool” special?

“Pool” specifically refers to pooling together capital from various investors to purchase the invoices, or accounts receivable, directly from FinTech’s clients, providing them with the aforementioned immediate cash flow.

Structured finance transactions may seem complex to the casual observer, but they are also incredibly common. One long-standing practice in the financial industry is securitization, which involves bundling debt obligations, such as accounts receivable, into a Special Purpose Vehicle that issues securities that can be bought and sold on financial markets. This process fractionalizes the total pool of underlying loan obligations and creates an efficient market, providing enhanced liquidity to the end loan parties. While a securitization at heart, this particular Pool stands out from other traditional structures by offering a unique set of features and benefits.

• Credit insurance
• Favorable liquidity
• Double-digit yield

By working with Clave/Liquitech, Credix has partnered with a cutting-edge FinTech lender that collaborates with credit insurance provider Cesce Colombia (or “CESCE”), the local subsidiary of global credit insurance company Cesce and backed by MunichRe, to eliminate a significant portion of the credit risk typically associated with transactions like this. In the event that repayments for the accounts receivables cease, the capital providers have the option to initiate a credit insurance process to recover losses. More on this later.

In addition, Credix has intentionally designed a pool that provides its capital providers with liquidity every 45 days, thanks to the unique repayment schedules of the underlying accounts receivables acquired by this FinTech lender. This revolutionary product is a first in the DeFi market that truly sets Credix apart, while also delivering investors the trifecta of strong yield, enhanced liquidity, and robust downside protection.

So what about Clave/Liquitech makes credit investors comfortable?

Having already established a successful partnership with Clave/Liquitech, including their participation in Receivables Factoring Pool 1, Credix has thoroughly assessed and evaluated Clave/Liquitech’s operations. While there are several impressive aspects of their business that set them apart as a leading FinTech originator, one stands out above the rest: Credit Insurance.

Clave/Liquitech has forged a close partnership with Cesce Colombia to provide insurance coverage for some of the receivables they acquire from their clients. This credit insurance feature is very appealing to investors because it offers an added layer of protection. In the event of defaults, the originator or investor can activate the insurance policy and recover the losses based on the coverage amount. This unique feature sets their credit transactions apart from the rest and provides peace of mind to potential investors.

Credit insurance… what’s that?

Credit insurance is a valuable tool that safeguards businesses from the potential risk of non-payment by their customers. When businesses offer goods or services on credit, there is always the possibility that customers may not fulfill their payment obligations. With credit insurance, this risk is minimized as it provides coverage for any potential losses. While there is a cost associated with this coverage, it offers a layer of protection and credit enhancement that can greatly appeal to investors and lenders, making the transaction even more enticing.

As credit insurance becomes more prevalent globally, it is still relatively rare in structured credit transactions within emerging markets. Factors such as limited awareness, the availability of alternative risk management tools, and cultural preferences can influence the popularity of credit insurance in a particular region. However, as Latin American financial systems continue to progress, it is likely that the use of credit insurance will increase over time. This trend is evident in the Receivables Factoring transaction we have organized with Clave, showcasing the growing importance of credit insurance in the region. We hope our transaction will help pioneer the growth of credit insurance in-market, bringing more capital to the region and furthering our mission of expanding capital access.

So how does it work?

In order to safeguard their accounts receivable, businesses often opt to purchase credit insurance policies from insurance providers. In the case we’ve been discussing, either the fertilizer company mentioned earlier acquires a credit insurance policy from CESCE or Liquitech itself secures the policy. Both scenarios provide equivalent credit protection, with the originator benefiting from this policy. This is the stage where the specific details regarding premium amounts and coverage are determined. For the originator, the insurance premium is paid upfront when they purchase the accounts receivable from the local originator, which in this case is the fertilizer company. The premium is calculated as a percentage of the invoice’s face value.

Furthermore, it is essential to highlight that the insurance company carefully evaluates and assesses coverage and premium amounts. They undergo a thorough assessment and underwriting process for potential insured customers. This additional layer of analysis and underwriting provides an extra level of assurance to lenders when considering the opportunity, as it examines the assets supporting the Receivables Factoring Pool.

Great, but how is the insurance policy triggered?

In this specific scenario, once an invoice surpasses the given payment deadline (also known as DPD or days past due), the originator promptly informs the fertilizer company about the overdue invoice. The fertilizer company then initiates various procedures to recover the funds from the farmer. If these efforts are unsuccessful, the fertilizer company will formally report the overdue invoice to CESCE, the insurance provider. CESCE will then meticulously follow its claims process to facilitate payment.

Although the process of recovering funds through the credit insurance policy may not be the fastest, it undeniably offers lenders a higher level of reassurance, as they can be confident that the capital they have provided is fully protected by the policy.

At Credix, we’re excited to partner with technology partners in Latin America and bring unique credit opportunities to our platform investors. Our work this past year with Clave is just one example of that. Stay tuned for more!