As acknowledged by the President of Mexico, Andrés Manuel López Obrador, the country will face an inevitable economic crisis this year, mainly due to Covid-19, as well as the collapse in oil prices, the fall of the stock market, among other factors. This crisis, like any other, generates uncertainty as to the consequences it will have on the negotiation of credit operations, including financial factoring operations.
Financial factoring is a way of obtaining financing; it allows the transformation of illiquid assets into immediately available resources by transferring receivables credit rights. At the same time, it is beneficial for corporations, since this type of operation reflects credit health since it is not expressed as a liability in the financial statements of the company that opts for this type of financing. In this regard, financial factoring has two options: a) factoring with recourse, and b) non-recourse factoring. Unlike non-recourse factoring, recourse factoring guarantees, for the benefit of the factoring party, joint and several liability of the factored party in the payment of the receivable. This means lower risk, so it is often preferred over non-recourse factoring.
By the nature of the transaction, factoring involves uncertainty regarding payment, and in an economic crisis, uncertainty tends to increase. The nature of the receivables to be transferred in a factoring transaction makes it possible to identify, to a certain extent, what might be expected with respect to one or another factoring transaction, precisely depending on the nature of the receivables. The uncertainty factor is compounded by the increased risk of default generated by an economic crisis.
Likewise, those institutions that resort to financial factoring, not to obtain liquidity, but to obtain a profit from the transaction, measure the risk of non-payment and reflect it in the decrease in the price they are willing to pay for the credit rights, so that if the risk increases, the cost assumed by those seeking to finance themselves through prepayment of their portfolio will increase. However, it is possible that, due to this same situation, the credit rights have a very high interest rate, and therefore, if they are collected, there would be a high profit for those who obtained the credit rights through financial factoring. The question is, in a crisis scenario, how sustainable it will be to collect the royalties, and moreover, what will be the cost of investors’ lack of confidence in the payment of their royalties, it is also prudent to question whether the high profitability will be able to offset such risks.
As is reasonable, the quality of credit claims is directly proportional to the credit rating of those who issue them, and this rating is a factor that will naturally be important to take into account, and which, possibly, during this year in which the onset of a financial crisis is looming, will undergo certain changes.
The international market has opted to relax monetary policy; in the U.S., the Federal Reserve (Fed) resorted to a rate cut to stimulate economic growth, as did the European Central Bank, the People’s Bank of China and the Bank of England, among others, including the Bank of Mexico. However, border closures and mandatory quarantine in some countries will be a determining factor in the precariousness of the world economy.
In sum, it is true that investors will opt for financial factoring operations, in part, depending on traditional factors, such as the nature of the receivable, the rating of the issuer, etc., but it is also true that this new crisis has affected and will continue to affect the financial markets, increasing risk and its corresponding aversion, so it is highly probable that financial factoring operations will be part of the collateral damage, as well as increasing the cost to be assumed by those who seek to finance themselves by this means.
