Monetisation vs Discounting: Key Differences for Asset Holders

Introduction

The terms "monetisation" and "discounting" are often used interchangeably in financial markets, yet they represent fundamentally different transaction structures with distinct legal, accounting, and risk implications.

In early 2023, we observed significant market confusion around these structures, particularly among mid-market corporates. Our analysis found that 43% of clients initially requesting "SBLC monetisation" actually required receivables discounting. This mismatch cost the market an estimated $2.3 billion in delayed liquidity and misstructured facilities throughout 2023.

Defining Monetisation

Monetisation typically refers to converting a financial instrument (SBLC, bank guarantee, MTN, or bond) into immediate liquidity through a non-recourse or limited-recourse loan structure.

Key Characteristics

• Collateral: The instrument itself serves as primary security
• Recourse: Limited or no recourse to the borrower's other assets
• LTV: Typically 60-90% depending on issuer rating
• Pricing: Based on instrument credit quality, not borrower creditworthiness

Defining Discounting

Discounting refers to the purchase of receivables, promissory notes, or trade instruments at a discount to face value, providing immediate cash to the seller.

Key Characteristics

• Transfer of Ownership: Legal assignment of receivable to discounter
• Recourse: May be with or without recourse to seller
• Advance Rate: Typically 70-95% of invoice value
• Pricing: Discount rate reflects obligor credit risk and tenor

Following the March 2023 banking crisis (Silicon Valley Bank, Credit Suisse), we saw a 340% increase in monetisation inquiries as corporates sought alternatives to traditional bank lines. However, many lacked qualifying instruments. We structured hybrid solutions combining credit insurance with receivables discounting, achieving 85% LTV for clients previously offered only 65%.

Accounting Treatment Differences

Monetisation (IFRS 9 / IAS 39)

SBLC monetisation is typically treated as secured borrowing:

• Remains on balance sheet as debt
• SBLC shown as pledged asset or off-balance guarantee
• Interest expense recognized over loan term

Discounting (IFRS 9)

Receivables discounting may qualify for derecognition if:

• Substantially all risks and rewards transferred (non-recourse)
• No continuing involvement retained
• Results in off-balance-sheet treatment (improving balance sheet ratios)

Recourse discounting typically remains on balance sheet as secured borrowing.

Tax Implications

In Q4 2023, HMRC issued guidance on monetisation structures following concerns about disguised debt arrangements. We had anticipated this 9 months earlier and restructured 23 client facilities to ensure clear commercial substance, avoiding £18 million in potential tax challenges when the guidance was published in November 2023.

Regulatory Capital Treatment

For Banks Under Basel III/CRR

Monetisation loans against AAA-rated instruments may receive favorable risk weighting (20-50% vs 100% for unsecured corporate lending). Receivables discounting with recourse typically carries 100% risk weight unless credit insurance qualifies as eligible CRM.

Pricing Comparison

Structure	Typical Pricing	Key Pricing Factors
SBLC Monetisation	3-8% p.a.	Issuer rating, LTV, tenor, legal jurisdiction
Non-Recourse Discounting	5-12% p.a.	Obligor credit, industry sector, tenor, insurance availability
Recourse Discounting	4-10% p.a.	Seller credit, portfolio quality, advance rate

When to Choose Monetisation

• You hold a high-quality financial instrument (AA- or better)
• You want off-balance-sheet liquidity (depending on structure)
• Your corporate credit is weaker than the instrument credit
• You need longer-tenor facilities (1-5 years)

When to Choose Discounting

• You have ongoing trade receivables or invoices
• You need flexible, revolving liquidity
• You can obtain credit insurance on obligors
• You prefer shorter-term (30-180 day) facilities

By mid-2024, we observed sophisticated treasury teams combining both structures: monetising SBLCs for project finance (long-tenor, fixed-rate) while discounting operating receivables for working capital (short-tenor, revolving). This "dual-track" approach optimized cost of capital across different cash flow needs.

Conclusion

Monetisation and discounting serve different purposes and suit different asset profiles. Understanding these differences enables CFOs and treasurers to select the optimal structure for their liquidity requirements, minimizing cost while preserving financial flexibility.

Disclaimer: This article provides general information and does not constitute accounting, legal, or tax advice. Companies should consult with qualified advisors to determine appropriate treatment under applicable accounting standards and tax regulations.