Matt Wreford, Demica: "The provision of cheaper financing is by no means the only virtue of SCF"

In a recent study, Demica found out that corporate treasurers are increasingly looking beyond traditional ways of finance to a wider range of alternative funding options that support their working capital requirements. What kind of options are they considering and why?

Corporate treasurers are now tasked with the crucial remit of supporting companies’ growth in a more positive economic climate, using a vigilant and disciplined approach to managing cash and minimising risk. The drive for competitive advantage means that treasurers have to look beyond the traditional forms of finance to explore a wider range of alternative funding options when supporting their working capital requirements. The need to unlock trapped liquidity has become even more important in a post-crisis world where narrow spreads have been rendered a thing of the past and credit has become harder to access for some companies. Grappling with rising financing costs, companies now have to broaden their financial spectrum to reduce reliance on bank credit and to find more additional, alternative funding sources.

In our survey entitled “Cash Positive?”, 80% of the respondents agreed that companies in their industry have to look for alternative financing methods as standard bank credit becomes more restricted. It is therefore not surprising that more than 85% of the respondents stated that their industry peers are exploring methods of releasing more liquidity from their account receivables. More than 83% of the respondents believe that companies in their sector have become more interested in arranging finance for their supply chain participants in order to extend their own payment terms, while helping their suppliers access an affordable method of improving liquidity. Another 60% reckoned there is a revival of interest in trade receivables securitisation (TRS) from companies in their industry. In addition, more than a quarter of the respondents are currently using factoring to sell off their receivables.

In their quest of converting receivables into cash, treasurers look for financing techniques to help them meet their goals. How is trade receivables securitization (TRS) helping treasurers?

TRS is particularly valuable for organisations with sufficient volume and quality of receivables to make the exercise worthwhile. Organisations leveraging this financing instrument can not only enjoy increased liquidity, but also have lower financing costs and a diversification of overall funding structure. In particular for sub-investment grade or non-rated companies which inherently have higher funding costs, TRS allows them to tap into capital markets which might otherwise prove difficult or impossible to access.

The increasing relevance of TRS for companies in their working capital strategy is evident in our research. Currently, around 16% of our research respondents are running a TRS programme. Amongst those who are not, a quarter will be looking to deploy this financing instrument sometime in 2015. Decisive drivers for those having implemented a TRS programme are first and foremost, to improve liquidity. The desire to obtain more favourable financing conditions and diversification of refinancing channels came as the second and third most important motivating factor.

The favourable standing of TRS as a cost-efficient corporate financing technique in the banking community has given a further edge to its development. Trade receivables represent an attractive asset class for financiers since they are self-liquidating, typically short-dated and are suitable for revolving finance. As financial institutions are keen to finance corporates through secured funding with low cost requirements, TRS allows banks to make the most efficient use of their capital and to provide broader financial support than they otherwise could in a conventional revolving credit facility.

What hinders the process of implementing a successful supply chain finance programme? 

On-boarding suppliers, overcoming legal and jurisdictional issues and gathering internal support are often the most challenging issues when implementing a supply chain finance (SCF) programme. Overcoming these challenges requires astute tactics. Since some suppliers still approach SCF with an initial scepticism, it is imperative that bank financiers, together with buyer companies, articulate the proposition properly in order to demonstrate the potential benefits to suppliers. Big supplier firms with strong financial standings and good access to bank borrowing might feel less inclined to join SCF programmes. However, the provision of cheaper financing is by no means the only virtue of SCF, there are other gains to be made too, including operational efficiency, improved visibility into supply chain operations and preservation of credit lines with relationship banks. It is therefore crucial that these additional advantages are being communicated to suppliers when encouraging participation in a SCF programme.

The implementation of an international SCF programme is inevitably more complex than a domestic one, given the differences in local regulations and jurisdictions. An in-depth understanding of the local legal framework is a prerequisite in ensuring that legal structures are enforceable and applicable. International financial institutions which can leverage their global support model to understand the local trade environment, as well as to scrutinise the tax position and documentation proposition in all supplier and buyer jurisdictions, will prove to be a particularly helpful partner in facilitating cross-border SCF initiatives.

Furthermore, since the implementation of a SCF programme affects different internal stakeholders, from treasury, procurement and legal, to information technology, business operation units and investor relations, internal support is an indispensable element in assuring alignment and cooperation across different functions within the organisation. In particular, close collaboration between the CFO and supply chain heads, as well as executive level leadership can make a vital contribution to unlocking financial agility advantages in the supply chain.

What are the most interesting industry-related trends that you foresee for 2015/2016?

Syndication between banks and non-bank funders is likely to increase over the next few years. The onset of Basel III will make it uneconomic for traditional bank funders to fund those parts of a programme that are internally rated below BBB (colloquially called the Mezzanine). The Mezzanine tranche(s) can be up to 15% of the facility size for non-investment grade clients, or for those with lower quality receivables, or for those seeking higher advance rates. Therefore, banks will become increasingly keen to cooperate with non-bank funders such as insurance companies, pension funds, hedge funds to fund the mezzanine. Third-party specialists that can provide technology expertise are already proving particularly valuable in helping Mezzanine investors (who take the first external loss) to mitigate risks.

As well as mezzanine tranches in large transactions, non-bank funders will play an increasingly important role in funding receivables finance programs for corporates no longer well served by banks that are restricted to fund only core clients in their principal geographies. Under-served clients include those that are non-investment grade, are in less well banked jurisdictions or in more challenging sectors, or have higher gearing in their capital structures – all of whom are confronted with the challenge of accessing working capital cost effectively.

In addition, with new entrants such as peer-to-peer lenders, early payment market places and dynamic discounters, the face of the alternative finance market will continue to evolve, providing companies with a broader palette of financing channels at a time when banks might struggle to fulfil the rising demand for financing.

About Matt Wreford

Matt Wreford joined Demica as CEO in November 2014. Matt was previously at Vernier Partners, an innovative supply chain finance business which he founded in early 2014. Prior to founding Vernier Partners, Matt spent 7 years at IPGL, the private holding company of Michael Spencer, CEO of ICAP Plc. He was appointed CEO of Exotix Partners LLP in 2011, the investment banking boutique specialising in illiquid bonds and loans, equities, and structured finance, and became CEO of IPGL in 2012. In addition to these roles, he has served as non-executive director of a number of other financial services companies.

About Demica

Established in 1992, Demica provides working capital solutions to multinational companies worldwide. Initially a leading technology and reporting services provider, Demica has evolved into a fully-fledged global funding platform. Today, Demica powers over 60 large receivables finance and supply chain finance programmes worldwide. In 2014, Demica facilitated the funding of USD 50 billion of receivables from 130 countries for clients in Europe, North America and Asia.