Asian corporates are taking greater advantage of tools to optimise their working capital cycles, writes Liz Salecka.
Although Asia is feeling the squeeze in the availability of US dollar liquidity, Asian companies across the board have not experienced any major internal liquidity management issues, and are benefitting from the stronger focus they have placed on cash management since the Asian financial crisis of 1997.
“This [US dollar liquidity issue] has not had that severe an impact on Asian companies’ cashflows. There are constraints on US dollar credit availability, but it is still available and companies can always still access local currencies instead,” says Ravi Saxena, regional head, trade, Asia Pacific, treasury and trade solutions, global transaction services at Citi.
“Due to the region’s general stronger economy and business flows, Asian corporates are under less pressure than their European counterparts,” says Lloyd Caughey, director, trade and working capital, global transactional services at Westpac Institutional Bank.
He explains that the Asian financial crisis hit many companies that were borrowing short term to fund long-term projects – and were doing so in international currencies to reduce costs, but notes: “Even today, many Asian companies are borrowing short term to fund longer term projects but we believe they are managing it a lot better.”
Similarly, Ashutosh Kumar, global head of corporate cash and trade banking, transaction banking at Standard Chartered points out that cashflow management is an absolute priority for many Asian companies, which learned the importance of managing cash after the Asian crisis. “They learned how to manage their inventory better so that working capital requirements could be reduced, and also recognised the opportunities presented by realising receivables early or extending their payables,” he says.
Many major Asian corporates that have grown their businesses in overseas markets are also placing an increased focus on establishing stronger treasury functions.
They are exploring the use of in-house banking models and global pooling structures to enhance control over their cash flows.
This enables them to self-fund more of their own operations. Corporates can cover funding gaps at one subsidiary by using surplus cash held at another subsidiary through an intercompany funding arrangement or notional pooling structure,” explains Victor Penna, head of solutions and advisory sales, Asia Pacific at JP Morgan treasury services.
“This results in lower overall funding costs whilst also reducing reliance on short-term loans or overdrafts, which can be expensive.”
Demand rises for trade finance
Whereas in the past, many Asian corporates relied heavily on short-term debt to finance their business operations, they are now taking much greater advantage of trade finance to optimise their working capital cycles.
“Pre-financial crisis, many Asian corporates could easily access the capital markets for short-term debt – and did not need to use trade finance. However, since the financial crisis, demand for traditional trade finance has gone up as well as for newer tools such as supply chain finance and receivables financing,” says Shivkumar Seerapu, regional head of trade finance, Asia Pacific at Deutsche Bank.
“Asian corporates are becoming increasingly sophisticated in the use of receivables financing – and this is not so much because of any squeeze on liquidity, but rather because they recognise that it is a better way to manage their liquidity,” adds Kai Fehr, managing director, head of trade and working capital Asia at Barclays.
Suppliers too, some of which find it more challenging to arrange financing at a competitive price, are also increasingly approaching their buyers for either early payment or for a reduction in payment terms.
“Both buyers and suppliers are becoming increasingly sophisticated in using financial tools on both the payables and receivables sides to maximise their working capital efficiency and thus reduce their funding requirements,” says Chetan Talwar, corporate trade advisory manager, Asia Pacific at JP Morgan treasury services.
He adds: “Given that the credit risk of a large global corporate would typically be better than the credit risk of a small supplier, selling receivables should provide a more competitive option as compared to short-term loans for small and medium-sized enterprises.”
Banks active across Asian markets are also favouring the provision of trade finance to traditional lending facilities because it is both shorter-term and perceived as lower risk.
“The availability of trade finance is not an issue,” says Saxena at Citi. “There was a big debate in 2008 on whether the availability of trade finance was impacting the growth of physical trade, but if you look at bank balance sheets since that period, their trade assets have gone up significantly, and they have put in extra capacity.”
While global trade banks may dominate in the international supply chain finance space, large regional players have also developed a strong foothold in this business
“Regional banks are in a good position to roll out regional programmes that cover China, Malaysia, Indonesia and other countries because they are embedded in these countries – and understand the counterparties,” says Fehr at Barclays. “Domestic banks are more limited to rolling out programmes in their own countries.”
He adds that banks are often more comfortable offering trade finance solutions as it brings them much closer to their corporate clients, and they benefit from greater visibility into their client’s trade flows. “The short-term nature of receivables financing is in many cases preferred over revolving credit facilities,” adds Fehr.
Smaller companies too are now also largely looking for some form of trade finance, and this is seen as more secure from many banks’ perspective.
“It is also cheaper, depending on the programme structure. In traditional trade finance, the risk is mitigated by a letter of credit. In a well-structured supply chain finance programme where there is a large buyer, the risk is placed on the buyer and this too helps to reduce pricing,” says Kumar at Standard Chartered.
Trade finance selection
For Asian corporates looking for trade finance, there are now a plethora of choices available from traditional trade finance to receivables financing and participation in supply chain finance programmes.
When looking at newer financing tools, whether a company opts for receivables financing or supply chain finance depends largely on its size and own underlying needs.
Kumar points out that supply chain finance typically comes into play where there is a large buyer and multiple suppliers. “If you are working with 20 to 30 buyers, only a small proportion of your receivables will be financed through the programme. If you are working, by and large, for just one large buyer then this works very well,” he says.
“In many instances, a company may be better off looking for a receivables financing solution, rather than being part of 20 supply chain finance programmes led by different buyers – it all depends on the dynamics.”
“For Asian suppliers selling to multiple buyers, where no one buyer constitutes more than a relatively small portion of their outstanding receivables, invoice discounting or selling receivables is the preferred option over supply chain finance,” adds JP Morgan’s Talwar. “On the other hand, a supply chain finance programme can be a simpler and more cost-effective way of accessing liquidity and covering risk stemming from more concentrated receivables flows.”
Meanwhile, Deutsche Bank’s Seerapu points out that for SME and mid-cap suppliers, joining a large MNC’s supply chain finance programme makes the most sense from a cost-efficiency perspective. “However a large Asian seller that has a lot of big ticket receivables and is working with a few institutional buyers is likely to prefer receivables financing,” he says.
Greater bargaining powers
Although supply chain financing can prove more cost-efficient – particularly from a small supplier’s perspective – many Asian companies are recognising that receivables financing provides them with greater control over how they access funding, and can strengthen their bargaining powers with buyers.
Participation in buyer-led programmes, on the other hand, may put them in a weaker position when negotiating terms and conditions with their buyers.
“Receivables financings are often used as this benefits the suppliers directly and is initiated by them. Supply chain finance is more difficult as it requires approval by the buyers and renegotiation of payment terms or price if there are to be tangible benefits for the buyer,” says Westpac’s Caughey.
“One of the key benefits of receivables financing is that it enables companies to effectively use their own receivables to finance themselves in many instances with added benefits of days sales outstanding (DSO) reduction, but if a company does join a buyer’s programme, then the economics are likely to be more beneficial, especially if it is a small company,” says Saxena at Citi. “However, the buyer may want something in return to make this beneficial for its company.”
Meanwhile, Barclays’ Fehr identifies a growing trend among many Asian corporates towards using receivables financing so that they can extend payment terms to buyers, and thereby strengthen their case for price increases.
For example, a seller using receivables financing can be paid in 90 days by its bank, but offer its buyer extended payment terms of 180 days. This puts the seller in a much stronger position when it is negotiating price increases for goods with that buyer.
The costs of participation in a supply chain finance programme will also depend on the circumstances.
Supply chain finance can be offered after the supplier has shipped goods, and the buyer has accepted them, and in this instance there is less risk and lower pricing.
But, as Kumar notes, this is not the case with post-shipment, pre-acceptance financing, where the performance of thesupplier has to be taken into account.
“For pre-shipment finance, the risk is much higher and hence the pricing will rise in tandem with the amount of associated risks,” he says. GTR