During 2007 Technical Consumer Products (TCP), the largest US distributor of energy-efficient compact fluorescent light bulbs, found that the push for greener energy consumption was fuelling explosive growth in orders and contracts while at the same time making fresh demands on its working capital.
As a supplier to a big box retailer, TCP had achieved new working capital efficiencies through receivables discounting – a JPMorgan supply chain financing capability offered to select vendors of this major retail client.
The solution, which eliminated the cost of using a conventional import letter of credit, proved so beneficial that TCP was eager to bring the same concept to another of its large customers.
This time, however, the firm sought an arrangement that would bring the same benefit by a very different route. The supplier rather than the buyer would drive the supply chain finance solution. The new deal was structured so that JPMorgan purchased receivables for up to 60 days from TCP for its light bulb sales to the retailer, after the retailer provided its invoice preapproval to JPMorgan.
By this arrangement, TCP could expect to discount as much as US$150mn annually in receivables from the new retailer. The result would be a significant liquidity gain for TCP at lower financing rates.
The solution required partnership across JPMorgan’s trade and credit businesses in the US and Asia managing the client relationships in the supply chain. The JPMorgan global team worked closely and quickly to create a discounting solution that could be delivered to TCP as one transaction (and, in this case, could also be integrated with foreign exchange renminbi conversions for their China operations).
“In other trade banks, business line silos might have prevented structuring the solution so effectively or delivering it so quickly – in less than three months,” says Jackie Kaiko, global trade services middle market sales executive at JPMorgan. “JPMorgan’s global infrastructure, team culture and technology platforms uniquely enabled the bank to build a solution that could provide a model for other buyer-seller financing solutions. Unheard of only a few years ago, this kind of deal is the new finance paradigm for optimising working capital across the supply chain. JPMorgan is uniquely positioned as a provider, with processing muscle through its technology, credit appetite, proven ability to assess and manage risk, and an immense commercial banking franchise accessing buyers and sellers.”
The advantage for TCP in obtaining this kind of receivables financing lay in JPMorgan’s ability to assess and take risk on a number of fronts – large retailers, medium-sized suppliers in the US and Asia, and in the classical trade finance sense, credit risk across the supply chain.
Open account discounting made it possible for JPMorgan to better match TCP’s trade flows – both payables and receivables – while substantially decreasing TCP’s financing costs and maximising its cashflow. This kind of financing, which JPMorgan calls the true future of trade, creates a win-win situation for both buyers and suppliers and is already changing the way companies finance and sell products to big US buyers.
TCP is one of an increasing number of American companies which, in order to remain globally competitive, have elected to manufacture products in China. Supply chain financing as provided by JPMorgan has enabled them to supply retailers with a quality product that can be sold at an attractive price to American consumers.
As states like California consider banning the sale of incandescent light bulbs, and the green movement gathers momentum worldwide, companies manufacturing products like TCP’s will continue to experience the fast growth and consequent tugs at supply chain links that fuel demand for financing programmes like this one.
Technical Consumer Products (TCP)
Amount: US$75mn in receivables discounting
Tenor: Up to 60 days
Date signed: December 2007