US corporates are looking to supply chain finance to achieve better pricing, improve their cashflows and support their suppliers at home and overseas. Four US banks discuss how to meet such demands.
- Jonathan Heuser, Executive Director, Global Trade Services, JP Morgan
- Paul Johnson, Vice-President, Trade and Supply Chain Product Management, Bank of America
- Mike McDonough, Managing Director and Head of Global Trade Product Management, BNY Mellon Treasury Services
- Jane Guttridge, Global Head of Supply Chain Finance Sales, Citi
- Aekyong Chung, Managing Director, Citi
GTR: Do you expect your provision of supply chain finance to US corporates to grow this year?
Johnson: We anticipate higher demand in 2010 as US corporates continue to find raising working capital from traditional sources, on acceptable terms, a challenge. Middle-market demand was slow to develop in the ‘good times’ but is accelerating rapidly as mid-sized buyers see the value of these programmes for themselves and their trading communities. Contrary to a lot of press comment, we did not see a material shift back to letter of credit payment terms during the financial crisis.
McDonough: There has been widespread acceptance of supply chain finance programmes among large corporates, many of which were early adopters and are now likely to expand their programmes. However, in the middle-market and at SME level, we have seen slower adoption of new technologies and supply chain finance than we first anticipated three to four years ago.
Guttridge: Now that many of our clients understand that supply chain finance is an almost identical product to dynamic discounting or some of the newer cards products, such as buyer-initiated programmes, we find that we are providing more and more programmes.
GTR: What is driving current demand?
Johnson: While traditional short-term liquidity is now available in the market, pricing is at elevated levels and the facilities come with covenants and conditions not seen pre-crisis. Squeezing free cashflow from extended supply chains has become a major area of focus. We are also seeing evidence of suppliers joining one programme and shortly afterwards encouraging their other investment grade buyers to establish similar programmes. In other words, we have created a ‘virtual circle’ as the deployment of one programme creates demand for the next.
Heuser: Buyers have become far more focused on cashflow efficiency and have become far more aggressive about managing payment terms, but have also developed a heightened concern for the stability of their supply chains. They have come to see supply chain finance as a tool that can provide stability by providing liquidity to their suppliers, without straining their own balance sheets, satisfying multiple corporate finance goals at once.
McDonough: There are several things going on. Most notably, many companies are still shaking off the cobwebs from the recent financial crisis and deferring their decision-making on supply chain finance. There are also concerns over the risks that supply chain finance and open account technology represent. The current environment makes it more difficult for many companies to get capital expenditure approvals, and companies, which are finding ways to manage their cashflows effectively, are likely to defer major expenditures. Large corporates that already have supply chain finance programmes in place, and recognise the benefits of this type of finance, will continue supporting them.
Guttridge: The trend towards greater use of these programmes is driven by the need to improve returns on invested working capital and the search for global operational productivity improvements. As use and acceptance of these programmes have grown, ease of implementation and effectiveness throughout the procurement process has smoothed execution, allowing gains for buyers and suppliers sooner.
GTR: Are there any particular US sectors where supply chain finance is now taking off?
Johnson: The auto-parts industry has been particularly active, reflecting a history of longer payment terms and a detailed understanding of the economic value created by these programmes. That said, we continue to add new clients in the retail, energy, high-tech and general industry segments.
Heuser: We have seen activity across a broad range of sectors, such as retail, consumer, pharmaceutical, and diversified industrial. This value proposition makes more sense in given circumstances such as when there is a significant differential in borrowing capacity between the buyer and its suppliers.
Guttridge: The most noticeable trend is that we are now seeing larger and stronger companies being added to the list of users. We see all areas investigating the opportunities presented, although there is less focus from financial firms.
GTR: Are US companies still seeking to support suppliers in specific emerging market economies such as China?
Johnson: US companies clearly want to support their strategic suppliers in emerging markets and many have accelerated the roll-out of programmes to overseas suppliers in the past year or so. While the situation in China may be improving, lots of suppliers in the smaller south-east Asian sourcing markets and in Central and South America continue to experience liquidity issues. Non-bank providers, such as credit insurers and factors, have not returned to many of these markets and, where they have, are being far more selective about who they finance.
Heuser: US companies want to support their entire supply chains, which means helping not only their overseas suppliers, but those in the US as well. In some cases they may even be running separate international and domestic programmes. While rapid recovery, or perhaps a milder crisis, in certain Asian markets – especially China – may seem to indicate that local financing is more readily available for suppliers, they continue to face financing limitations and high costs, and supply chain finance programmes continue to be in demand.
McDonough: In certain cases, importers with concerns about their suppliers are looking to provide them with improved access to working capital. However, local banks in exporting countries such as China and India, as well as in a number of other Asian countries, are stepping up to the plate in this area.
GTR: Is the US Exim playing a greater role in supporting finance programmes for US corporates and are you working with them in this area?
Johnson: Bank of America is one of the most active users of US Exim programmes, as evidenced by the 2009 Best Deal Award from GTR for our structured finance solution for Korean-issued letters of credit. As US Exim rolls out programmes to support supply chain finance we’ll certainly be looking at ways to leverage them for our corporate and financial institution clients.
Chung: Citi has always been talking to a variety of export credit agencies, including the US Exim. There is great political pressure to find new ways to finance the SME sector and Citi, with its expertise in supply chain finance, is working with various agencies to try to solve these problems.
The US Exim supports US exports, so the deals we do with US Exim always have US corporates standing behind them as exporters/suppliers. In the last 18 months alone, we have financed about US$3bn of US Exim-guaranteed loans in support of US corporates that are making export sales. US Ex-Im provides comprehensive guarantees for up to 85% of a project so, typically, Citi utilises a special funding vehicle to fund these types of guaranteed loans in the most effective manner possible through accessing the US commercial paper market.
McDonough: US Exim has shown a great deal of flexibility in response to the recent financial crisis, although they are not specific players in supply chain finance. However, they do offer insurance programmes and working capital finance, which can be adapted for supply chain finance programmes. From my own view, I do not believe that they offer a specific supply chain finance product, but that is not to say that their export programmes could not be adapted to support them.
Heuser: Our work with US Exim certainly helps to finance supply chain-oriented activity for many of our clients, though not through standard payables discounting-oriented programmes. To date, US Ex-Im has been most active in supporting discrete, high-value, low transaction volume export transactions whereas the typical supply chain finance programme supports ongoing flow business.
GTR: In today’s economic climate, do any particular countries present a greater risk when rolling out cross-border programmes?
McDonough: We always look at the level of risk posed by the buyer, and take a predominantly conservative approach when arranging supply chain finance programmes. While the countries concerned are less of an issue for us, there are, nonetheless, risks involved if a country has sovereign debt issues or there is pressure on trade transactions. Because supply chain finance is seen as a corporate finance transaction – not a trade finance transaction – it can be perceived as presenting a greater risk.
Johnson: Clearly the risk of fraud increases the more extended cross-border supply chains become, particularly in times of economic stress. The challenge for us is to make sure we have the appropriate controls in place to ensure that double financing is not taking place, especially in markets where it is difficult to perfect a security interest in the receivables being purchased. Over the past year, we’ve strengthened our documentation and added additional operational checks to make sure the assets being purchased are ‘free and clear’ of existing liens or charges.
Heuser: Aside from the usual concerns about buyer and supplier performance, different geographic supplier locations inject varying degrees of risk into supply chain finance transactions. These issues may take the form of concern about the local economic circumstances, regulatory hurdles, unique documentary requirements and opaque legal environments. As a global institution, it is critical for us to establish as clear an understanding as possible of the nuances of the markets in which we do business in order to protect both our own interests, and those of our clients.
GTR: Do your programmes support suppliers in ‘riskier’ emerging markets?
Guttridge: Broadly speaking we have suppliers in many of the emerging economies, some of which are in CEE. It is true that, in certain countries, it is not as easy to perfect security as one is required to do in a supply chain finance programme. And this does mean that there are some countries where we have to consider alternative solutions. Citi works on a case-by-case basis but we have to maintain the integrity of that proposition.
Johnson: Bank of America offers two flavours of programme – invoice discounting and trade draft discounting. Invoice discounting is by far the most popular offering with domestic US suppliers. However, we’ve found the less technology-intensive draft programme is better suited to suppliers in emerging markets. This is particularly true where the supplier is being migrated from letters of credit to open account payment terms and is used to submitting a draft as part of the payment process.
Heuser: The majority of our programmes create a global or regional supply chain finance programme. This enables buyers to support their suppliers wherever they may be located and to accommodate – not just current economic circumstances – but also whatever lies ahead.
GTR: How do you mitigate credit and cross-border risks?
Johnson: We responded to the crisis with standard balance sheet management techniques – by increasing pricing, managing limits and/or distributing risk. Our focus is definitely on investment grade buyers and, while the majority of clients continue to be based in North America and EMEA, we are seeing opportunities in Latin America and Asia. Quite often, this involves deploying a programme to a subsidiary of one of our North American or European clients. In these instances, we insist on a formal parent guarantee, rather than a verbal assurance of parent support, which may have been acceptable in the past.
Heuser: We manage risk through a variety of means, ranging from structure and documentation to secondary market distribution, trade credit insurance and capital markets solutions. Despite the variety of options available, in today’s credit and risk environment there is a natural tendency to favour investment grade corporate clients as they represent a more moderate level of risk, are oriented towards larger, global programmes, and are likely to have a greater financing cost differential between themselves and their suppliers. That said, smaller and sub-investment grade clients, with global supplier networks or an acute interest in managing their working capital, are increasingly becoming aware of the benefits, and today we are more frequently engaged in discussions with them too.
McDonough: We do not lend or promote credit unless the buyer is committed to the programme, and we mitigate risks through their provision of credit support. It is not critical to us that all our clients are investment-grade companies, but we always need to have a good relationship-based business rationale for extending credit to the buyer setting up the programme.
Guttridge: Citi has paid close attention to managing risks through proprietary processes that we believe allow us to help global clients in a unique way, while keeping a close focus on cross-border risks.