For many European corporates and their suppliers, the recent sovereign debt crisis has strengthened the need for supply chain finance and receivables financing. Liz Salecka investigates.

Europe’s sovereign debt crisis looks set to hamper the availability of traditional credit facilities for both European corporates and their suppliers, stimulating demand for alternative sources of liquidity such as supply chain finance (SCF).

A report, published in June, by Standard & Poor’s (S&P), reveals that sovereign risk is now a major concern for European governments, banks and investors.

“We believe increased sovereign risk could ratchet up pressure on (European) banks’ net interest income,” said S&P. “In the worst-case scenario, it could trigger another liquidity crunch similar to that of 2007-08.”

According to Dominic Broom, managing director, treasury services at BNY Mellon; the debt crisis has already led to liquidity withdrawals from Europe’s financial markets.
“Evidence suggests that most UK and US banks have largely cleaned up their balance sheets, but some European banks may have a bit of catching up to do here,” he says. “This could potentially affect their ability to provide future funding to corporates.”

“We are seeing some degree of retrenchment, and upwards pressure on prices,” continues Lex Greensill, managing director and Emea head of supply chain finance, global transaction services, Citi. “It is possible that the shocks of Greece, Portugal and other southern European countries will increase SCF business flows for us – especially if the current situation persists.”

And Niklas Callerstrom, global head of supply chain services, product management, global transaction services, SEB Merchant Bank, adds: “The European debt crisis will lead to growth in SCF as traditional facilities, such as overdrafts, become harder to obtain.

“Corporates are being forced to look at how else they can raise finance, and the assets they can use to back-up their borrowing activities. Supply chain finance, factoring or inventory finance all represent established ways of using assets to access finance.”

Financial crisis impact

The current scenario follows a major movement towards the deployment of local, cross-border and international SCF programmes by large European corporate buyers since the financial crisis escalated.

“SCF has been relatively successful in some markets, but has witnessed slower traction in others, such as the UK and mainland Europe. Since the financial crisis started, there has been an explosion in demand,” says Jeremy Shaw, head of trade services, JP Morgan.

Meanwhile, Citi’s Greensill explains that, today, many large European corporate buyers recognise the need to guard against the bullwhip effect, whereby suppliers, having reduced their stock provision in the event of an economic downturn, face difficulties finding the capital needed to meet the larger orders that their buyers may place as economic conditions improve.

“It is at this stage that suppliers need to increase their working capital to support their customers, and this is where the liquidity crunch really bites. As far as small and medium-sized companies are concerned, the majority of bankruptcies happen in an economic upswing. This is why SCF is so important – it is not about buyers extending payment terms but ensuring that liquidity is available to suppliers.”

Although the movement towards supply chain financing is evidenced across all European industry sectors, manufacturing, retailing, consumer durables and telecoms are key areas of growth.

“On the obligor side, it is large international corporates with good to excellent ratings that are looking for this type of financing,” says Daniel Schmand, head of trade finance for Emea, Deutsche Bank.

“Usually these corporates have a best-in-class ‘physical’ supply chain concept implemented, which is steered centrally. This is true for all industries, and in particular, the retail, textiles, consumer durables and food industries.”

SEB’s Callerstrom adds that demand is particularly strong among manufacturers of large machinery, which source from specialist suppliers.

“This is because this industry has long lead times and ties up a lot of capital. It also relies on very specialist suppliers, producing parts that are customised to individual manufacturer’s needs,” he explains.

“It means that they really have to secure their supply chains. For companies working in this industry, if one supplier went bankrupt, it would be very difficult to find another one that could be up and running quickly.”

Aside from growth in demand for new supply chain finance programmes, there has also been greater supplier take-up of existing programmes set up by European corporates.

“We [at Citi] have programmes that have been up and running for 10 years, and it would be fair to say that demand has increased for those existing programmes,” says Greensill.

And Shaw from JP Morgan adds: “The European debt crisis may also work in many banks’ favour as it will push suppliers into joining large supply chain finance programmes.”

Crossing borders into CEE

Today, many large European corporates are actively launching cross-border programmes to support suppliers in the emerging markets of Central and Eastern Europe (CEE), driven by the growing movement towards sourcing from this region.

“We have seen a number of automotive and retail corporates start to shift their supplier bases away from Asia and towards CEE countries since the financial crisis began. They are getting more local in their sourcing to reduce shipment periods,” says Markus Wohlgeschaffen, head of global trade finance and services, UniCredit Group, who notes a big increase in requests for solutions that span CEE.

“A number of different companies are approaching us, including local and US companies, which are now sourcing from the CEE region. A large proportion of German and Austrian companies are also looking for solutions that support local and cross-border suppliers.”

“Every procurement department in every major producer will always be looking at ways of reducing costs and improving access to their suppliers,” adds Mario Messerschmidt, senior vice-president, corporate banking cash management and international business at Commerzbank. “China does have a reputation for being a low-cost provider, although labour costs are rising, and countries such as Romania and Bulgaria are becoming more competitive.”

Southern Europe problems

Meanwhile, although the rollout of supply chain finance programmes in southern Europe has not been hampered by the recent debt crisis, the risks these countries present are now being more carefully monitored.

“We have not seen a noticeable shift away from these markets as trade finance providers do distinguish between short-term trade and long-term government funding issues, but that does not mean that there are not any concerns,” says BNY Mellon’s Broom.

And Shaw concurs: “We do monitor all these markets very carefully, and if we had a large exposure to one particular country or one particular supplier, this would create cause for concern.

“Countries like Spain have also been affected by this crisis, but there are a lot of good companies there that need to secure finance so that they can continue with their manufacturing operations, and supply their buyers. If a supply chain finance programme can be rolled out, it can benefit them and the local economy.”

But Shaw points out that certain types of structured financing may prove less attractive. “Banks engaged in pre-shipment finance to suppliers in southern European countries are now likely to face increased risks,” he warns.

Citi too has maintained its appetite for both existing and new supply chain finance programmes across southern Europe. “We are happy to follow our multinational clients wherever they go, and a country like Greece definitely has some strong names – such as Nestle Greece,” says Greensill.

“However, we are applying a heightened level of caution to make sure we are making the right judgements. We are monitoring the situation in these countries, and have placed additional focus here.”

Looking after Asia

Many large European corporates have remained equally aware of the critical need to provide early financing opportunities to their suppliers in Asia, which prevails as a major source of components, parts and raw materials.

Wohlgeschaffen explains that UniCredit’s approach to supporting suppliers often involves the use of local banking partners – one or more of its own correspondent banks – so that it understands the risks inherent in the local market, and can gain direct access to suppliers.

“In Asia, UniCredit does not have such a strong retail or branch network so, depending on the structure of the programme, we would normally ask our clients if they want to bring a local banking partner into the syndicate.

“Much also depends on the number of participants. If there was a corporate buyer with a hub in Hong Kong and 10 suppliers, UniCredit could certainly set up a supply chain finance programme. But if there were 200 suppliers, potentially in various countries, then we would recommend that the buyer look for assistance from local bank players.”

Meanwhile, Callerstrom points out that SEB seeks to co-operate with large global banks when rolling out programmes for clients in countries where it does not have a physical presence.

“If we are talking to a very large Swedish buyer about an international SCF programme, it is also important to look at the volume of business involved. Programmes that involve fewer suppliers, and large volumes of business, are more attractive to finance,” he adds.
Commerzbank too is eager to follow its clients into Asia, as Oliver Klein, assistant vice-president, corporate banking cash management and international business, explains:

“Our main policy in relation to international trade is to provide services to our corporate customers in the international markets they cover,” he says. “We do have a presence in Asia – including four branches in China – but we don’t do any SCF programmes. Instead, we focus on the provision of individual credit lines to suppliers of our existing customers.”

As for the future, European banks look set to continue to play a leading role in the provision of SCF programmes for their corporate clients globally.

Broom points out that the days of global banks dominating international programmes may be over. “Many (corporates) are now looking for a broader number of bank relationships,” he says. “This has been driven by the geographic markets they want to cover as much as anything else.”

Greensill agrees, but points out that European corporates are still keen to centralise their systems and processes to drive efficiencies in their programmes.

“As a result, there has been a major movement towards syndicated deals, led by one international bank, and this is a very prudent move,” he says. “It is also important for banks themselves not to have single, massive exposures from having overall control of one supply chain finance programme.”

Nevertheless, Deutsche’s Schmand believes that global banks will still remain the first choice for global programmes.
“For multi-country programmes, international banks are the preferred partners,” he says. “In a nutshell, the higher the complexity and demand for a global integrated system, the more global the providers.” GTR