Joining the dots

Trade finance, Working capital management

Joining the dots

February 2020

Can attractive supply chain finance pricing drive sustainable behaviour? And when are trade payables really debt? Clarissa Dann reports on key discussion topics at the 2020 BCR Supply Chain Finance Summit in Amsterdam

One of the great pleasures of returning to an annual industry fixture each year is not only reconnecting with familiar faces, but comparing how conversations have moved on in 12 months. And in Amsterdam at BCR’s Supply Chain Finance Summit – now in its fifth year – delegates saw sustainability move from “good to do” to actual examples of transaction, and heard why ratings agencies just don’t buy extensions of payment terms as anything other than more debt.

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The summit’s regular chair John Bugeja from Trade Advisory Network was back on stage and opened with the observation that lines between traditional paper-based trade finance and the open account dynamics of supply chain finance have blurred. “Supply chain finance starts in the physical world of moving goods, and there is an interesting connections between what is happening in that physical word and the financial solutions that relate to it,” he said.

“What has been the biggest innovation that made the most impact on global trade in last 100 years?” he asked. The answer was a piece of standardisation – the agreement that the 40 foot container would be adopted by everyone enabled international trade to grow. Bugeja went on to point out that there is a parallel with trying to achieve digital trade and finance standards where different consortia working on different ecosystems are in danger of developing digital islands that have no status outside their bubbles.

This is why the ICC Banking Commission is working on the development of the Digital Trade Standards Initiative, an update which was presented on Day 2 by ITFA Chair Sean Edwards, where he revealed that this aimed to “deliver a suite of open technology standards and protocols required to enable seamless interoperability between digital trade systems, applications and networks”, doing for trade “what the internet did for information”. Launch date is currently scheduled for April 2020 and a managing director is being recruited to run this from Singapore.

 

Trade conflicts and uncertainty

Robert_Koopman_keynote_800px.jpg

Robert Koopman from the WTO explains ongoing trade “events” in his keynote talk

WTO Chief Economist Robert Koopman set the trade backdrop to the event outlining what he termed “a febrile geopolitical environment”.

The literature tells us that trade policy changes such as tariff reductions and regulatory coherence account for around 25% of trade growth. Koopman said the WTO is very concerned about data bubbles and that the WTO Ecommerce Joint Initiative is trying to negotiate some high level global rules for digital trade that would allow businesses to form business to business rules.

“I don’t have very good news about what to expect in the coming years, “ he warned before putting up a slide stating that world merchandise trade is expected to only show 1.2% growth for 2019, well below the April 2019 predictions of 2.6%. And as for trade volume growth – while this could accelerate slightly to 2.7% in 2020 with global GDP growth holding at 2.4%, all this depended on the easing of the trade tensions that characterised the past year. The bottom line, he said is that trade conflict is bad for the global economy. “While tariffs and rising trade costs cause a lot of trade diversion and some fragmentation of a fairly globalised economy, a negative investment shock, lower long-term growth and a technology war could fragment the world digitally into two or three spheres – Chinese, US and European.”

Koopman outlined how investment is trade intensive. “When firms invest, a high share of those investment dollars are on traded goods, imported capital, and then that investment contributes to economic growth,” he explained. “So if investment is reduced, future economic growth potential is reduced.” But he added that some of these effects could be offset by increased consumer spending, or the Federal Reserve cutting interest rates or the government spending on infrastructure. “Trying to tease out what is driving the investment numbers is important and it’s important to us economists to sort this out”.

 

Successful implementation

It is always inspirational to hear more about what has worked well (and what has not) in supply chain finance. This was provided by a panel moderated by PWC Netherlands Danny Siemes that included former Citibank SCF specialist Anurag Chaudhary, now part of EY in a consulting arm called Pinnacle Trade Finance. They were joined by Boris Huttenlocher, now at UniCredit after managing receivables and supply chain finance at Siemens, and Standard Chartered’s Head of Trade Product Michael Harte.

 

Danny Siemes (PwC Netherlands); Anurag Chaudhary (Pinnacle Trade Finance); Boris Huttenlocher (UniCredit); Michael Harte (Standard Chartered Bank)

Left to right: Danny Siemes (PwC Netherlands); Anurag Chaudhary (Pinnacle Trade Finance); Boris Huttenlocher (UniCredit); Michael Harte (Standard Chartered Bank)

The panel agree that identifying what the corporate wants - and aligning your solution with an outcome that delivers frictionless trade, increases their revenues and reduces cost - is essential.

 

Figure 1: key tips and tricks to implement a successful and scalable SCF programme

Once this initial strategy is in place, scalability, supplier onboarding to a technology platform that where suppliers can upload their KYC documentation, and a review of potential to roll out to emerging markets (given what are often stringent regulatory and compliance requirements) follow.

The panel emphasised the importance of completing all the training sessions available and bringing suppliers and procurement teams to meetings. “You need a dedicated project manager who drives it all,” said one panellist.

 

Sustainability in action

Koen Boone, a financial economist and Research and European Director of the Sustainability Consortium (TSC), explained how more than 2,500 companies report to their retail customers using TSC performance indicators collected via routine surveys. More than US$200bnof consumer goods is under management using TSC tools, said Boone (see Figure 2).

 

Figure 2: Collecting the TSC performance indicators

Figure 2: Collecting the TSC performance indicators
We wanted to verify whether we could contribute to systemic change by proving traceability
Viktor Ivanov Head of Sustainability, Transaction Banking, EMEA BNP Paribas

Walmart, which has been sending these for over years to their suppliers, started working with HSBC to use the information to improve their trade financing. The more sustainable a supplier is, the better financial conditions they get,” Boone explained. Open to all suppliers of Walmart in Canada, the US and Mexico, the scheme has a globally standardised method so that it can be applied to suppliers of many other retailers/wholesaler/caterers and brands in the same way.

To be eligible for the financing, suppliers have to either score 80% in the assessments or, if not able to do this, demonstrate at least an 11% year-on-year improvement.

Another example of ethical supply chain finance in action was presented by the double act of BNP Paribas’ Head of Sustainability, Transaction Banking EMEA Viktor Ivanov together with Halotrade Founder Shona Tatchell.

Trado, a multi-sector collaboration between blue chips, start-ups and banks convened by the University of Cambridge Institute for Sustainability was piloted in September 2019 with smallholder tea farms in Malawi, which were offered a financial incentive in return for feeding social or ecological data into the blockchain.

“We wanted to verify whether we could contribute to systemic change by proving traceability and whether preferential access to trade finance using DLT technology could drive sustainable behaviour,” said Ivanov.

“Trado’s goals were pretty big,” continued Tatchell. Specifically, the pilot aimed to tackle Sustainable Development Goal 12 on responsible production and consumption, and a few others along the way. The pilot is supported by Barclays, BNP Paribas, Sainsburys, Sappi, Standard Chartered and Unilever.

The lower cost of funds to the producer gets reinvested back to benefit the smallholders at no extra cost to the consumer, explained Tatchell. With transparency across the supply chain network providing visibility of product and producer original and finance flows between them, consensus was made possible by everything being recorded in the blockchain.

 

Richard Hayes (Nordea); Tara Norton (BSR); Viktor Ivanov (BNP Paribas) Shona Tatchell (Halotrade); Koen Boone (TSC); Armand Ferreira (ING)
Left to right: Richard Hayes (Nordea); Tara Norton (BSR); Viktor Ivanov (BNP Paribas) Shona Tatchell (Halotrade); Koen Boone (TSC); Armand Ferreira (ING)

In a follow-up panel session Ivanov made the point that banks are there to help corporate manage their footprint effectively – but the dialogue extends beyond supply chain finance with clients and needs to look more widely at how corporates can achieve their sustainability objectives. In addition, now that sustainability is much further up the corporate agenda, “you get to the C level very quickly and everyone comes together to form a strategic plan.”

Armand Ferreira, Director of Sustainable Finance at ING Wholesale Banking agreed that banks could have more impact if they help companies become more sustainable. “If your company and supply chain are not sustainable you won’t get the investment,” he said. Having started in this area four years ago, it was a struggle to get clients to talk about it, but now every client “applauds when we raise the subject,” he said.

 

Ratings agency perspective

In his keynote talk a year ago at the 2019 Supply Chain Finance Summit in Amsterdam, Deutsche Bank’s EMEA Financial Supply Chain Head Anil Walia explained to delegates the real danger corporates faced of having their trade payables treated as debt, following the Carillion collapse in early 2018. Moody’s had pronounced this “exposes flaws in the accounting for supply chain finance arrangements” in a report published on 13 March that year.

 

Figure 3: Reverse factoring disclosure: Carillion example

Illustration of Reverse Factoring - Carillion
The Standard Definitions for Techniques for Supply Chain Finance, explain what we actually do and they contribute to the discussion on accounting
Christian Hausherr, Product Manager Supply Chain Finance EMEA, Detsche Bank, Chair, Global Supply Chain Finance Forum

So it was particularly helpful to hear from Frédéric Gits, Group Credit Office, Corporates at FitchRatings at the 2020 event. He confirmed that from the agency’s perspective, trade payables that are extended beyond what is considered normal in the industry (for example 60 days) with the help of an intermediary financial institution would be classified as bank financing. He gave the following example:

  • Assume an outstanding amount of confirmed €100m in trade payables
  • There is an extension of these trade payables from 60 days to 180 days

Fitch would consider that the 120 days extension is akin to financial debt and would add to financial debt 120/180 of the outstanding amount, i.e. €67m. Cash flow impact of a year- on-year change in reverse factoring balance would also be adjusted for.

This treatment, said Gits, reflects the uncommitted nature of these facilities and “the likelihood that in financial distress they will become unavailable, requiring alternative funding to be found”. Taking this approach, he added, “improves comparability between issuers engaging in reverse factoring and those not doing it”.

Unsurprisingly this prompted extended and robust discussion among delegates. While they understood the need for transparency, several felt this automatic reclassification to bank debt once the payables went past 60 days was missing the granularity and dynamics of the payables finance product. “Payment terms are extended because the financing is more attractive to the seller,” said one bank delegate.

But as Bugeja summed up, if a payables finance programme is all fully disclosed as a means of supporting suppliers upfront, there should be no concern. If, however, the motivation is to extend terms beyond what is reasonable for the industry, corporates “deserve all they get”. He pointed out that ratings agencies are there for the benefit of investors and lenders.

Bugeja added that the group that rarely reads ratings reports - and trust a big name corporate - are the suppliers who are particularly vulnerable if, having agreed longer payment terms, they are dependent on a source of finance they would not otherwise have had access to. “If the banks pull the plug because they can see a Carillion situation unfolding, suddenly those suppliers have work in the pipeline they will not get paid for as these are not committed lines. So they then have a whole load of pre-shipment risk − and stock that is now going to be a load of unsold stock − on their balance sheet because the company has gone bust.”

While it is not helpful for the pendulum to swing too far, the way to combat surprise reclassifications into bank debt by ratings agencies is to be very transparent so they can make sensible judgements, he concluded.

Deutsche Bank’s Christian Hausherr (Product Manager, Supply Chain Finance EMEA), who also chairs the Global Supply Chain Finance Forum, pointed out in a later panel why the Standard Definitions for Techniques for Supply Chain Finance were such an achievement for the industry. “These help anyone who is interested in this business, whether it be a regulator, analyst, accountant or corporate, explain what we actually do and they contribute to the discussion on accounting – which while a hot topic that has escalated recently, has actually been an issue for the past 15 years.”

Christian Hausherr and Anil Walia
Deutsche Bank’s Christian Hausherr and Anil Walia at the Deutsche Bank stand in Amsterdam

The BCR 5th Annual Supply Chain Fnance Summit was held at the Grand Hotel Krasnapolsky, Amsterdam 30–31 January 2020

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