Trends in Supply Chain Finance

Transcription

1 Trends in Supply Chain Finance Buckeye Financial Forum John Loy April 2015

2 Agenda History of Supply Chain Finance The underlying economics why it works Current trends Industry Geography Structures Future possibilities Bank of America Merrill Lynch John Loy Director Global Trade and Supply Chain Solutions (312)

3 Working capital performance challenges According to the Supply Chain Impact Survey commissioned by Capgemini and conducted online in October 2013 by KRC Research, 87% of global supply chain managers reported top-down pressure to continually reduce costs and optimize working capital in the supply chain. Capgemini: Supply Chain Management An integrated approach to Optimize Working Capital (March 25, 2014) With billions estimated to be tied up in excess working capital, optimising the flow of funds through the financial supply chain will surely continue to be a top priority for companies in the years ahead. Treasury Today: Overhauling working capital management (April 2014) 3 Apple, Coca-Cola and two dozen other companies are signing on to a White House effort to speed payments to firms down their supply chains.. [through] SupplierPay, a voluntary program in which companies commit either to pay small suppliers faster or help them get access to lower-cost capital. Wall Street Journal: July 11, 2014

4 History of Supply Chain Finance What are we talking about- Supply Chain Finance? Wikipedia Refers to the set of solutions available for financing specific goods and/or products as they move from origin to destination along the supply chain. It is related to a quickly growing use of a battery of technologies and financial business practices that allow for discounting of Accounts Receivable and financing of companies' confirmed Accounts Payable Investopedia A set of technology-based business and financing processes that link the various parties in a transaction the buyer, seller and financing institution to lower financing costs and improved business efficiency. Supply chain finance (SCF) provides short-term credit that optimizes working capital for both the buyer and the seller Prime Revenue Supply chain finance, also known as supplier finance or reverse factoring, is a set of solutions that optimizes cash flow by allowing businesses to lengthen their payment terms to their suppliers while providing the option for their large and SME suppliers to get paid early. This results in a win-win situation for the buyer and supplier. The buyer optimizes working capital, and the supplier generates additional operating cash flow, thus minimizing risk across the supply chain. Financing the Cash Flows in the Financial Supply Chain- A Structure that lowers the overall financing costs in the financial supply chain, and providing the ability for the benefits to be shared between the Buyer and Supplier 4

5 History of Supply Chain Finance Where/when did it start? Answer #1: 200 hundreds years ago, with European Banks and International Trade- Draft Acceptances Answer #2: Specialized factoring Companies in the 1960 s made deals with large companies to provide financing to their suppliers Answer #3: Automotive industry- late 1990 s 5

6 History of Supply Chain Finance Where/when did it start in the format that is currently used? Late 1990 s early 2000 s Automotive Parts Retailers/Automotive Suppliers/Retailers Everyone gets creative in this new arbitrage space Early (a little later) The SEC makes a comment about Supply Chain Finance Robert Comerford: December 11, 2003 Everyone freezes... to figure out what it means We figure out how the Supply Chain Finance Industry can grow Recession: Liquidity REALLY matters for the supply chain We figure out that it can be even more efficient and it really grows 6

7 History of Supply Chain Finance Overall Market Over the past 10 years, Supply Chain Finance has grown into a mainstream trade finance/capital structure product As the SCF industry developed. simpler structures (legal/pricing) clarified roles (banks, clients, third parties) improved supplier engagement Supply Chain Finance First appeared in the U.S., circa 2001 Initially offered by large U.S. banks Initially adopted by retailers; followed by automotive parts distributors Grew rapidly following the 2008 financial crisis Helped large buyers with strong ratings protect their supply chain both locally and internationally Offered by most global banks and many regional banks Current global market is approximately $500+ billion in annual spend volume and 400+ buyer programs Most programs are in the U.S. and Europe APAC and LATAM are quickly growing and are seen as the highest growth regions Global market is expected to reach $2 trillion in spend over the next five years SCF programs have broadened to include a wide array of industry verticals, like oil & gas, mining, manufacturing, consumer products and healthcare Size of program sponsor decreasing as SCF use expands- Mid-corporate and secured sponsors are realizing benefits 7 Challenge for sizing the SCF industry- no published industry data/ information

8 Supply Chain Finance- Why it Works The Power of Data And Automation Excess credit capacity for stronger companies- less capacity for weaker/smaller companies Removing the Risk of Supplier Performance- Changing receivable financing risk Credit Pricing Arbitrage 8

9 Supply Chain Finance How It Works 1. Buyer transmits purchase orders to supplier 2. Supplier submits invoices to buyer 3. Buyer reconciles and feeds approved invoice file into SCF platform 4. Supplier selects and requests discount/purchase from Bank on approved invoices 5. Bank discount/purchases invoices and remits payment to supplier 6. Bank debits buyer account on invoice maturity date Bank Platform Buyer Invoice Purchase order Supplier WOW- that seems simple.. 9

10 Supply Chain Finance Tall Challenges Supplier sign-up Painful process..getting less painful Legal structures Receivables, drafts, or discounts, oh my! Sharing the profits/revenue/savings created Being greedy in the short term backfired. Accounting It is not all about the accounting Presented formidable obstacles in any supply chain finance program 10

11 Supply Chain Finance Industry Trends Why is Supply Chain Finance embraced? Equipment Manufacturing Technology Consumer Goods Retailers Automotive Credit price arbitrage (supplier to buyer) Buyer/supplier relationships (long term, critical, control) Industry followers (working capital comps) Strategic initiative (Finance AND Purchasing) Oil/Gas, Utilities, Healthcare What other industries will be next? 11

12 Supply Chain Finance- Trends Supplier Trends Trends Supplier Geography NEXT? Why is Supply Chain Expanding Geographically? East Europe Southeast Asia Changing Trade Flows (following the economy) LATAM India Local Costs of Financing (credit cost arbitrage) China West Europe Legal Jurisdiction Restrictions (changes in laws) USA What about Buyers/Sponsors? 12

13 Supply Chain Finance Trends in Structures Legal and operational changes Why are they evolving? Receivables Discounts/ prepayments Receivables/Drafts/ Early pay discount Legal issues (moving to new countries) 1. US Dollars Multi-currency Accounting considerations Fee Sharing/Revenue splitting Payment terms and costs negotiations Self-funding Maximizing Cash Discounts (but still have excess cash) Unsecured, large, investment grade Unsecured/ Secured, Mid-corporate FX risks (increases as terms extend) Specific Suppliers All Suppliers Supplier Segments Focus on segmenting suppliers ( for maximizing benefits) 13

14 Supply Chain Finance Future Directions? Trends and Best Practices Challenges Issues Future? Supplier Enrollment Legal/Accounting Issues Capacity Legal Documentation KYC ---TIME----- Supplier- perfection Buyer- secured borrowers ----TIME---- Banks view of future Liquidity needs of clients ---Resources--- All Electronic Industry Standard Docs (ISDA) Non-Bank Conduits Non-perfection structures Not needing approved payables Acceptance of new type of payable on balance sheet Pools/Funds Use of Credit insurance Expanded syndications 14

15 Summary- Supply Chain Finance Trends It is here to stay, grow, and change.. Working Capital viewed as a cost of the supply chain Supply Chain management focus shifting from fulfillment and risk/costs, to Costs AND Liquidity It has become a Strategic Initiative in many leading companies and across many industries/countries SCF Continues to Improve the efficiency of the Financial Supply Chain 15 Whether you are a Supplier or a Buyer- Don t be late and miss the boat!

16 Notice to Recipient "Bank of America Merrill Lynch" is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation ("Investment Banking Affiliates"), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered as broker-dealers and members of SIPC and, in other jurisdictions, by locally registered entities. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp. are registered as futures commission merchants with the CFTC and are members of the NFA. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured * May Lose Value * Are Not Bank Guaranteed. This document is intended for information purposes only and does not constitute a binding commitment to enter into any type of transaction or business relationship as a consequence of any information contained herein. These materials have been prepared by one or more subsidiaries of Bank of America Corporation solely for the client or potential client to whom such materials are directly addressed and delivered (the Company ) in connection with an actual or potential business relationship and may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with us. We assume no obligation to update or otherwise revise these materials, which speak as of the date of this presentation (or another date, if so noted) and are subject to change without notice. Under no circumstances may a copy of this presentation be shown, copied, transmitted or otherwise given to any person other than your authorized representatives. Products and services that may be referenced in the accompanying materials may be provided through one or more affiliates of Bank of America, N.A. We are required to obtain, verify and record certain information that identifies our clients, which information includes the name and address of the client and other information that will allow us to identify the client in accordance with the USA Patriot Act (Title III of Pub. L , as amended (signed into law October 26, 2001)) and such other laws, rules and regulations. We do not provide legal, compliance, tax or accounting advice. Accordingly, any statements contained herein as to tax matters were neither written nor intended by us to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on such taxpayer. For more information, including terms and conditions that apply to the service(s), please contact your Bank of America Merrill Lynch representative. Investment Banking Affiliates are not banks. The securities and financial instruments sold, offered or recommended by Investment Banking Affiliates, including without limitation money market mutual funds, are not bank deposits, are not guaranteed by, and are not otherwise obligations of, any bank, thrift or other subsidiary of Bank of America Corporation (unless explicitly stated otherwise), and are not insured by the Federal Deposit Insurance Corporation ( FDIC ) or any other governmental agency (unless explicitly stated otherwise). This document is intended for information purposes only and does not constitute investment advice or a recommendation or an offer or solicitation, and is not the basis for any contract to purchase or sell any security or other instrument, or for Investment Banking Affiliates or banking affiliates to enter into or arrange any type of transaction as a consequent of any information contained herein. With respect to investments in money market mutual funds, you should carefully consider a fund s investment objectives, risks, charges, and expenses before investing. Although money market mutual funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in money market mutual funds. The value of investments and the income derived from them may go down as well as up and you may not get back your original investment. The level of yield may be subject to fluctuation and is not guaranteed. Changes in rates of exchange between currencies may cause the value of investments to decrease or increase. We have adopted policies and guidelines designed to preserve the independence of our research analysts. These policies prohibit employees from offering research coverage, a favorable research rating or a specific price target or offering to change a research rating or price target as consideration for or an inducement to obtain business or other compensation. Copyright 2015 Bank of America Corporation. Bank of America N.A., Member FDIC, Equal Housing Lender. 16