Session 7: Introduction to Supply Chain Finance and Receivables Purchasing Jolyon Ellwood-Russell Richard McKeown 30 October 2015
Agenda Overview of Receivables Risks and credit quality Specific structures: Supplier led Buyer led Other types Legal issues to consider Fraud Conclusions
Overview of Receivables What type of receivables? Payables arising from sales of goods (and services) characterised and evidenced in an invoice Cross border Nature of SCF and receivables purchase Involving a mixture of jurisdictions Could be multi-jurisdictional in same transaction Assumes the existence of the receivables But view performance and payment risks Both seller and paying party
Overview of structures Framed as receivables purchases and documented as a Receivables Purchase Agreement (RPA) Different types Bilateral Multiparty both sellers and buyers of goods Use of electronic platforms Structured arrangements Forfaiting Factoring Invoice Discounting Securitisation
Risks and credit quality Key risks Receivable does not exist Receivable is not paid Receivable gets paid to someone else Due diligence Quality of supplier Performance risk Quality of what is supplied Quality of receivable Quality of paying party
Receivables Due Diligence What performance is needed from the supplier? Will the buyer pay the invoice delivered? The independent payment undertaking (IPU) What is its place? What are its problems?
Supply Chain and Receivables structures Supply Chain structures - Buyer-led Receivable Purchase arrangements - Supplier-led Legally structured as a purchase by way of assignment Third party structures
Receivables Purchase (Supplier-led) structure The supplier is the financer s primary client Usually contractual arrangements with supplier only might be limits on debtor exposure Can be facultative or whole turnover May be confirmed or unconfirmed receivables May be disclosed or undisclosed Supplier as collection agent of the financer maintain commercial relationship Risk of Recharacterisation
Receivables Purchase arrangement 2. SUPPLIES GOODS / SERVICES AND INVOICE SUPPLIER (SELLER) 1. PURCHASE ORDER SUPPLY CONTRACT DEBTOR (BUYER) 7. ON PAYMENT OF FACE VALUE OF RECEIVABLE ON MATURITY DATE 5. FINANCER ACCEPTS AND PURCHASE / ASSIGNMENT AND MAKES PAYMENT OF DISCOUNTED PURCHASE PRICE 3. RECEIVABLES PURCHASE AGREEMENT 4. DETAILS OF ELIGIBLE INVOICES / REQUEST AND OFFER TO FINANCIER TO PURCHASE 5a. NOTICE OF ASSIGNMENT 6. PAYMENT OF FACE VALUE OF RECEIVABLE ON MATURITY DATE INTO TRUST ACCOUNT FINANCER
Supply Chain finance - Buyer-led The buyer / debtor is the financer s primary client and repayment covenant Contractual arrangements with the buyer / debtor Confirmed / accepted receivables Electronic platform and IT infrastructure Disclosed assignment and debtor onboarded to platform Commercial reasoning suppliers obtain early payment with financing costs based on creditworthiness of buyer used as a wider scheme to help buyer / debtor lengthen payment term producing cash-flow benefit Focus on accounting treatment for supplier AND buyer / debtor
Supply Chain (Buyer-led) structure 1. PURCHASE ORDER SUPPLIER (SELLER) 2. SUPPLIES GOODS / SERVICES AND INVOICE DEBTOR (BUYER) SUPPLY CONTRACT 5. REQUEST FOR FINANCES TO PURCHASE RECEIVABLES (manual discount only) 6. PAYMENT OF DISCOUNTED PURCHASE ORDER TO THE SUPPLIER FOR ASSIGNMENT OF THE RECEIVABLES SERVICE PROVIDER / FINANCER 7. NOTICE OF ASSIGNMENT OF RECEIVABLE 8. PAYMENT OF FACE VALUE OF RECEIVABLE ON MATURITY DATE
Third party structures Lots of providers in the SCF market usually buyer-led Has a ready made IT platform for financiers to utilise Financiers can be disclosed or just behind the scenes Third party originator as paying agent and collection agent
Third party structures other contractual structures SUPPLIER (SELLER) SUPPLY CONTRACT DEBTOR (BUYER) RECEIVABLES PURCHASE AGREEMENT FINANCER FINANCES AGREEMENT THIRD PARTY ORIGINATOR
Third party structures other contractual structures SUPPLIER (SELLER) SUPPLY CONTRACT DEBTOR (BUYER) FINANCER AGENCY AGREEMENT THIRD PARTY ORIGINATOR
Legal issues of Receivables Purchase Purchase or Loan Sale v secured financing True sale issues Best position for financer Notice of assignment Avoid set offs and counterclaims Contract of Sale (or at least the receivable) must be assignable. How to transfer the receivables Purchase of future receivables
Cross border Receivables Governing law of the sale contract / receivable Governing law of the receivable purchase document Must they be the same? The issues How to work around the problems
Financial crime in Receivable Finance Increasing concern on financial crime Documents passing on risk to customers Need right systems Trade Based Money Laundering (TBML)
Case study The double funding BANK 4 SELLER BANK 2 1. Seller and Buyer enter into Contract of Sale. 2. Seller provides goods. 3. Invoice issued to Debtor. 4 2 1 3 5 4a. Obtains financing from Bank. DEBTOR 4b. No notice of financing to Debtor. 5. Seller then issued more invoices to Debtor and signed up to new RPA with another bank.
Double funding - analysis Straight fraud Financers too relaxed No notices of assignment Financers let supplier act as agent Little tracking of payments Worked while business growing until Legal fights on priorities Lessons learned Track your receivables
Case study Change to payment instructions BANK 4a SELLER 1. Seller and Debtor enter into Contract of Sale. Trust Account New Account 2. Seller ships goods. 4b 2 3 1 5 3. Creates a receivable and Seller issues an invoice. 4a. Seller enters into RPA with Bank. DEBTOR 4b. Gives notice to Debtor. 5. Seller sends further notice to make payment into new account.
Change to payment instructions - analysis Possible fraud Financer too slow to react Know your transaction should not have permitted this Paying party says come and sue me in my jurisdiction Financier unlikely to see much return on financing
Conclusions Receivable Purchase good structuring possible Cross border issues can be dealt with Look at structuring from true sale point of view Important to have an enforceable right to payment Remember what has gone wrong and can go wrong Length of document is not an excuse for poor due diligence There are Risks in Trade Finance but Trade Finance is not Risky
A to Z of Trade Finance Structures & Solutions in Trade Finance
Speakers Jolyon Ellwood-Russell Partner, Hong Kong T +852 2583 8298 E jolyon.ellwood-russell@simmons-simmons.com Richard McKeown Partner, Hong Kong T +852 2583 8252 E richard.mckeown@simmons-simmons.com
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