Trends in Supply Chain Finance

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

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) 521-4719 john.loy@baml.com 2

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

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

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

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 2000- (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. 2004-2007 We figure out how the Supply Chain Finance Industry can grow Recession: Liquidity REALLY matters for the supply chain 2008-2012 We figure out that it can be even more efficient and it really grows 6

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

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

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

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

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

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 2000 2015+ What about Buyers/Sponsors? 12

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

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

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!

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