SUPPLY CHAIN FINANCE (SCF) NEW PERSPECTIVES & NEW

Peter Mulroy

FCI Secretary General

SUPPLY CHAIN FINANCE (SCF)NEW PERSPECTIVES & NEW

SOLUTIONS:A NETWORK APPROACH

Agenda

Brief History & Introduction to SCF/Reverse Factoring (RF)

Technical Aspects

Case Study

Survey & Request for Proposal (RFP)

Introduction to FCIreverse

Differences between the 3 & 4 Corner Model

Timeline of the Roll Out of FCI Reverse

FCI Film

Conclusion

Launch of Confirming in Spain

CONTEXT:

90’s crisis – Spain – long payment terms.

Traditional Factoring quite extensive in Spain

NEED:

Control as many receivables from strong and reliable debtors.

Turn high-risk factoring transactions into higher quality assignments.

SOLUTION:

Due diligence over the receivable.

Confirmation of validity and enforceability.

Confirmation of payment.

The Mechanism was based on Factoring

The SUPPLIER invoiced the buyer as usual.

The BUYER confirmed the BANK that goods were received and invoice

was good to pay.

BANK offered the SUPPLIER a simple factoring transaction due to:o Particular receivables vs whole turnover

o officially recorded and confirmed for payment by the buyer

o undisputable receivables

o 100% value /advance payment – less purchase price

o off-balance sheet for supplier

o transfer of ownership of the receivable to the BANK

o Covering insolvency risk of the Buyer

o Money collection made on a direct debit to the buyer’s bank account.

EXAMPLE

BANK

file sent with confirmed receivables of

Suppliers A+B+C

to be paid in future dates

DEBTOR

OR BUYER

issues

purchase

receivable

offers

SUPPLIER A

SUPPLIER B

SUPPLIER C

BANK

accepts offer

assigns receivables

SUPPLIERS

A + C

waits for maturity

debit funds

buyer’ s bank account

send funds risk of non-payment

risk of insolvency

does not accept offer, waits for maturitySUPPLIER B

Bank does not guarantee anything/ Supplier bears own risk

maturity date / sends fundsBANK

A + B + C A + C: keeps & settles

B: sends transfer

SUPPLIER B

What is Receivable & what are owner’s rights?

Buyer

Performance(i.e., sale of

property or

services rendered)

Obligation

To Pay

Money

Seller

Collect/Enforce

Modify

Sell

Pledge

Credit

• Inability to Pay

Contract

• Defenses and Disputes

Setoff

• Mutual Debits/Credits

Rights of CreditorRisks of Creditor

Definition: A receivable is an intangible asset on the balance sheet of the supplier, created when the

seller agrees to ship on open account terms, typically for a period up to 180 days

How is a factoring transaction structured?

Client

(seller)

Factor

customer

(buyer)

Import Factor

Performance

risk

Payment

risk

Dispute (quality

problems)

Delays

Counterclaim

Indirect payment

from customer to

Client

Fraudulent invoices

Financial difficulties

Non co-operation by

customer

Fraud risk

Risks in Factoring averted in SCF/Reverse case

LEGAL BALANCE

bilateral bilateral

BANK

DEBTOR SUPPLIER

RECEIVABLE TRANSFER

Agreement

(reverse factoring

Agreement)

receivables

purchase

agreement

o limit

o should ensure trade debits

o irrevocability

o what should be in the file

o payment terms

o conditions for stoppage

o payments at maturity

o insolvency

o Uncommitted offer

o Assignment (signee)

o Enforceability (legal companies)

o Remission 100% funds

o Wording to permit off-balance

o Approachable wording and

commercial condition

SCF Reverse Factoring Case Study

Reverse Factoring/SCF case

Buyer

is having operations in durable consumer goodsindustry with production, marketing and after-salesservices.

member of a big Turkish industrial group, offeringproducts and services around the world with its 18production plants in 7 countries.

Industry leader with a market share exceeding 50% inTurkish white goods, built-in appliances and air-conditioners markets and fastest growing brand with amarket share of 28% in TV market,

Europe's number three white goods brand in terms oftotal sales.


The Challenge

Buyer has more than 300 suppliers, almost all of them are SMEs.

Conditions of the purchase agreement with the suppliers:

Payment term – 90 to 120 days

Open account sale

No partial payment before delivery of the goods

Extension of payments up to 180 days is possible

Suppliers are

small companies with limited access to bank finance at favourable rates

in need of urgent cash injection to the working capital for production and supply

of raw material

The solution

Factor offered Reverse Factoring to the Buyer

Steps forward

• Factor and Buyer sign a Reverse Factoring agreement

• Factor signs a Domestic Factoring agreement with Suppliers which accept toreceive advance payment

• Supplier sends goods and invoice to the Buyer

• Supplier assigns the receivable to the Factor

• Buyer checks the invoice and accepts it.

• Buyer sends the details of the invoice to be paid to the financial institution.

• Financial institution sends advance payment to the suppliers.


Benefits to the Buyer

The buyer, through the Factor, offers its suppliers a financial tool, it can negotiatebetter payment conditions with the suppliers.

Factor offers the Buyer extended payment terms ( up to 180 days) after the agreeddue date (120 days). In that case, the Factor pays the supplier on the agreed due dateand the buyer pays the Factor on the 180th day.

Benefits to the Supplier

The supplier receives an offer to have the open-account invoices paid in advance,without the need to go to a financial institution (FI) to ask for a financing facility.

The supplier is not using its bank credit risk capacity to finance these invoices, as theFactor provides the capital to the supplier.

The Factor only works with financially sound buyers, the price offered by the Factor tofinance the approved invoices is normally very competitive, probably better than thatthe supplier might get in a facility directly negotiated with its local bank.


FCI Survey & Request for Proposal (RFP)

Results of survey with FCI members:150 Responses (40% of Members)

66% members already have some form of SCF service.

52% plan to invest in SCF platform in the coming 2 years.

76% interested in a platform developed by FCI.

68% highly interested in using FCI for KYC, Education

92% FCI should build in edifactoring for a 4-corner model

80% would like FCI to provide education on SCF.

SCF Solution Providers invited to participate

How FCI is getting involved in SCF market

Regular 3-corner model

• FCI members currently notactive in offering SCF, will beable to start offering SCFdomestically .

• This way, the FCIreversesolution can be used to gaininitial experience in offeringSCF

• There is no need for other FCImembers to participate in thissetup, hence a ’regular’ 3-corner model.

FCI specific 4-corner model

• FCI members currently active inSCF can use the FCIreversesolution as a way to dobusiness in more countries

• To meet both localregulations and KYCrequirements, a 4-cornermodel is advised to startinternational SCF

• The EF can take different rolesin this setup which needs to bedecided upon by both IF and EF

FCI and Demica: building the future together

• FCI is the global representative body for Factoring and financing of Open Account domestic and

international Trade Receivables. With nearly 400 member companies in 90 countries

• Demica is the market leader in independent working capital solutions, offering integrated

working capital solutions to banks and multinational corporates, with one team covering the spectrum

of working capital products from Supply Chain Finance (Reverse Factoring) to Trade Receivable

Securitisation.

• Both partners have a Global aspiration, aiming to provide the ultimate technology to FCI

members with programs both locally and cross-border competing with global providers on the same

or even a superior level.

GLOBALDemica is currently present in more than 130 countries Globally

INNOVATIVE TECHNOLOGY Demica already interfaces to over 240 Enterprise Resources Planning and accounting packages, providing daily invoice level data to our partners and customers.

Marketing legalLegal

Supply chains operate globally but

domestic banking regulations, local

currency payments, the need to onboard

suppliers in many different languages

and timezones makes its challenging

for regional firms to offer a global SCF

service to their clients.

FCIreverse: aimed to unlock two opportunities…

FCIreverse uses the power of the FCI

network & Demica’s common

platform to enable members to easily

partner with those that have the

operational capabilities (and

licences) to onboard suppliers

around the world.

There is a huge opportunity to offer SCF to

clients with revenue of $100m - $1bn – but

the high costs of cost of licencing in-house

systems and the large setup costs per

programme required by most platforms

make this uneconomic for new entrants

FCIreverse has pooled the purchasing

power of the network to negotiate a pay-

as-you-go model with no upfront fees

with the market leading platform:

Demica

Glo

bal

Clie

nts

Mid

-mar

ket

FCIreverse Legal framework signed betweenFCI/Demica

Focused on the aim of protecting our membersMandate agreement Set the standards of the service provided.Establish pricing scheme.Regulate potential disputes between the member and Demica.

Develop the standard contracts between Demica and:The buyerThe member acting as Import Factor (buyer’s financial institution)The Export Factor (supplier’s financial institution)The supplier

Mandate’s agreement was signed by FCI and Demica on 17th May 2018

$100bn funding provided & growing at over 20% p.A.

Opportunities for FCI members

1

2

65% of companies in Europe > $1bn revenues have SCF progammes

Only 10% of companies in Europe < $1bn revenues have SCF programmes

Opportunities for large FCI members to participate and

for smaller FCI members to syndicate in jurisdictions

where suppliers have not been onboarded

Opportunities for smaller FCI members to fund

programmes within this size

3-corner FCIreverse Community Agreements

Buyer

1- Demica Community Membership

Buyer Tracking and Settlement agreement

Supplier

Supplier Finance Agreement

FCI Member


2- Platform Terms &Conditions

All parties shall become Demica Community Members, granting to use the Platform as Buyer, Supplier

or FCI Member (Funder), with different benefits and duties. They shall also sign The Demica Platform

Agreement (Terms & Conditions).

Each party shall sign their own bilateral agreements: Buyer to allow the Platform tracking and settling

invoices; Supplier to allow the platform assigning invoices to a FCI Member when accepting the

advanced payment proposal; Member to allow the Platform intermediating in the funding info flows.

Supplier and Funder sign through the Platform a bilateral Supplier Finance Agreement for the sale of

Receivables.

The 4-Corner Model

Why FCI is an added value in the SCF world?

The FCIreverse solution uses the FCI-network, allowing for full service & on-boarding coverage of the world

4-Corner Model: Demica Platform & Edifactoring

1-Supplier sells goods or services to the buyer.

2-Buyer send the details of the invoices to pay to its Financial Institution, in this case, Import factor, through Demica’s platform.

3-IF send the advanced payment proposals but detects suppliers that can’t on board by themselves (normally for geographical reasons), and contact a financial company (Export Factor) in the country of the supplier asking for help to onboard the supplier.

4-IF asks EF to contact the supplier to obtain KYC documentation.

5-IF may asks Tax and legal assessment to the EF before executing the advanced payment.

4-Corner Model: Demica Platform & Edifactoring

6-Possibility for the EF to finance the supplier:

-From the issuing of the invoice till supplier receives the advanced payment proposal of the IF. During this period the EF runs the risk of payment of the invoice.

-Finance the invoice from the issuing date till maturity, counting with the confirmation of the invoice by the IF. At the moment that the EF will receive this confirmation, the only risk will be the counterparty risk of the IF.

These contacts between IF and EF will be channelled either through Demica’s platform or via EDI messages.

4-Corner Model: Legal Framework

In a situation in which the Export Factor finances the Supplier with the agreement of the Import Factor (buyer’s Bank), we took the following decision:

- When the Import Factor informs the Export Factor about the confirmation of an invoice, this confirmation will be

100% binding

- upon financing of the Supplier by the Export Factor based on this confirmation, the risk of insolvencies, commercial disputes, credit notes or other payment delays by the Buyer will be transferred to the Import Factor and the invoice will be assigned for the Import Factor to start the (legal) dunning process.

- Export Factor hence to assess the Import Factor counterparty risk as the main indicator.

- The legal committee is working on the creation of the required legal articles to cover this aspect.

Four Corner Model Legal Framework Developed

Creation of the General Rules for FCIreverse, applicable only when doing cross border supplier on-boarding between two correspondents under a buyer-centric program

Regulates the rights and obligations of the IF and EF. Interfactor agreement must be signed between two correspondents New EDI messages have been developed in the FCI edifactoring

platform, to allow the IF to request the services of the EF to support supplier on-boarding

4C Model is platform neutral. Cross border reverse factoring can be done on multiple operating platforms, including via Edifactoring.com

4-corner FCIreverse Community Agreements

Buyer

1- FCIreverse Community Membership

Buyer Tracking and Settlement agreement

Supplier


Export Factor (Supplier)

Supplier Finance

Agreement

2- Platform Terms &Conditions

Same structure as with the 3 Corner Model, but including the Export Factor

Export Factor is the Financial entity performing the Supplier onboarding and funding the discounts to

the suppliers.

Import Factor (bank of the Buyer) provides bilaterally a guarantee to the Export Factor (bank of the

Supplier) covering all discounts.

Import Factor (Buyer)

GuaranteeGuarantee

1&

2

Getting Started with FCIreverse

Selected Partner of Choice: A bike analogy


There is clear direction on the developments of the platform into the future


The SCF provider is financially stable and can handle the rocky

path ahead




path ahead


The platform is operationally capable of running on any terrain in any global region



path ahead



The system can shift in any gear, basic for starters as well as more advanced solutions



path ahead




For those members new to SCF, we can add the trainer wheels to get them started



path ahead





The frame is well tested by other financial institutions and corporates



path ahead




The financial hurdle to start using this new product, is relatively low





path ahead




Pilot members should be ready to mount the saddle and ride!

The financial hurdle to start using this new product, is relatively low



Test period and Pilot Member On-Boarding

• FCI has 35 member companies interested in participating as a Pilot member.

• Test period can’t be developed with 35 companies at the same time. A selection will be made in the coming months.

• Those not selected will be considered priority and on-boarded after the text period once the platform goes live.

• Interest shown by the development banks, including IFC, Asia Development Bank, EBRD, and AfreximBank

• Since the signing, Demica has begun final development of FCIreverse, expected to be launched in 4Q2018

Education

We are perfectly aware that not everybody understands the product. It will hardly will be used if it is unknown.

FCI created a new User Guide on SCF, the first document to explain reverse factoring.

The aim is to facilitate the members knowledge of the product and increase usage of FCIreverse.

The User Guide does not provide specifications of FCIreverse itself, but to explain how reverse factoring operates

FCI also published an accounting analysis of FCIreverse and reverse factoring by KPMG to understand the implications under IFRS9

SHOW FILM

Thank You!

Documents

SUPPLY CHAIN FINANCE (SCF) NEW PERSPECTIVES & NEW