Management of Large Treasury Teams

| 11-2-2019 | by  Pieter de Kiewit |

Last month I was contacted by one of our clients -we found many staff members for them- about the organisation of the treasury team. The team has over 10 employees and recently has undergone extensive changes. We both know there is not one way to set up a team and after a short brainstorm, we decided it might be a good idea to gather her peers for a round table meeting. What can we learn from each other?

Last Friday a small group of treasury people managers, each of their teams has 10 members or more, gathered for a two hour meeting. The expected topics were team structure, hierarchy, job titles and the profile of the ideal treasury team member. Our hypothesis was that there are certain standards most of us can apply to optimize our treasury teams.
After a brief introduction it became quickly clear there were more than enough topics, two hours was not enough. And the aforementioned standards might exist but this meeting did not result in making them very clear. This in line with a previous blog I wrote about the shape and size of treasury teams. The following observations dominated the meeting:

  • The size and structure of a treasury team depends on questions about the company like: is it a HQ treasury or treasury hub?, what is the geographical footprint of the company?, what is the primary process of the company?, what is the maturity of the company as a whole and the willingness to invest in support functions?
  • Technology has an increasing impact on corporate treasury. Cloud and other solutions enable outsourcing, although the following remarkable statement was made: “if you can outsource it,  you can automate it”. One of the participants told exciting initiatives using robotics;
  • Substantial time was spent on HR aspects like how to deal with Millenials, age versus IT literacy, hiring the ambitious and unstable candidate versus the stable non-ambitious one and how do you screen to hire the proper candidate (see also our blog about the Treasurer Test).

The variety of topics, the different points of view and approaches applied by treasury managers is inspiring. As was the energy and enthusiasm of all participants. Together with them I will decide how we will proceed. Let me know if you want to join this initiative!

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

 

Effective Finance & Treasury in Africa: Unlocking Africa’s potential

| 8-2-2019| Eurofinance | treasuryXL |

As Africa strives to modernise and reform, the continent continues to offer enormous business opportunities. Nevertheless, in an environment of permanent market, regulatory and geopolitical change, optimising liquidity and risk management is key to successfully leveraging these opportunities.

While we move towards an economy of prediction in which data is the raw material of business, digitalisation is changing the way companies manage treasury in Africa. Lack of visibility, speed and control will soon be a thing of the past. Initiatives such as Vision 2020 in Nigeria are fast driving digitalisation in areas that include legal and finance. The adoption of real time payments and faster reconciliation in several markets are helping treasuries improve working capital. Mobile solutions have changed the payments landscape in Kenya specially and increasingly across the region. Blockchain technology could help drive efficiency too.

Who should attend?

Corporate treasury and finance professionals who are responsible for their company’s African operations – whether you are already in Africa or thinking about it.

Product, sales and marketing teams from financial institutions and service providers who want to meet with corporate treasurers and better understand the challenges they face in Africa.

Why attend?

Hear how you can tap into the potential of this dynamic region

Connect with other treasurers and finance professionals operating in Africa facing the same challenges as you and finding ways to overcome them.

Meet the key banks and solution providers operating in the region.

Hear corporate case studies from treasurers who have overcome the challenges you are currently facing.

Hone in on your area of interest by joining round table discussions on: Angola, Egypt, Ethiopia, Morocco, Nigeria, South Africa, Sudan, Somalia, Zimbabwe, West African Economic and Monetary Union and Trade Finance in Africa.

Thursday 7 March 2019
8 AM – 6 PM
Greenwich Mean Time

Hilton Canary Wharf, London, UK

For more information or if you want to register for the event visit the events website.

 

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ACT CASH MANAGEMENT CONFERENCE

| 31-1-2019 |  treasuryXL |

The 15th edition of the ACT Cash Management Conference takes place on 12 February 2019 in London.

The ACT’s flagship cash management event of the year provides a unique opportunity to share best practice, hear practical case studies from leading corporates and network with fellow cash management and treasury professionals.

Programme

The payments landscape: keep up to date with the latest changes in payments innovation and regulation:

  • the latest regulatory changes and payment fraud (panels)
  • cross-border payments, the New Payments Systems Organisation (breakout sessions)
  • setting up a payments factory (best-in-class case study)

Cash management evergreens: lack of control and visibility remain the top cash management challenges for treasurers. Discuss key questions such as:

  • what really makes good cash management? (panel)
  • cash pooling structures and trapped cash (breakout sessions)
  • how to get cash forecasting right from the beginning (best-in-class case study)

The bigger picture:look beyond day-to-day cash management and listen to frank discussions on:

  • the profitability of cash management products from a bank’s perspective (panel)
  • designing an optimised liquidity portfolio (breakout session)
  • the future of cash management innovation (panel)

For more information or if you want to register for the event visit the events website.

 

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Treasury Intelligence Solutions: Centralizing Corporate Payments System

| 29-1-2019 | TIS Treasury Intelligence SolutionstreasuryXL

Interview with CEO and Co-Founder of TIS Jörg Wiemer by CIOReview

In today’s era where the face of IT is changing drastically, enterprises are facing a multitude of challenges germane to regulation, risk management, and most importantly performing business to business payments. Having served as senior vice president and global treasury veteran at SAP, Jörg Wiemer, the CEO and Co-founder of Treasury Intelligence Solutions (TIS) highlights that corporate transactions often involve multiple parties from both internal and external departments, and the legacy systems often cause recurrent delays in payments. The failure to bring this mission-critical process under control may affect the supplier relationship to the extent that the supplier may discontinue the business relationship. In the thick of grave challenges, modern CIOs are keen to bring in a robust technology that assists them to streamline payment processes. At TIS, the leadership brings to bear its vast experience to aid enterprises to efficiently and effortlessly manage corporate payments and cash flows through a SaaS platform.

The platform works as a central hub that is dedicated for enterprises to manage, organize, and analyze their corporate payments flowing across and within the organization. Through the power of SaaS, TIS’ cloud-based platform helps clients quickly connect their ERP systems with different banks to manage bank accounts. Moreover, the platform allows enterprises to perform analysis of liquidity and cash flow in real time. It also conveniently addresses complexities triggered by different communication protocols and channels, enabling clients to communicate and process transactions in their customers’ preferred language. “The clients can simply leverage the library of bank formats and the bank connector, which we have built over the last year, to allow transactions between ERPs and banks seamlessly,” informs Wiemer.

By challenging the status quo of legacy solutions, the TIS platform empowers multiple leadership executives with the ability to make smarter decisions and assists them to process, view, and analyze transactions in real time using a cash flow analytics feature. Cementing the digitalization objective of enterprises, the TIS cloud platform helps keep processes fully under control through increased efficiency, visibility, and transparency in corporate payments and audit trails.

“The clients can simply leverage the library of bank formats and the bank connector, which we have built over the last year, to allow seamless transactions between ERPs and banks”

Citing an instance, Wiemer brings to fore the case of a luxury goods company, Oettinger Davidoff AG, which faced the challenge in standardizing their payment processes while restructuring their ERP systems to migrate to SAP S/4HANA. Aside from centralizing their international payment transactions, the retail company sought to achieve a better overview of a large part of the liquidity in the company. Partnering with TIS, the client had seamless SAP integration and quick bank format hosting, which helped them successively onboard all the bank accounts to SAP without any hassle. Fast-forward to today, the client has about ten bank accounts of foreign subsidiaries in Switzerland that are connected to the TIS platform to perform all of the international payments of local subsidiaries.

Having researched the potential market for corporate payments solutions, Wiemer states that the total market for “ERP systems” is roughly about $80 billion (ERP) per year and for “payments” $1,000 billion per year, respectively. Tapping this huge market, TIS initially plans to expand its wings to Europe and the U.S. within the next month. The success of TIS reflects in its rich portfolio of clients from diverse industries including finance and insurance, retail and automobile, among others. Emphasizing the fact that TIS continues to help customers switch into a new way to collaborate and execute payments, Wiemer concludes saying, “The fintech industry will fuel the payments industry to become more efficient over time, and it will have customers save cost immensely.”

Original published on CIOReview

Crypto-assets and EU regulation: to a global format

| 28-1-2019 | Carlo de Meijer | treasuryXL

It is increasingly becoming a certainty that crypto-assets are here to stay. Also regulators are now more convinced that these will be here for the long run. Long time taken a wait-and-see attitude, there is growing consensus at European regulators to come up with EU-wide regulation. While on the one hand EU regulation could give the crypto market legitimation and encourage the adoption of crypto-assets. Doing nothing could endanger both investors and financial markets.

Question is however: how should this regulation be shaped taken account the various specifics of crypto-assets and its users. And to what extent may the EU intervene on existing local member state regulation. Early this month, both the ESMA and EBA published their advice to the relevant EU institutions.

So let’s have a deeper dive.

What are crypto-assets (not)?

What makes shaping regulation for crypto-assets so difficult is that these are a unique phenomenon when compared to conventional financial instruments. According to Oliver Wyman they are governed by “a fundamentally different set of constraints, and as a consequence regulators have to take into account these specifics”.

First of all crypto-assets are not tied to national governments and central banks. No government regulation or guidance currently exists around managing crypto-assets. Most crypto-assets are not based within any one specific jurisdiction.

Second, the crypto-asset environment is not bound to one country. There is no single sovereign state that is responsible for regulatory oversight at all times. This will make it difficult to apply traditional regulation to control these crypto-assets.

A third complicating factor for shaping regulation is that cryptocurrencies as they are generally known today in fact do not perform all the functions that are generally understood to define the term currency. They are not acting as a medium of exchange; they are not particularly good as a store of value, given their volatility; and they are not being used as a unit of account. That is why for reasons of regulation it is better to use the term ‘crypto-assets’ instead of the more commonly ‘cryptocurrencies’

Why regulation for crypto-assets?

Regulatory certainty is a critical prerequisite and catalyst for technology adoption in financial services in general, also for crypto assets. It is becoming more evident that regulatory certainty can support safe innovation in the crypto-asset sector.

There are a number of issues that ask for specific attention by regulators.

First (and foremost) from a risk point of view. There are the inherent risks to investments due to volatile crypto-asset markets, when compared to conventional fiat currencies. Related to this is the vulnerability of crypto-assets to market manipulation given that the exchanges currently “sit outside of market abuse regulations”.

There is also increased scope for hacking, leading to the theft of the crypto-assets. Crypto-asset platforms are widely considered to provide opportunities for money laundering and other criminal activities because exchanges allow anonymous access and are not governed by any (AML) regulation.

Each of the above concerns underpin the need of a secure regulatory environment that offers investors and consumers sufficient safeguards. There are however many ways to create a workable, balanced regulatory framework. One that addresses consumer and market risks while supporting innovation, efficiency and competition. But finding this is a real challenge.

Read the full article of our expert Carlo de Meijer on LinkedIn

 

Carlo de Meijer

Economist and researcher

 

1TC | Treasury Convention

| 24-1-2019 |  treasuryXL |

1TC Treasury Convention, hosted by BELLIN, will take place for the seventh time on February 13/14, 2019. 1TC is the first conference in Germany dealing exclusively with treasury topics. The two-day event focuses on sharing specialized treasury knowledge and application-related expertise.

BELLIN hosts the BELLIN Community and offers an engaging program focused on customer case studies alongside product workshops. This is complemented by an exhibition showcasing select businesses who – in combination with BELLIN services and solutions – provide added value to customers.

Whether it is top management or the many BELLIN users in entities worldwide – everyone benefits from this treasury highlight. 1TC premiered in 2012, and by 2018 we could boast 420 attendees from 17 different countries.

1TC – Catch up with the BELLIN Community

The 1TC motto is, “meet, talk, learn and enjoy!” BELLIN clients, partners and exhibitors from around the globe get together to enjoy treasury input, an exhibition as well as plenty of networking time!

Meet: fellow tm5 users, the BELLIN treasury specialists and select BELLIN partners.

Talk: about new products and solutions, trends and developments, and tips and tricks.

Learn: from best practice solutions, presentations, workshops and panel discussions.

Enjoy: treasury pure, a great atmosphere and communal spirit, an outstanding evening event.

For more information or if you want to register for the event visit the events website.

 

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Vacature in the spotlight: TREASURY MANAGER

| 23-1-2019 | treasuryXL |

Eindverantwoordelijk voor de tweemans treasury van een zeer dynamische en internationale onderneming. Amsterdam, circa €85K. Funding, cash management, risk, strategie en operatie. Sterke persoonlijkheid met denkkracht en track record.

TAKEN TREASURY MANAGER

De treasurer wacht niet op instructies van de CFO maar neemt zelf zijn verantwoordelijkheid. Hij kent de interne en externe stakeholders, slaat bruggen naar zijn discipline en bepaalt zijn prioriteitenlijst. Hij is niet bang zich te laten gelden indien dit nodig is maar zorgt ook dat treasury als service unit de business verder helpt.
Zonder uitputtend te zijn vallen de volgende deelgebieden in ieder geval onder zijn verantwoordelijkheid: liquidity management, (asset based) funding, trade finance, FX & rentemanagement, reporting en analyse.

IDEALE TREASURY MANAGER

De ideale treasury manager combineert denkkracht (academische opleiding), communicatie (overtuigen en faciliteren) en vakkennis. Hij voelt zich thuis in een kleine organisatie met grote exposures. Als persoon neemt hij verantwoordelijkheid en heeft een goed ontwikkeld gevoel voor verstandig zaken doen.

ONZE OPDRACHTGEVER

Onze opdrachtgever is een Nederlandse handelsonderneming doorspekt met internationale business relaties en vele honderden miljoenen omzet. De medewerkers zijn energiek, assertief en er heerst een ondernemende spirit. Vrijheid en meer verantwoordelijkheid wordt verdiend door het behalen van resultaten.

ARBEIDSVOORWAARDEN EN PROCES

Het basisinkomen voor deze positie zal circa €85K zijn. Voor kandidaten die evident meer brengen is men bereid meer budget vrij te maken.

Wij hebben deze search opdracht enkele maanden eerder opgestart. Door ontwikkelingen is deze on hold gezet en nu opnieuw opgestart.

LOCATION

Amsterdam

Voor meer informatie ga naar de vacature sectie van onze website treasuryXL

Global Financial Market Outlook

| 15-1-2019 | ICC Consultants | treasuryXL |

Deze blog bevat concrete middellange termijnvoorspellingen voor de mondiale rente- en valutamarkten. De visie van ICC Consultants is gebaseerd op een groot netwerk binnen de wereldwijd toon-aangevende researchhuizen en 40 jaar ervaring in de financiële markten. Middels de weblink onderaan deze blog kunt u meerdere rapporten van ICC Consultants downloaden.

 

Groeigevaren gepareerd met geldpomp

Ons eerste rapport van dit jaar willen we graag beginnen met al onze lezers een voorspoedig nieuwjaar toe te wensen. Een jaar dat waarschijnlijk gekenmerkt zal worden door grote volatiliteit op de financiële markten. Velen vrezen dat dit tot uiting zal komen in de vorm van lagere aandelenkoersen en rentes naar aanleiding van een afzwakkende wereldeconomie. Wat daar met name zo gevaarlijk aan is – en voor veel volatiliteit kan zorgen – is dat de lagere groei gepaard gaat met een grote schuldenlast. Dit laatste kan lage groei gemakkelijk laten doorslaan naar een diepe recessie. Denk bijvoorbeeld aan het recordaantal obligaties met een BBB-rating dat is uitgegeven. Dit is een rating die nog net toestaat dat institutionele beleggers daarin mogen beleggen. Zodra deze rating echter verlaagd wordt, worden het zogenaamde junk bonds waarin de institutionele beleggers veelal niet mogen beleggen. Vandaar dat de rente omhoog schiet zodra de rating van een BBB-obligatie verlaagd wordt. Het betreffende bedrijf moet dan tegen veel hogere rentes herfinancieren, hetgeen veelal niet opgebracht kan worden. Er ontstaat dan een zichzelf voedende negatieve spiraal van hogere rentes, meer faillissementen, lagere groei, nog hogere rentes enzovoort.

Risico’s alom

Gezien dit laatste gevaar is het van het grootste belang dat flink fiscaal en/of monetair gestimuleerd wordt, zodra zo’n negatieve spiraal dreigt uit te breken. Daar zit echter precies de angst waar de financiële markten zo mee worstelen. In belangrijke landen als China, Japan en de EU zijn de schulden al dusdanig hoog, de overheidstekorten dusdanig groot en staan de rentes zo laag, dat de bewegingsruimte op dit vlak zeer gering is. De Amerikaanse autoriteiten hebben wat dit betreft iets meer ruimte, maar groot is deze ook niet. Begrijpelijk is dan ook dat de markten met angst en beven naar de recente zwakkere cijfers uit vrijwel de gehele wereld kijken. Zwakkere cijfers die veroorzaakt zijn door de handelsoorlog tussen de VS en China en de dreiging dat deze zich uitbreidt. Daarnaast ondervindt men steeds meer de gevolgen van de gestegen rentes en het uitgewerkt raken van de fiscale impuls in de VS. Ook politieke onrust en de onzekerheid rondom Brexit helpen niet. Ook het vaak irrationele gedrag van Trump zorgt voor veel onzekerheid.

Meevallers

In dit kader is het dan ook zeer begrijpelijk dat de markten eind vorige week zeer positief reageerden op sterke werkgelegenheidscijfers uit de VS en uitlatingen van de voorzitter van de Fed dat verdere renteverhogingen en verkleining van de balans van de centrale bank niet in steen gebeiteld staan. De vraag die alleen nog overblijft, is of de markten dan niet van een te negatief scenario uitgaan voor de Amerikaanse economie, als ze ervan uitgaan dat de top van de rente al bereikt is. Daarover hieronder meer.

 

 

 

 

 

 

 

 

 

 

 

Het volledige rapport kunt u lezen op de website van ICC Consultants. Hier kunt u tevens meer rapporten downloaden.

Some blockchain predictions for 2019

| 10-1-2019 | Carlo de Meijer | treasuryXL

2018 was a challenging year for the blockchain world. Not all my predictions were realised. But what is sure: the hype is over. The adoption of this technology by the industry was less outspoken than predicted. Blockchain spending by companies went slower than expected, while many ongoing projects were stalled or even stopped. This had much to do with the turbulences on the crypto markets. And that is not that strange as many still see a narrow link between bitcoin and blockchain technology. The crypto markets lost more than 80 percent of their overall value from the beginning of the year. Add to that increased government scrutiny and outright bans of certain activities like crypto currency trading, ICOs etc.

As 2018 has come to an end, many are wondering what awaits us in the near future. Where are things going, and what are the trends and developments CIOs and other leaders interested in blockchain should be aware of. It is thus time to give an insight into predictions for blockchain technology for 2019 and beyond. I know, it is always difficult to predict what is in store for the future. But here are a number of my predictions in 2019 concerning the blockchain technology that should be on their radar screen. So let’s take a look at how things are likely “to work out” over the next 12 months.

The blockchain industry is working to improve its image

Blockchain has a bit of a reputation problem. It is believed that a lot of businesses are actually sceptical of blockchain and unwilling to adopt this technology just because it is too much associated with cryptocurrencies, and especially bitcoin.

The blockchain industry is expected to further try to work on its image in 2019, and separate blockchain from crypto in the minds of business. This in order for blockchain adoption to happen on a larger scale. It should be broadly communicated that blockchain technology can have numerous use cases that are completely unrelated to cryptocurrencies.

We will also see a shift in terminology. It is reasonable to expect that the term blockchain will be gradually replaced by another more neutral one: DLT or distributed ledger technology. This to send a clear signal to executive teams within corporates that their projects have nothing to do with the hyped world of cryptocurrencies and ICOs. Once this becomes clear to more people in business, blockchain will be able to experience much wider adoption.

The trilemma problem will (largely) be tackled

Another challenge for the blockchain industry is to solve the so-called trilemma problem. Despite the hype and huge investments in existing blockchain projects, the great promise of this technology has largely gone unfulfilled. A major stumbling block the industry faces is the imbalance between scalability, decentralisation and security. This seemingly intractable trilemma of technical barriers has undermined the trust and capabilities necessary for mainstream adoption and business relevance.

Much work is already being done to figure out solutions to this trilemma. Major research on possibilities to overcome the key shortcomings in existing architectures have been exploited, this to allow blockchain transactions becoming faster while preserving security and decentralisation.

This should enable  developers to build applications that solve real-world business challengesThough it took time to attain a consensus, scaling solutions such as sidechains are already showing promise. And as we move further into 2019, these solutions will become more and more sophisticated. Real breakthroughs in scalability and performance are expected to begin coming to fruition and the blockchain trilemma largely being solved in two to three years from now.

Companies will look for best-fit applications

Moving further down the line, we will begin to see a separation between hype and reality. 2019 will be a year where the industry will shift its focus toward the real-world problems that blockchain technology could solve, with the goal of making “incremental and necessary changes to operations”.

Blockchain technology has long time be wrongly seen by many as a “magical way” to resolve all issues that we struggle with today. While it is true that blockchain can help with a lot of them, there are still numerous other problems that are better suited to be solved by alternative technologies, such as robotics, AI, and similar ones.

According to Deloitte’s 2018 Global Blockchain Survey, companies are starting to move from proof-of-concept projects to real-world applications. There will be a particular focus on discovering not just where blockchain could fit, but to find places where it is the best fit.

We will therefore see a transition of enterprise interest towards identifying tangible, productive use cases for blockchain. Projects will thereby move away from a “blockchain-for-everything” approach to back-to-earth implementation.

Blockchain projects may become more mature …

In 2018, companies have implemented a large number of high profile blockchain pilots but the results of these developments have yet to come to full fruition. Earlier this year Forrester Research anticipated that 90% of blockchain pilots won’t become complete products or services.

For the industry to mature and gain legitimacy, this shake out had to happen. 2018 has been a tough testing ground to establish how this technology could be improved, and what problems they could solve. The successes and failures of blockchain technology have given technology providers the tools they need to launch into the next stage of development: clear, targeted goals and expectations.

In 2019, it is expected that blockchain technology will come off age. As technology and valuation start to converge at rational levels the stage will be set for the blockchain industry to enter the next phase of maturity. A level of maturation within the blockchain space, with sustainable blockchain projects on the rise as dedicated blockchain teams are steaming up their efforts to deliver “exciting” projects.

…. and will raise visibility for blockchain

In 2019 we will see a growing number of new projects and new platforms continue to emerge. Developers and the innovative projects they work on will continue to advance blockchain capabilities, by creating ground breaking proofs-of-concept and building and achieving product-market use cases.

We may expect to see projects ranging from supply chain, identity, transparency, and governance proving the true value of blockchain. Several prominent blockchain projects will significantly raise its visibility and if delivering as promised it will positively influence corporate interest in this technology.

As a result we will see a wave of widespread and compelling specific use cases and real applications coming into the market emerge in 2019 as corporates are looking to implement more focused blockchain applications.

Read the full article of our expert Carlo de Meijer on LinkedIn

 

Carlo de Meijer

Economist and researcher

 

Busting some of the ‘holy grail’ myth of reverse factoring as example of supply chain finance solutions….[Part 2]

| 8-1-2019 | by Marc Verkuil |

In the first part of this article, which focuses on the potential disadvantages, risks, and pitfalls of SCF and RF Programs in particular from the perspective of the Seller, the benefits of an RF Program were mentioned, while the almost unavoidable impact on a Seller’s WACC and the potential negative outcome for the Seller from an EVA, ROE and EPS perspective have also been discussed. In this final part of the article, focus will be on the possible commercial impact on account of SCF for a Seller, as well as on the regulators’, investors’ and credit rating agencies’ points of view. The article will present conclusions and some recommendations in the realization that since no company is the same, the thought-process going into the decision for entering or not entering into SCF will not be the same either; certain positive or negative arguments described herein may be more relevant for one company, while others may be more impactful to another. It is safe to conclude, however, that there is substantially more to SCF than what is typically presented and marketed, and it is hard to argue that SCF is the ‘holy grail’ to working capital finance for each and every party involved.

Both the immediate and potential future commercial impact of entering into an RF Program should carefully be considered…

What may be overlooked by Sellers when they are concluding upon a “cheap SCF solution that increases their ROIC and reduces their working capital balances”, is that such solutions are different from the usual forms of debt funding in the sense that even though the Buyers can not be a party to the transaction, these solutions implicitly involve all three parties in the combined commercial/financial transaction. This results in the Sellers having little control on the terms, conditions, and continuation of such funding solution, while there is an important commercial element that is not apparent in more common debt funding. The potential consequences of a lower credit-worthiness of the Buyer or less credit capacity or appetite of the Factor to the Buyer have already been mentioned in this respect. Moreover, and as argued before, an RF Program is usually offered subsequent to the Buyer, being the financially and commercially ‘stronger’ party, requesting an extension of its payment terms from the Seller. Even though the Seller may not be in a position to decline such a request anyhow, the Seller should carefully consider a number of commercial questions and, if deemed relevant, negotiate these as best as possible upfront with the Buyer: “does the RF Program provide real(istic) opportunities to increase sales and EBIT or ensure a more committed and longer term relationship between Seller and Buyer, i.e., do the commercial benefits outweigh the negative (financial and/or ratio) impact, if any?”, “can the Seller charge the additional funding cost, including the cost of extending its payment terms, of an RF Program structurally through to the Buyer?”, “could such a program create a precedent, and if so, what could be the impact (think of other customers requesting/requiring the same extensions and programs)? E.g., what are the long-term consequences of extending payment terms under an SCF program and what happens if or when the program is terminated; will the Terms & Conditions ‘automatically’ return to the old payment terms?” A sound argument in favor of an RF Program may be the fact that credit insurance (on the Buyer or in the market as a whole) may either no longer be available or be higher priced than what the Factor is offering. Hence, a number of questions and arguments a Treasurer usually does not need considered, let alone answered in a straightforward, bi-lateral working capital facility with a lender.

Also note the continuing trend of the desire for more transparency…

There is clearly a trend, driven both by regulators and investors, towards (public) companies being required or demanded to reporting or disclosing more financially relevant information, and as such, not only to leave less room for the non-disclosure of off-balance sheet transactions that may be relevant for the public, but even to add certain transactions that have historically been treated off-balance sheet, back into the financial statements for certain reporting parties; think of IFRS16 as a recent example in this respect. Currently, if receivables (invoices) are sold in an RF Program on a non-recourse basis there are no required reporting or disclosures in any financial statement filings under US GAAP or IFRS. For the MD&A section of a public company’s quarterly and annual filings (at least under the US SEC rules), however, disclosures are more judgmental and subject to materiality thresholds. Such potential disclosures cover a wide range of corporate events, of which the most relevant (from an SEC and FASB perspective, but probably similar for IFRS purposes) are: (a) “trends, demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way”, and (b) “any known material trends, favourable or unfavourable, in capital resources, including any expected material changes in the mix and relative cost of capital resources, considering changes between debt, equity and any off-balance sheet financing arrangements”. An exact materiality threshold above which a company would be required to disclose its off-balance sheet (SCF) programs has not exactly been defined (yet) from an SEC or FASB perspective.
The reference above to the impact of certain (SCF) transactions on a company’s liquidity position is worth explaining further, as this is a position the major credit rating agencies also tend to take: due to the uncommitted nature of basically all SCF solutions and certain other (significant) financial transactions that are not reported in the financial statements of a company, the rating agencies, if or when made or becoming aware of these types of deals, will add these back into the financial statements for ratings purposes. The most important reason for their argument is that the moment these programs are terminated, the company’s liquidity position will be impacted and the company will most likely need to replace the off-balance sheet funding with an alternative source of funding, which the agencies unconditionally assume to be on-balance sheet unless the company can and would want to proof differently, which is a difficult task. Although there are no exact materiality thresholds with the rating agencies either (to the author’s knowledge), it is clear they effectively decide to adjust for those known SCF solutions that they deem relevant and material (in total) in both the balance sheet and income statements.

Conclusively, SCF solutions may be a valuable funding tool, but be aware…

SCF solutions, including RF Programs, may be a valuable additional and alternative source of funding, even for financially and commercially ‘weaker’ Sellers participating in such programs. However, these parties in particular should be well aware of both the broader financial impact, i.e., beyond the “cheap discount rate and positive ROIC impact” as often advertised by the Factor, as well as of the immediate and strategic longer term commercial and financial consequences of such programs, i.e., these solutions should only be entered into for “all the right reasons” and at the “right” cost (of marginal debt funding as the upper limit). Finally, from a Treasurer’s point of view, typically targeted with at least considering, if not outright optimizing the investors’ interests and having a ‘bottom line’ (WACC, ROE, EPS, EVA) perspective on things, it is recommended to ensure that even if certain of these solutions do not tick all above boxes positively, they do not impact or threaten to impact the company materially, both instantly and in the future, which could include putting a firm limit, e.g., an x% of total debt threshold, for these types of programs in place. Finally, it would probably not hurt for Treasurers, particularly those employed by Sellers again, to pro-actively advise their executive management teams and wider (financial and commercial) organizations of those arguments in this article that they deem to be relevant for their businesses.

 

 

 

Marc Verkuil

Treasury Professional