IBOR phase out – a serious challenge

| 17-9-2019 | treasuryXL | Enigma Consulting

For the last 40 years IBOR (interbank offered rates, including LIBOR and later also EURIBOR) have been a fact of daily life in the financial services industry. They have been the benchmark for lending, hedge contracts, current accounts, valuation models etc. for a long time till the regulators, central banks and market participants decided to seek alternatives as from 2012.

Besides the switch to new reference rates, it now seems that alternative rates will be fixed afterwards based on a daily fixing component while the LIBOR Rates are now published at the beginning of each interest period.

Transitioning to alternative rates and calculation methods will be challenging, and it will have serious implications for both financial institutions as their customers on how lending and hedge contracts are priced and how treasurers manage risks and their working capital.

Although a lot of about detailed timing and specifications of the new reference rates is still unclear, we strongly recommend our clients  to be pro-active and not to follow the ‘wait and see” approach as the impact is expected to be substantial and the demand for resources to support these changes will increase in the coming months.

Bas Kolenburg: “Although this transition seems to be in the distant future, now is the time to start preparing! The impact can be huge….”

Enigma Consulting support both financial institutions and their clients to adapt to these new market circumstances. For financial institutions, Enigma Consulting provides project management support for the migration activities and client communication. For (corporate) clients, Enigma Consulting is performing impact analyses, that result in an action plan/ heat maps for the short and medium term. These action plans can then be used to prepare the organization for the expected changes and communicate with internal and external stakeholders such as your banks, market data suppliers, TMS & other systems suppliers and accountants.


Senior Consultant at Enigma Consulting

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



Busting some of the ‘holy grail’ myth of reverse factoring as example of supply chain finance solutions….[Part 1]

| 7-1-2019 | by Marc Verkuil |

Supply Chain Finance (hereinafter referred to as ‘SCF’) involves financing solutions helping businesses, usually through the involvement of a third party lender, to free up working capital trapped in supply chains. These solutions target financing of specific working capital items, such as payables, inventories or receivables, as the underlying products move from origin to destination in the physical supply chain. Examples of SCF solutions include factoring, inventory repurchase, dynamic discounting, and reverse factoring programs. The latter solution (hereinafter, the ‘RF Program’), which has been offered by an increasing number of banks lately, involves a Seller being given the opportunity to sell its receivables (invoices) on a specific Buyer (typically) without recourse to a financial institution or investor (hereinafter, the ‘Factor’) at a discount in return for the immediate receipt of the (discounted) cash or liquidity from these receivables. In funding the Seller, the Factor is exposed to the Buyer as it assumes the credit risk on the latter, i.e., the (in)ability of the Buyer to pay its outstanding debt to the Seller (or Factor directly) at maturity.

RF Programs are in essence a form of credit arbitration and require participants in the supply chain with different credit standings…

SCF is often marketed as a ‘win-win’ for all parties involved. In recent years dozens of articles in Treasury and related magazines and possibly a similar number of sessions at conferences and seminars, some of which were even completely dedicated to this subject, have heralded SCF, and RF Programs in particular, as the ‘holy grail’ in working capital (finance) management. Although most of the observations in this article are valid for other SCF solutions, focus will be on RF Programs, which are based on the premise that a Seller will benefit from the better credit-standing (or rating) of a Buyer, as a Factor is willing to provide funding to the former on the basis of the credit (risk) of the latter, i.e., at a discount rate similar to the one the Buyer rather than the Seller would be able to obtain from lenders for funding its working capital. Interestingly enough, however, principally without exception all of these articles and sessions have been written and presented by representatives of two of the same participants in these solutions: the Buyers and the Factors, and although they all provide various, mostly valid arguments for the benefits of these solutions to the Sellers, they also tend to provide little or no input on the disadvantages, risks, and pitfalls of these solutions to the latter. Therefore, this article focuses on the perspective of the Seller, the financially and often commercially ‘weaker’ participant in the SCF transaction. Please note that the reference to the ‘weaker’ participant does not limit this to small SMEs, but in day-to-day reality applies to the vast majority, if not all Sellers (with an intent to) participating in SCF as the premise of the solution would otherwise not be valid anyhow. The author of this article used to work for an investment grade rated, powerful, global commodities trading company with revenues in excess of USD 45 billion, which was in fact frequently requested, or even practically forced to participate in RF Programs as the ‘weaker’ Seller.

The opportunity for Sellers to enter into RF Programs usually does not come in isolation…

One other aspect of basically any RF Program is important to take into account; even though an RF program cannot be directly or formally linked to the (payment) terms & conditions agreed between Seller and Buyer, as the program may in that case be deemed by auditors to correspond to and thus to be reclassified as debt in the financials of either participant which would defeat at least part of the purpose of these solutions, the most common benefit sought by the Buyer, often even expressed prior to the Seller being made aware of the opportunity to enter into an RF Program, is the request to the Seller for an extension of its payment terms to and in favor of the Buyer. The Buyer clearly does not wish to cannibalize the debt capacity with its lenders (read: the Factor) in return for nothing; in fact, the Buyer is usually the initiator of the sequence of events leading up to an RF Program in its efforts to improve working capital management first and foremost for its own and rightful benefit (and even if a Buyer would claim it (indirectly) offers an SCF opportunity in order to support a ‘struggling’ Seller, this would still be done primarily in the best (short term) interest of the Buyer, which in that case will no doubt already be looking for longer term buying alternatives). It should be evident that an extension of the payment term has an embedded cost for the Seller, which it should (at least try to) pass on to the Buyer through an increase of its product pricing. A term extension from, e.g., 45 to 90 days, will otherwise require the discount rate of the SCF solution to be half of the Seller’s existing cost of (incremental or marginal) debt funding in order for both funding options to break even.

The benefits of RF Programs are evident…

The most obvious benefits of RF Programs to Sellers are well documented: lower cost of funding, immediate availability of liquidity, lower working capital and (usually) debt levels, financial opportunities to grow and invest, and more limited credit exposure to the Buyer(s). The risks, disadvantages, and pitfalls to the Seller are on the other hand much less frequently mentioned.

However, disadvantages may include an increase in the Seller’s cost of capital…

One of the most important objectives of a Treasurer, certainly one of a public company, is minimizing its company’s weighted average cost of capital or ‘WACC’, i.e., achieving the optimal level and cost of debt and equity funding. By entering into an RF Program, and most other SCF solutions for that matter, the Buyer and Seller are effectively scaling down the value of their working capital and balance sheets respectively; the Buyer by virtue of obtaining extended terms from the Seller and thus of increasing its days of payables outstanding leading to lower net working capital and (debt) funding balances, and the Seller by virtue of converting part of its receivables balance into immediate liquidity and thus of reducing its days of sales outstanding typically followed by the repayment of outstanding on-balance sheet debt. As the proceeds of an RF Program will practically never be used to return funds instantly to the Seller’s shareholder(s), the Seller’s WACC will practically always increase as it has reduced the normally more cost efficient (i.e., less expensive after tax) debt balance on its balance sheet without proportionally reducing its more expensive equity position, e.g., through share repurchases. An increase in a company’s WACC is hardly ever a desired outcome for a Treasurer in considering a financing transaction, and even if this by itself does not necessarily preclude Sellers from entering into these types of (off-balance sheet) transactions for other good reasons, especially the size and relative proportion of this type of debt funding should merit careful consideration from a Treasurer in its analysis of the company’s total (future) debt to equity mix. A company with a not a-typical debt to equity ratio of 30/70, a cost of equity of 8,5% and a cost of debt of 3,5% has a WACC of 7,0%; if, as a result of an SCF solution and the subsequent repayment of some of its on-balance sheet debt (and all rates staying equal), such company would end up with a debt to equity ratio of 20/80, its WACC would increase to 7,5%, even if its total cost of debt funding, i.e., including the cost of an SCF program that is less expensive than the existing cost of debt, would end up being lower in this example!

The argument of RF Programs resulting in ROIC improvement is generally true; at the same time, it is not the whole story…

One of the most important reasons for companies to use the proceeds of RF Programs to pay down debt is the fact that a vast majority of these programs is uncommitted, implying that each participant in the relevant supply chain, Seller, Buyer or Factor, may unilaterally and ‘without cause’ decide to discontinue or amend the RF Program at any given moment. E.g., a Factor may decide to increase the discount offered to the Seller if the former assesses that the Buyer’s credit-worthiness has deteriorated (or if the Buyer has been downgraded) or it may decide to discontinue or limit the RF Program if the Factor no longer has (sufficient) credit available on the Buyer, while the Buyer and/or Factor may decide to discontinue the Program if the Buyer needs its credit capacity for other transactions, such as a significant acquisition financing need. The Seller should consider two pitfalls as a result of the uncommitted nature of these SCF solutions: (1) the cost or discount rate of these programs should be compared to existing cost of debt funding of the Seller, and (2) prior to entering into an RF Program, the Seller should carefully assess its commercial proposition both at inception and at the moment these programs are discontinued.
With reference to the first pitfall, marketeers of SCF solutions regularly argue that their programs are “cheaper than the WACC of the Seller”, “will increase the return on invested capital (hereinafter, ‘ROIC’) of the Seller”, or will “decrease the total cost of debt funding”. With respect to the comparison to the Seller’s WACC, this argument has already been refuted earlier: it does not make sense to compare the cost of debt funding (in an SCF solution) to that of debt and equity funding (in a WACC) of a company, while SCF solutions will most likely increase the WACC in any case. The ROIC improvement argument is mostly true, but far from a complete one. Even if an SCF solution is significantly more expensive than a company’s cost of debt funding, an increase of its ROIC may be achieved due to the fact that despite the return, i.e., net income in the numerator decreasing, the invested capital, i.e., (receivable) assets in the denominator will decrease even more leading to an improved ROIC or return on net assets. However, in that case this company’s net income and thus its return on equity will decrease, while it will also lower the company’s earnings per share as a result of such transaction. Bottom line, such a transaction will reduce a company’s shareholder value (or EVA), another outcome a Treasurer would typically want to avoid. A numerical example of this is included at the bottom of the second part of this article which will be posted tomorrow. It suffices to say that unless a company only wishes to be managed and valued on its ROIC performance, which would be surprising to say the least, any SCF solution that is more expensive than a company’s existing cost of debt funding will harm most of its financial ratios and definitely its shareholders. This brings up the last argument mentioned above of a decrease of the total cost of debt funding; comparing working capital financing provided by SCF solutions to long term and often committed debt funding is an ‘apples to oranges’ comparison as the latter forms of funding are intended and used for different purposes or reasons, such as funding of permanent or other long term assets, or as a safeguard against volatile markets or sudden spikes in working capital needs. Furthermore, as argued before, the proceeds of SCF solutions are typically used to pay down short-term and usually uncommitted (working capital) debt making the comparison to the cost of (incremental or marginal) debt funding the only appropriate one in most cases.

In the next and final part of this article, focus will be on the possible commercial impact of SCF for a Seller and on the regulators’, investors’ and credit rating agencies’ points of view, while some conclusions and recommendations will be presented as well. To be continued…

Marc Verkuil

Treasury Professional


Corporate Trade Finance Products: What is Factoring & Forfaiting

| 26 -11-2018 | by Nijay Gupta | treasuryXL |

In view of Credit & Geo-political Risk worldwide, the Corporates & Financers (mainly Bankers & Financial Institutions) are offering plenty of products to Sellers & buyers to enable them to do Trade.  The most sought after product  now a days is Factoring & Forfaiting for Domestic & International Trade.

What is Factoring & Forfaiting (Post shipment Finance)

Factoring: A sort of Financial arrangement between the Seller & Intermediary Bank, to sell its Accounts Recievable rights in favour of the Factor (intermediary bank) to collect/discount the proceeds of the bills/Invoices. A business will sometimes factor its receivable assets to meet its present and immediate  cash needs.

This may involve discounting of bill by the Factor Intermediary . Generally the discounting is done upto between 80 to 90% of the invoice value on Recourse basis. The factor charges, Collection, Administration, Management , Credit Protection & Financing (if done) cost to the Seller/exporter.  Generally, the Factor insist for Seller to have this arrangement for all their sales, which is generally not liked by the sellers/exporters, those are keen to give business only for the troubled countries/buyers with Geo-political & other problems. The Factor helps seller collection of Invoice proceeds thru all legal means through their world-wide branches/subsidiaries or correspondent banks network.

Forfaiting:  Forfaiting is a factoring/discounting arrangement used in Domestic/International Trade Finance by Sellers/Exporters who wish to sell their receivables  to a forfaiter (intermediary Bank, Financial Institution or a Finance Company) on without recourse basis.

This can be for short-term (1 month) to Long-term (10 years) Bills with or without LC on Without Recourse basis.  The Forfaiter collect its discounting fee upfront for the entire period and it is the best arrangement for the exporter and intermediary Forfaiter.  Its win-win for both, as exporters get the bill proceeds upfront (as all risks are passed on to the Forfaiter) on without recourse basis and gives good income upfront to the Forafaiter. Paying upfront interest to the Forfaiter is permissible  by RBI under FEMA 1999.

Many Foreign Banks in India are offering these products on aggressive basis, even to the exporters does not have account relationship with them, in order to earn comission, fee & Interest on Factoring & Forfaiting business for their buyer customers LC or without LC, in other countries. Interest Rates are at MCLR or Libor relates rates of interest with lower mark-up.  Infact, sometimes, its cheaper for the exporter to get Finance under these schemes cheaper than normal Interest rate charged by Banks to exporters under Pre-shipment or Post-shipment Finance schemes.


Nijay Gupta

Founder & CEO NK GUPTA Consulting



How to improve your working capital with Trade Finance instruments

| 22-5-2017 | Olivier Werlingshoff |

Trade finance instruments are developed especially for companies that deal with  export and/or import of goods to reduce risk but also to improve the working capital. Before going into the working capital part first let us refresh the theory.

If you are an importer of goods you would like to be sure the goods you will receive are the same as the goods you ordered. How can you be sure that the exporter sent you the right quality of goods and the right quantity, or that he sent them at all? One of the possibilities you have to reduce that risk is to pay after receiving the goods. If the quality and the quantity do not match with what you ordered, you simply do not accept the goods and do not pay the invoice.

At the same time the exporter of goods is worried that after sending you the goods, the invoice will remain  unpaid after the agreed payment period. What if the client does not accept the goods in the harbor? He would then have to arrange for new transport to return the goods or try to find new clients in a short period of time.

There is a lot of risk for both parties especially when they do not know each other very well or if they are located on different continents.

Letter of Credit

In this case a Letter of Credit could be a solution. With a Letter of Credit you make agreements with the exporter about the quality and the quantity of the goods that you buy, and how, when and where the goods will be shipped to.  Only if all terms and conditions of the Letter of Credit have been met the bank will pay the invoice. A lot of paper work will be part of the agreement for instance a Bills of Lading, a commercial invoice, a certificate of origin and an inspection certificate. As an additional security, the exporter can have the Letter of Credit confirmed by his bank.
In a nutshell this is the basic of how Letters of Credit (L/C) works.

Working Capital

Now you can ask the question how could this improve your working capital?

Firstly you will have more security that the payment will be made, therefore the risk of nonpayment will be reduced.

With trade finance you could also set up a line of credit based on your security and overall financial situation.

For the importer, he can finance the gap between paying the exporter and selling the goods to a buyer or use it for manufacturing purposes.

For the exporter, he can fund the gap between selling the goods and receiving payments from the buyer.

If there is not enough equity or there are no sufficient credit lines available, there is another option. Transaction Finance, hence the goods you will sell. [Export L/C] are used to fund [collateral] the buying of these same goods [Import L/C] This is called a Back to back L/C.

There could be a fly in the ointment, however! What happens when there is a mistake made in the paperwork? If this is a small mistake both parties would agree the transaction will go forward. But if during shipment the prices of the goods drop the importer will maybe not be very collaborative and will grab this opportunity to refuse the goods and not to pay the invoice!

Since the credit crisis the use of L/C’s went through the roof. If you need consultancy advise on this topic, drop us a line!

Olivier Werlingshoff - editor treasuryXL


Olivier Werlingshoff 

Group Treasury Director




More articles from this author:

How can payments improve your working capital?

Managing cash across borders

How to improve cash awareness without targets

Working Capital Management – not just a finance issue

|14-12-2016 | François de Witte |



When looking at the sales, conversion and procurement cycle, we should not only focus on the stated DSO, but also at the hidden DSO. In order to identify this, we must go much further to a complete analysis of the order to cash cycle, as illustrated by the following  6 examples:



  • Several companies do not manage their inventory efficiently
  • Quite a lot of companies still have a time lag between the moment that the goods and the services are delivered, and the moment that the invoice is issued
  • Several  companies still issue paper based invoices. The postal delay will also increase the collection time. For this reason, I recommend to my clients to move to e-invoicing
  • When I worked with a car dealer, I realised that between the moment that the cars were delivered by the importer, and the moment that they were sold, there was a huge time lag
  • A marketing company struggled with the process of offers, leading to purchase orders, because the various participating units did not provide their time sheet and cost estimation in time.
  • On the inventory side, purchase of spare parts were done, even without having a duly executed purchase order of the client, and clients were not reminded in time to take delivery of the goods, resulting in higher stocks

Hence, when starting an assignment on the working capital management optimisation, one should not only look at the processes within finance, but at the overall processes.in the company. By analysing the detailed processes on the floor, you can better understand the drivers of the cash conversion cycle, and take some actions, such as:

  • Ensuring that procurement only purchase spare parts when they have a duly executed purchase order, with then required the advance payment
  • Making staff aware of the need to ensure a quick invoicing process
  • Understanding the possible resistance to new concepts such as e-invoicing and automated incoming document scanning
  • Identifying the triggers, which will make that the staff cooperates to reduce the order to cash cycle
  • Having a better alignment between the finance staff and the sales department on e.g. the credit risk and the payment terms
  • Make procurement more sensitive to treasury aspects. I have seen several cash risk companies who left aside the possibility of supply chain financing of discounting schemes, because the KPIs of both procurement and treasury were not aligned;

But overall, if you wish to succeed in optimising the cash conversion cycle, you need to ensure that the changes are embedded in the organisation by:

  • Explaining to all the participants the importance of working capital management and their contribution to it
  • Providing to the various participants KPIs in this area, which are monitored on a regular basis. In my recent assignment, we have put joint KPIs for the Sales Administration in prompt invoicing and in DSO terms
  • Ensuring also that there is an internal control on the procedures
  • Ensure that you have the correct tooling (e.g. e-invoicing, credit management, credit collection, etc.)
  • Having a regular review of the processes

We can conclude that an efficient working capital management is a matter for the whole company. Beside hard skills, you also need soft skills and KPIs to ensure that the processes are really embedded in the organisation.



François de Witte

Senior Consultant at FDW Consult