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The Impact of Rising Interest Rates on Working Capital

07-11-2022 | treasuryXL | ComplexCountries | LinkedIn |

No apologies for the second report on working capital and interest rate rises in a short period: we are seeing significant changes in the business environment, and treasurers are being challenged.

Source

This call focused primarily on the higher interest rate environment. One participant was mostly concerned about how to invest excess cash – the others are grappling with rapidly increasing working capital, driven by the need to keep bigger buffers, due to COVID and the Russia/Ukraine war, and the long delays in logistics circuits.

Funding challenges:

One participant manages treasury for South America, where there have been significant rises in interest rates, and, in some countries, funding shortages, with banks unable to provide cash and prioritising local companies. The challenges have been manageable, and they have not had to resort to drawing down all their lines to make sure they are available. This behaviour, which is akin to the rush on toilet paper in supermarkets, has been an issue in many markets, including more developed ones. However, there has been some, limited, pre-funding around significant events.
This has led to an increase in the number of banks in the funding panel.
One participant prefers their subsidiaries to fund themselves locally – but the cost of higher interest rates (for example, 35% in Turkey) is dissuasive, even if, economically, they are significantly below the inflation rate (>80%).
There is an increased focus on being more efficient in the use of cash within the company, so more pressure on cross-border pooling, accessing trapped cash, intercompany netting, etc.
Some participants are using the situation to selectively get higher discounts for pre-paying suppliers: this can be an effective way to increase the return on cash
Generally, the participants are at the point where these challenges cause additional work, but none of them is particularly serious.

Working Capital Management

Typically, treasurers have to fund working capital, but they do not manage it.
In all cases, there is a dialogue with the business about how much working capital the business can support, and how it can be reduced.
Higher interest rates are resulting in increased expense. Depending on the company, this may, or may not, be reflected in the measurements of the business units.
The participants all agreed with the business need to hold more inventory, but a dialogue is required to make sure this doesn’t get out of control. One participant works with the business on resisting calls to change payment terms, while another helps arrange pre-funding for suppliers, when needed.

Contributors:

This report was produced by Monie Lindsey based on a Treasury Peer Call chaired by Damian Glendinning

To access this report:

Access to the full report is available to Premium Subscribers of ComplexCountries. Please log in on the website of ComplexCountries to access the download.
Please contact ComplexCountries to find out about their subscription packages.

Ask the treasuryXL expert #5 What is Factoring in Trade Finance?

03-11-2022 | treasuryXL | Wim Kok | LinkedIn |

treasuryXL is the community platform for everyone with a treasury question or answer! A common question asked by treasurers is what Factoring means in Trade Finance. In today’s article Ask the treasuryXL Expert, Wim Kok defines factoring in trade finance for us.

Question: “What is Factoring in Trade Finance?”

Answer provided by Wim

What is Factoring in Trade Finance?

Well, there is a pretty good definition included in the Standard Definitions for Techniques of Supply Chain Finance, prepared by the Global Supply Chain Finance Forum and published by the ICC in 2016. It is currently being updated, but the definition is still alright.

There they give the definition of factoring in trade finance as: Factoring is a form of Receivables Purchase, in which sellers of goods and services sell their receivables (represented by outstanding invoices) at a discount to a finance provider (commonly known as the ‘factor’). A key differentiator of Factoring is that typically the finance provider becomes responsible for managing the debtor portfolio and collecting the payment of the underlying receivables.

Would you add anything to this definition?

There are a number of things I would add to this to explain the terminology and make it more clear:

The term “factoring” is sometimes used as an umbrella term for all forms of invoice financing, including confidential invoice discounting. Strictly speaking, “factoring” refers to both debt management and debt purchase.
In the UK, factoring is usually communicated to the debtor, as the collection procedures are carried out by the funding provider (the “factor”).
Non-public factoring is usually more popular than full factoring. In this case, the customer retains control over the collection of the receivable.
In some markets, disclosure is required by law. Some even require the debt to be formally acknowledged before purchase.
In the UK, the standard practice is for the factor to purchase all debt – known as “whole turnover” – even if not all debt is eligible for financing. This gives the factor leeway to absorb any dilution or non-payment of individual invoices. Banks also take secondary security in the form of an “all-asset debenture”. This is registered at Companies House and notifies other potential lenders that debts have been transferred.
A subtle but important point is that a debt assignment can serve two purposes: it can mean that the debt has been bought or that the debt has been taken as security for a loan.
Many Fintechs offer single invoice/selected invoice/selected debtor solutions, but these are inherently riskier than whole turnover solutions. Large bank providers are generally reluctant to follow suit.
Factoring can be done with or without recourse. Even arrangements without recourse include provisions allowing the factor to require the customer to buy back the invoice under certain conditions (e.g. contractual dispute).
Factoring can possibly be “wrapped” in credit insurance.
In the UK, major finance providers tend to operate an “availability model” in factoring rather than funding individual invoices. The “availability” changes in real time as new eligible debts are purchased (within agreed counterparty limits etc) and existing debts are settled, defaulted or become ineligible. The customer can then draw down to “availability” at any time. This is similar to a “borrowing base” approach, albeit with frequent increases and decreases within the day. This model, combined with the “whole turnover” mandate, provides the factor with a secure source of repayment even if some invoices remain unpaid.

I trust this will be helpful and give more insight into this subject.

Wim Kok

Do you also have a question for one of the treasuryXL experts? Feel free to leave your question on our treasuryXL Panel. The panel members are willing to answer your question, free of charge, with no commitment.

MENA Investment Banking Review First Nine Months 2022

02-11-2022 | treasuryXL | Refinitiv | LinkedIn |

Refinitiv Deals Intelligence brings you the MENA Investment Banking performance review, covering First Nine Months 2022.

Access this report for Investment Banking fees, volumes, and league tables across M&A, Equity Capital Markets, and Debt Capital Markets. Examine deal flows, top deals, most active nations, and most active sectors.

Report Highlights

INVESTMENT BANKING FEES

An estimated US$1.1 billion worth of investment banking fees were generated in the Middle East & North Africa during the first nine months of 2022, 5% more than the same period in 2021 and the highest first nine-month total since 2008. Almost half of this year’s fees were generated during the first three months of the year, with quarterly fees declining in the following two quarters. Fees totalled US$186.4 million during the third quarter of 2022, the lowest quarterly total in the region in six years.

MERGERS & ACQUISITIONS

The value of announced M&A transactions with any MENA involvement reached US$69.7 billion during the first nine months of 2022, 17% less than the value recorded during the same period in 2021. Despite the decline in value, the number of deal announcements in the region increased 5% from last year to the highest first nine-month total since our records began in 1980.

EQUITY CAPITAL MARKETS

MENA equity and equity-related issuance totalled US$15.3 billion during the first nine months of 2022, the highest first nine-month total since 2008. Proceeds raised by companies in the region increased 166% compared to the first nine months of 2021, while the number of issues increased 110%.

DEBT CAPITAL MARKETS

MENA debt issuance totalled US$18.3 billion during the first nine months of 2022, down 80% from the value recorded during the same period in 2021 and the lowest first nine-month total since 2011. The number of issues declined 68% from last year at this time.

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ARTICLES

The Impact of Rising Interest Rates on Working Capital

Funding challenges:

Working Capital Management

To access this report:

Ask the treasuryXL expert #5 What is Factoring in Trade Finance?

Question: “What is Factoring in Trade Finance?”

Answer provided by Wim

What is Factoring in Trade Finance?

Would you add anything to this definition?

MENA Investment Banking Review First Nine Months 2022

Report Highlights

Download the report

Go to

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Contact us

Subscribe

BCR Publishing

We are the leading provider of news, market intelligence, events and training for the global receivables finance industry.

Follow BCR Publishing

ARTICLES

Funding challenges:

Working Capital Management

To access this report:

Question: .av_font_icon.av-zldx9w-157fea06cedd83d7df379472df0b3322 .av-icon-char{ font-size:40px; line-height:40px; } “What is Factoring in Trade Finance?”

Answer provided by Wim

What is Factoring in Trade Finance?

Would you add anything to this definition?

Report Highlights

Download the report

Go to

Partner Program

Contact us

Subscribe

Question: “What is Factoring in Trade Finance?”