BCR Publishing

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

Working with industry leading organisations, experts, governments and universities, BCR Publications delivers expertise in factoring, receivables and supply chain finance to a global audience.

BCR has long been a beacon of innovation and excellence in the realm of receivables finance, playing an instrumental role in shaping the industry’s international landscape. Through its comprehensive conferences, insightful publications, and thought leadership, BCR has facilitated crucial dialogues and connections among industry professionals, driving forward the development of receivables finance globally.

Follow BCR Publishing

Free passes

For corporate treasurer roles/functions!

ARTICLES

Short term financing – lines of credit

| 17-04-2018 | treasuryXL |

There are many instruments that can be used to obtain short term funding. We have touched on some of them earlier in this series. This article is all about lines of credit. These are normally provided by banks of other financial intermediaries and help corporates with their short term funding needs. At first glance is might appear to be the same as a short term loan, but there are some clear differences. Normally, the financial institute that is the counterparty, will provide you with a line of credit – after appropriate inspection – which sets a specific limit on the amount of credit to be extended. Let us see how this works.

An agreed line of credit will contain, within its contract, a few simple terms:

The maximum amount that can be drawn
The minimum amount that can be drawn
The minimum and maximum tenor
If based on floating rates – the base will be specified
The additional margin rate above the index rate
The end date of the facility
The facility fee – usually expressed in basis points

Facility Fee

When a bank extends a line of credit, they are actually earmarking these funds in their books – they have a contingent liability. The facility fee can be seen as the cost of the arrangement. Normally the facility fee is paid monthly on the notional amount outstanding on the facility. In other words, if 70% of the facility was not being used, then a facility fee would be owed at the end of the month on a pro rata basis for this amount.

Drawdowns are communicated via the agreed channels and the bank credits the client. Lines can either be secured or unsecured – a secured line would attract a lower interest rate payable. Furthermore, normal corporate governance would apply in respect of bank compliance – agreed ratios must be maintained in order to keep the facility running.

The main advantage with a line of credit, is that the client has the flexibility to borrow exactly the amount that they require – given the contract conditions – and also have flexibility regarding the tenor. With a traditional loan, they would receive all the funds on the first day, irrespective of if they actually needed all the funds on that day.

Interest is only paid on the amount borrowed – not on the whole facility. For the balance, as mentioned earlier, a facility is payable. Due to its revolving nature, the facility can be used for many times during the agreed life of the facility. This gives the borrower enormous flexibility and ensures that they never need to borrow more than they actually require.

This product is normally used for operational issues, that are influenced by specific factors. It could be that a company is exposed to seasonal factors that result in a shortage of cash. A line of credit enables the company to smooth out these peaks and troughs and ease the bottlenecks restricting their operations. Additionally, due to the time lag inherent in many companies between delivering goods and receiving payment a line of credit ensures continuation of the daily operations.

The product can be renewed, but will be subject to a new inspection and, possibly, new terms and conditions at renewal. For companies that experience wide fluctuations in cash flows, this is a useful product to arrange their short term funding.

If you have any questions, please feel free to contact us.

[button url=”https://www.treasuryxl.com/contact/” text=”Contact us” size=”small” type=”primary” icon=”” external=”1″]

[separator type=”” size=”” icon=””]

Repurchase Agreements – alternative short term funding

| 16-04-2018 | treasuryXL |

There are times when a corporate needs to borrow funds – this can be accomplished in a manner of ways. If the corporate actually held securities (Government paper, bonds etc.), it could consider entering into a repurchase agreement – better known as a Repo. This transaction entails a trade where the corporate sells securities at an agreed price and date to a counterparty and purchases them back at a future date for an agreed price. In return, the corporate receives cash – in essence, a Repo is a collateralised loan. Let us look at the working and reasons behind this money market product.

As a funding instrument, repos have been around for 100 years – originally used by the Federal Reserve to facilitate open market operations. As a repo is a collateralised loan, the interest rate is, normally, lower than for unsecured lending. The major factor is the type of collateral that is offered. This can normally be Government paper, but can also include other forms of bonds and securitised paper. The interest amount is not paid separately, but included in the final price upon redemption. The classic term for a repo is a “sell and buyback” – the paper is sold in exchange for a principal amount and bought back on the agreed future date. The counterparty that buys the paper is entering into a reverse repo.

By offering the paper as collateral, the lender is entering into a secured transaction – if the borrower defaults, the lender still holds the paper. The preference in the market is for high quality liquid securities, though markets can be found for more opaque paper. After the financial crisis, the demand for repo trading rose sharply as the interbank market was reluctant to extend unsecured funding to counterparties.

The paper falls into 2 distinct categories – specials and general collateral. A special refers to a specific security (recognised by its unique ISIN number) that is in demand. These are bonds that are normally being very heavily traded in the market and market makers need to cover their short positions by borrowing the paper. As such the rates on specials can be appreciably lower than on normal repos – and far below the rates on the interbank money market. In particular times of shortage, rates can even be negative.

General collateral is any paper that is accepted as collateral at that moment – it could be any German Government paper as this is deemed by market participants as being of equal value and standing. Most collateral is subject to a haircut – due to the additional work involved and the potential credit risk. This means that a bond with a face value of EUR 1 million can only be used as collateral to borrow EUR 950,000. Whilst these loans are collateralised, and often cover Government paper, the is always a specific credit risk.

For the buyer of a repo, they are lending funds and receiving collateral. One of the main players on the buy side are Money Market Funds. For the seller there is an opportunity to receive short date finance whilst pledging assets that they are holding in their portfolio.

Repos normally have a short tenor – from overnight to 3 months. They facilitate the short dated market and provide funding at attractive rates, and assist bond traders in covering their positions.

If you have any questions, please feel free to contact us.

Cashless society – the backlash

| 13-04-2018 | treasuryXL |

Last week an article appeared on the BBC website about the current situation in Sweden. They have embraced the world of digital payments – cash payments in the retail sector now amount to only 15% of the total, compared to 40% in 2010. But against this resounding success, there is a growing unrest among the elderly and other groups perceived as vulnerable. The majority of the banks in Sweden have stopped customers from withdrawing or paying in cash at the banks. So, what are the consequences in a cashless society and how will digital money perform in the future?

75% of Swedes claim that they hardly use cash anymore – they take advantage of digital payments via cards, mobile phone and online facilities. The counter argument is that as long as people have the right to use physical cash and it is permitted by law, the people should be free to choose their method of payment. Those people that are protesting are normally seen as the elderly who have yet to embrace the culture and are still adverse to using digital technology. There are also many elderly who have no access to a computer at home who are now facing additional costs in a cashless society.

The crux of their argument that it should not be more expensive to enter into transactions if they decide not to use digital services. Riksbank (the Swedish Central Bank) adopted a cautionary stance in their annual report, stating that whilst progress was good, this must not result in a part of society from being excluded from the payment markets. Whilst the progress towards a cashless society looks inevitable, a survey in Sweden has shown that 70% of Swedes would still like the choice to pay with cash in the future.

If we move towards a completely cashless society, this will have a profound impact on the banking industry. Digital cash can be issued by the central bank directly to residents. It will not require the current level of intermediation that commercial banks currently provide to disperse money. Cash, as currently used, provides a certain level of anonymity – this trait would cease to exist if central banks issued digital currency. A fully digital currency would shorten the time needed for transactions to be settled and replace the plethora of existing settlements systems and exchanges.

It would appear that the biggest benefit would come in cross border payments – an area of banking that is still relatively slow and expensive to implement.

Cash is still king, but it would appear that it is starting to be seen as an old fashioned and inefficient means of settlement in an increasingly digital world.