This demonstrates the company’s opportunistic approach to leverage the recent oil price collapse. They have identified Saudi Arabia, Kuwait, Qatar and the UAE as the specific countries requiring a financing solution and are implementing a solution with one of their global partner banks (GPB) which will buy receivables on a non-recourse basis.
Photo of Martin Scott, HSBC, Anita Prasad, Rahul Daswani and Taru Rintamaki, Microsoft.
Structured Finance Manager
General Manager, Treasury Capital Management
Director, Structured Finance
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The Middle East is a region in transition, underpinned by the recent drop in oil prices which has seen those countries dominated by oil look to diversify their economies. And this is having both a positive and negative impact on businesses.
For Microsoft, whose business in the region is dominated by sales to the public sector and governments, this poses an interesting paradox. On the one hand, governments in the region are focusing on digitisation in order to raise productivity in the enterprise sector, which offers growth potential to Microsoft. Yet on the other, there are significant challenges that Microsoft needed to deal with in the present, as governments reduce spending and re-prioritise projects, often resulting in delayed payments to Microsoft’s partners who sell on behalf of the company in the Middle East. This of course impacts the ability of the partners to pay Microsoft in good time and can also lead to the cancellation of new orders.
Whilst there were some obvious ways to solve this, such as bank financing and credit insurance, these all had downsides – namely cost and availability due to the ‘high risk’ nature of the markets. “But, without our partners having adequate funding in place it was clear that credit limit capacity would constrain our ability to grow sales in these markets,” says Anita Prasad, General Manager, Treasury Capital Management at Microsoft.
It was identified that Saudi Arabia, Kuwait, Qatar and UAE were countries that were most in need of financing and a solution was conceptualised with the following elements:
Payment term extensions for invoices related to licensing to large public sector entities, extended to the partner.
Selling down longer payment term receivables to a bank on a non-recourse basis so that Microsoft can remove the invoices from its books.
Disclosing the transaction to the partner.
The partner continuing to be responsible for collection from the public sector entities.
Once the solution was conceptualised, the next step was to identify a bank which could buy the receivables. Given that Microsoft’s partners in the region are software companies, with little fixed assets on their balance sheets and that the public sector business is characterised by ‘lumpy’ deals, requiring sizable credit limits, not every bank would have the appetite.
HSBC, a global partner bank of Microsoft, was ultimately selected after the team negotiated a deal which would see the bank buy the receivables with 100% non-recourse to Microsoft – HSBC would use syndicated credit insurance to manage their own credit risk. To speed up the process Microsoft co-operated with HSBC to complete their due diligence on credit risk and documented the end-to-end process.
“For Microsoft Treasury winning the award for 2016 Best in Class Middle East Solution is a testament to the ‘Customer Obsessed’ approach that the company has adopted. The Adam Smith awards have Industry wide recognition and for the structured finance team it is an honor to receive this award.
Microsoft as a company has adopted a Growth Mindset culture and by using this approach various teams within the company collaborated to execute this solution. For Microsoft to be selected over its peer groups is a recognition from Adam Smith Awards for the innovation and high impact that our solution brings to the business and the structured finance team is delighted to accept this esteemed award on their behalf.”
The Sale of Receivables Programme was finalised by December 2015 and rolled out to Saudi Arabia in January 2016 where Microsoft were able to bring $20m financing for significantly large payment terms. “The programme is now being expanded in Saudi Arabia and also to other markets such as Kuwait and Qatar, where we have secured $30m financing for similar longer payment terms,” explains Taru Rintamaki, Director , Structured Finance at Microsoft. “Negotiations have also been concluded for a similar set up in UAE.
“Our partners are very happy with this initiative as it allows them to get payment terms which match their cash conversion cycle. They also appreciate the new funding capacity beyond their own relationship banks thanks to the introduction of a new global bank from abroad,” adds Rahul Daswani, Structured Finance Manager at Microsoft.
Best practice and innovation
Developed a new way of managing business for Microsoft where they do not have to take additional credit risk but are still able to provide the longer payment terms needed by the partners.
Cross-border financing solutions that increase the total credit appetite available and thus allow for additional sales.
Collaborative planning process across various sales/finance/treasury teams which developed risk management solutions arising from macro environments in the Middle East.
Developed a solution which can be scaled across markets.
The financial markets in the Middle East have been witnessing very challenging times with geo Political issues and commodity market’s stresses. This Best in Class solution also helped bring about the following learnings:
The solutions that are needed from treasury are more important now than ever and treasury should adopt a listening approach to help understand the issues and develop innovative solutions.
Due to its very unique issues, solutions needed in the Middle East need to reflect both a regional approach however also take into account nuances of the local country needs.
The solutions needed in such complex markets are quite often requiring various groups in the company to collaborate so it is very important to identify what will constitute a win-win solution for everybody and then define timelines so that every group can execute to a shared goal.