This is a hybrid accounts receivables monetisation solution which has optimised GE’s working capital and strengthened its customer relations. The solution covers tenors ranging from three months to almost three years, backed with documentary instruments or open account solutions.
Photo of Sachin Bafna, Citi and Vincent Liu, General Electric.
Asia CFO Power Services
Commercial Finance Leader
Operating in approximately 175 countries, General Electric (GE) operates through the following segments: power and water, oil and gas, aviation, healthcare, transportation and capital which cater to the needs of financial services, medical devices, life sciences, pharmaceutical, automotive, software development and engineering industries.
in partnership with
Given the market environment, the team faced several challenges:
Economic slowdown and impact on working capital
The general slowdown of the infrastructure sector has reduced business opportunities. As a result, GE has been receiving client requests to further stretch their payment terms, putting pressure on CFOA metrics.
In an increasingly competitive market in Asia, the GE Power Services team faced a dual challenge:
To win customers.
Product differentiation and financing package. To remain competitive, GE had to look for ways to bundle a cost-effective innovative product suite with an economic financing solution.
Steven Hong, Asia CFO Power Services explains, “To address the above we worked with Citi to develop a hybrid AR monetisation solution that would help us create sustainable streams of cash flows vis-à-vis our operations by targeting metrics such as cash from operating activities (CFOA).”
The hybrid AR monetisation solution can be customised, based on the needs of different GE customers. For example, GE won a large contract in ASEAN for a Gas Turbine upgrade for over $100m. GE’s customer made an operational request for $20+m of Gas Turbine spare parts ready onsite during the upgrade, but had challenges with their budgeting cycle as the budgeting for spare parts was only scheduled for 2018.
Leveraging the solution, GE was able to extend its customer’s payment terms to three years and in return, secure a usance Letter of Credit (LC) from the customer’s bank. The customer issued a LC using non-fund based credit lines, achieving a relatively cost effective solution for extended payment terms in line with the cash flow generation of the underlying asset.
GE, on the other hand, worked with Citi to monetise the LC within a couple of days of parts shipment and immediately generated free cash flow. Market-leading turnaround speed and strong execution capabilities were demonstrated by the GE team. Within a week of winning and dispatching under the contract, the GE team worked tirelessly to ensure the cash flow was monetised for the important quarter end deadline.
In the past year, GE has customised the hybrid AR monetisation solution for other ASEAN orders, partnering with Citi for implementation. The solution is innovative and dynamic, because it involves hybrid risk of the corporate as well as banks issuing the LC.
To date, GE has executed over five hybrid AR monetisation structures covering different markets and instruments. GE’s flexible solution covers tenors ranging from three months to almost three years, backed with document instruments or open account solutions.
These structures have helped to provide upfront cash for receivable monetisation and back ended payment terms to GE’s clients. To track their progress, GE has set quarter-on-quarter targets for AR monetisation, working capital improvements as well as operational cash flow. These metrics are tracked from the CFO down to the operational teams, with very close coordination with their customers. GE’s strong customer relationships play a significant role in enabling them to achieve these financial targets and resulting in a further enhanced partnership.
Best practice and innovation
GE’s effort on AR and working capital management is a win-win for GE and their end customers. Their hybrid solution addresses the key needs of all large industrial businesses and is replicable in many ways. As a result, GE Power Services’ finance team has been credited for leading the cash flow generation efforts; significantly improving the quality of earnings for the business.
Significantly improved quality of earnings.
Strengthened customer partnerships.
Working capital optimised.