This issue’s question

“How important is supply chain finance for companies; what are the implications of Greensill’s collapse on SCF?”

At Metso Outotec we run one SCF programme for our large suppliers that utilises a programme run by Citi, and one for our smaller suppliers that uses C2FO’s dynamic discounting. The idea is that both programmes enable all our suppliers to obtain faster payments, improve their cash flow, liquidity, and DSO ratios. Rather than waiting for payment under our typical 90-day terms, under our SCF programme suppliers can get paid in ten days.

The Citi programme is global and run across Europe, North America, Australia, Brazil, China and India. The programme has increased in size and we are regularly onboarding new suppliers, especially since our merger as we are now onboarding ex-Outotec suppliers. We have also recently syndicated the programme, adding a couple more banks to the Citi programme to share the risks and diversify the portfolio. It has also allowed us to enlarge the programme with suppliers and countries.

Our SCF programme has a direct link to our strategy. Our aim is to continue to be an investment grade rated company, and SCF helps us to improve our working capital and cash flow with longer payment terms. It also allows us to deepen our supplier relationships by providing them with an opportunity to finance their receivables on good terms. Suppliers are interested in improving their cash flow, liquidity and ratios, and the programme provides them with a competitive financing option. Much of our procurement is from developing countries, where financing costs are typically higher. We have only ever utilised the Citi platform with SWIFT connectivity so have no experience of third party platforms.

The Greensill case has not directly impacted us, but I believe there may be indirect impacts, such as increased regulation and reporting requirements. I expect regulators will require companies to report their SCF exposure in their annual report. At Metso Outotec, we don’t externally report on the programme, but because we already report our SCF exposure internally, reporting externally wouldn’t be a big step if we were required to do so.

We have strict risk analysis underpinning the programme and have a limit to our overall exposure – a maximum amount that we won’t exceed. And our bank programme is not committed, so our banks can stop financing suppliers anytime if they want. If we didn’t offer a SCF programme, I assume many of our suppliers, now used to obtaining payments early, would start negotiating shorter payment terms. This would have an impact on our working capital and liquidity. SCF helps with our procurement and supplier relationships. It is a win-win for our suppliers and our treasury.

Another consequence of Greensill’s collapse could be that more large players such as global investment banks start financing supply chains, especially if investors grow wary of SCF, and start avoiding the asset class. The Greensill case will also make everyone involved in SCF more careful and prudent in selecting counterparties.

SCF, payables finance or reverse factoring, has been going on for years. It involves banks or lenders financing the gap between corporate buyers receiving goods from their suppliers, and the point the payment is due. SCF programmes are distributed amongst banks which manage the onboarding of suppliers onto their programmes.

Greensill was running traditional SCF programmes using Taulia’s technology platform. After Greensill’s collapse, Taulia secured financing from a consortium of banks led by J.P. Morgan which quickly picked up the invoice information and brought money to the table. Companies on the platform may suffer a slight delay to their funding cycle, but this is a small interruption for such a significant event. It proves the resilience of the product.

SCF in support of high quality, investment grade corporate supply chains are a good investment in terms of return on capital for banks, but it is low margin and needs scale. If lenders go down the value chain, they take on a higher risk and make a higher margin, but SCF as a product is not designed for this. SCF is about taking the best credit rated entity in the supply chain and shifting the funding cost of that entity down the supply chain, making it cheaper for small suppliers to access finance. When you have a poor rated entity at the top, suppliers down the chain don’t benefit as much because the gap between drawing on the SCF programme compared to other costs of borrowing reduces.

Greensill’s lending was also based on future receivables: this isn’t a trade finance product. Trade finance doesn’t intermediate the financing of a transaction that hasn’t happened – all trade finance products rely on the underlying trade documents being presented to the bank in order to get financed. Financing future receivables like Greensill was with GFG Alliance is straightforward lending that should have been priced appropriately.

Greensill’s collapse won’t have a huge impact on SCF. Most of the funders in the space are financial institutions that understand the risk. When they buy a SCF asset, they ensure any structure in place has ultimate access to the obligor and SCF assets are also sold under a trust structure. However, expect more investor scrutiny in terms of asset securitisation vehicles, or SPVs. Investors will look more closely at what makes up these assets, but this is a due diligence that should have been done anyway and is nothing to do with SCF.

Platform providers have an opportunity now. They provide visibility on what is being bought and a dashboard of flows and legal entities. Don’t expect more regulation of fintech providers. There may be a cause for more regulation for alternative lenders or shadow banks, but this depends on how systematic the risk is, and I believe Greensill does not pose a systematic risk.

It is incumbent on treasury teams to double check the strength of their underlying platform provider and reliability of their funders. They should check their quality, ability to onboard suppliers, and provide transparency. Elsewhere, treasury teams may face changes in accounting rules. Investors are increasingly calling on the Financial Accounting Standards Board and the International Accounting Standards Board for clarity on companies’ supply-chain finance programmes to ensure their true financial health of the buyer is disclosed.

The Greensill case has only directly impacted the companies that used Greensill’s SCF programme. But even here, other banks stepped in and Greensill’s SCF programmes for large corporates have been snapped up. Moreover, these companies will continue to use Taulia as their main technology provider.

However, companies using riskier SCF will see an impact. Rather than regular payables finance, Greensill was doing something different. It couldn’t make enough margin on standard SCF transactions, so it looked to corporate anchors with lower credit ratings and charged a higher margin from providing certainty to their suppliers. SCF is a low margin, big volume, sticky product. When you introduce platforms and asset managers wanting to get paid, or investors wanting yield, it can take on much higher risk.

Greensill got involved in future invoicing. This involves discounting the value of future receivables far into the future to lend money today, effectively allowing corporates to monetise future contracts. Greensill was taking on much greater risk than other lenders in the market by financing future trades that might never happen, based on the prediction that they will. No one is willing to do these kinds of trades for corporates now. There will always be investors in plain vanilla SCF, but returns are low.

Investors looking for yield will now ask more questions about what they are we investing in. Greensill shows that future receivables are a whole difference ball game, and investors will be cautious. Greensill’s structure saw SPVs mixed with various anchors and comprising different programmes, not just receivables but also future receivables. The danger comes when you mix up the anchor corporates and tell investors it is a great mix and put credit insurance on top. For this reason, structures around SPVs will change.

I don’t expect any scarcity in standard SCF, or pricing to increase. Most programmes comprise a large anchor with a technology provider or bank in a one-on-one relationship whereby the funders know what they are investing in. If they don’t know every supplier, they will have a note or structure that they know applies to that one buyer.

Investors and corporates will increasingly look to platforms for transparency around when payments are coming in, and payment trends. Technology providers have an opportunity to provide transparency so that anchor corporates, suppliers and funders all know exactly what is outstanding, and understand on an individual invoice level what they are financing.

SCF has two aspects of due diligence, one around the anchor and one around individual suppliers. Banks’ due diligence around anchors is good, but due diligence around a long tail of suppliers is more difficult. It involves more work and is a trade-off between the cost of onboarding and the benefits to lenders. It’s one of the reasons why KYC is always mentioned as a stumbling block to long tailed suppliers. The important thing is that plain vanilla SCF or paying confirmed invoices early is beneficial. It is a force for good, particularly for SMEs coming out of the pandemic.