The challenge:

Several challenges existed here. The first arose from the credit risk of the buyers/distributors as they are much smaller than GE. The second challenge came from the legal framework which includes the bi-lateral agreement for AR purchase as well as a tri-party agreement for insurance cover between Deutsche Bank, GE and the insurance company. The third challenge was time. Discussions were initiated in late May and GE was looking for the transaction to go live in September.

Through collaboration across global, regional and local on the key deliverables including: the pool rating methodology, the legal framework, credit, risk mitigation and operational flows, the first transaction went live by September, successfully meeting the objective for balance sheet improvement. This was achieved as follows.

The solution:

A local bank provided a Receivables Purchase solution on a without recourse basis to GE to purchase the pool of receivables from the company’s buyers/distributors. In addition, Deutsche Bank provided a US$50m Receivables Purchase solution to GE which covered the pool of receivables from its six local subsidiaries, comprising a large number of distributors and buyers from the various businesses of GE. The receivables were sold to Deutsche Bank without recourse so that the transaction was booked with GE’s buyers as obligors, who did not meet the Bank’s rating criteria.

Establishing individual ratings for small credit lines would have been an inefficient exercise and could not reflect the value of the business relationship between GE and its buyers, which has strong influence on the AR quality. Deutsche Bank adopted a ground-breaking pool rating methodology instead, whereby the credit rating of the entire pool of buyers was assessed based on their historical payment track record over the past two years.

Best practice and innovation:

There are two unique reasons why this solution stands out. Firstly, the pool rating methodology that GE China adopted as part of the solution enabled a simplified credit rating of a pool of counterparties, allowing the credit appetite of a large number of counterparties for small amounts to be established.

Secondly, from a risk management perspective, in addition to the innovative pool rating methodology, the use of a third-party insurance company to mitigate GE China’s risk was an integral part of the whole solution. The solution was part of a unique structure which was designed to allow the company to recognise its true-sale of the whole AR to the bank. In the meantime GE will also be engaged to support the recovery process for any default by the buyers/distributors including the claim process from insurance company.