The challenge
Lenovo was looking for a working capital solution to improve its balance sheet. The company’s initial strategy was to better manage its working capital through the sale of receivables on a without recourse basis, which would allow Lenovo to derecognise the receivables from its balance sheet and recognise cash.
The company had already implemented a similar receivables programme a few years earlier and wondered if there was a different option available so set about speaking to its banking partners to see what would be possible.
The solution
Lenovo was right and after speaking with its banking partner, BNP Paribas, it realised that it could reach its objective by focusing on the accounts payables instead of the accounts receivables side of the working capital equation.
It therefore went about creating a supplier financing programme with the bank that would see Lenovo negotiate extended payment terms with its suppliers while the bank offered Lenovo’s suppliers the option to sell their due-receivables.
Breaking down the solution, Lenovo adopted the following best practices:
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Payment terms extension:
Lenovo managed to extend the payment terms with its supplier from 45 days to 90 days by way of amendment to the purchase contracts. The suppliers were attracted by the programme in which they would have the option to receive a standard payment or to opt for early discounting by selling its receivables at an earlier date.
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Accounting-friendly legal documentation:
Under the programme, the bank signed a Payment Services Agreement with Lenovo, in which this document was restricted to the appointment of the bank as paying agent to the suppliers, with no reference to the financing transaction. This documentation enabled Lenovo to obtain a favourable accounting treatment as “trade payables” instead of “debt” on its balance sheet, allowing it to achieve its goals in improving its cash conversion cycle.
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Effective syndication strategy:
Funding is provided by banks for a total amount of US$575m.
Overall, Lenovo has been able to extend payment terms to its suppliers, resulting in an increase in its days payable outstanding and consequently improving its overall working capital management and balance sheet.
Best practice and innovation
This solution offers a unique and alternative approach to meeting the challenging objectives of improving working capital and balance sheet management at the same time. Also, the benefits attained by Lenovo were significant, especially when compared to the marginal gains that would have been gained from extending its receivables purchase programme.
