Kuresh Sarjan, Head of Asia Pacific Trade and Supply Chain Finance, Bank of America Merrill Lynch, identifies current trends in global trade, as well as new technology-driven trade and supply chain solutions.
Head of Asia Pacific Trade
and Supply Chain Finance
Published: 13th September 2013
What trends are you seeing in global trade?
The trends this year are fairly similar to those in 2012. The trade corridors between Asia, Middle East and Africa are growing in significance, particularly with the Middle East acting as a hub along the ‘New Silk Road’. There is also an increasing level of trade between Latin America and Asia.
Furthermore, as the US and the West economies begin to show signs of recovery, there is a net positive effect for trade because the export corridor from Asia Pacific to the West, which has been muted during the past few years, will gain further impetus as we move through the upturn.
However, there are a number of significant differences. At the beginning of 2012, the markets were experiencing a significant tightening of US dollar liquidity. Over the past year the quantitative easing action taken by central banks – specifically the European Central Bank and the Federal Reserve – resulted in a liquidity overhang, which has resulted in nearly a surplus moving through the markets. This is an important change from the situation in 2012.
The liquidity overhang has had an impact on virtually all asset classes, but in particular trade finance because as more liquidity is made available the price of that liquidity goes down. It went down to the point where it became difficult to deploy capital and make an adequate return in certain markets for our shareholders. For example, Korea is a strong economy with strong credits, but liquidity pricing has been pushed down to levels where it has become difficult to operate from a banking perspective.
Additionally, this year we experienced a much higher demand from our Asia Pacific clients for solution-oriented concepts, which are more structured and complex. We have not seen this level of maturity previously, and it has kept us quite busy from a product solution standpoint.
One theme that we are continuing to see grow year-on-year is the need for transaction-based financing, where the underlying transaction is used as a vehicle for creating a financing opportunity in the working capital cycle. Through such an instrument our clients can access the most competitive financing, monetise their receivables and better manage working capital metrics across days payable outstanding (DPO) and days sales outstanding (DSO).
Are regulations like Basel III having an impact in terms of what the bank is doing?
Absolutely. Basel III is at the forefront of everything that we do across Bank of America Merrill Lynch (BAML), particularly our trade business. We are examining every solution we develop and deliver to our clients through a Basel III lens.
Can you describe the trade and supply chain finance (SCF) environment in more depth, beginning with currency trends?
Currency volatility is creating instability within the market. Recently the Indian rupee traded at historical low levels. The rupee, like other emerging market currencies, has been hit by foreign fund outflows, as a result of the expectation that the US Federal Reserve will begin winding down its stimulus scheme.
This impacts the corporate treasurer not just in terms of currency volatility in itself, but also in terms of trade finance. Corporate clients have to manage their currency exposures from an import/export flow perspective, and ascertain what form of financing is the most beneficial for themselves and their supply chains in these volatile times. But there is much confusion in the corporate world as to the best course of action. Firstly, they need to ask themselves the most pertinent question: to hedge or not to hedge? If a corporate does certain types of US dollar borrowing but leaves its exposures unhedged, it will have a significant – whether mark-to-market or real – impact on its business. Additionally, many treasurers may choose to hedge their currency exposures but then won’t know what to do once the hedge matures. This is where the corporate’s banking partner needs to step in and give advice tailored to its business objectives.
Working capital and liquidity management is another area that our corporate clients are focused on. BAML has enhanced a number of product areas to make them more relevant to our clients from a working capital management perspective, which also ties in with our liquidity solutions. For example, we are working on a receivables finance solution, both a funded and an ‘unfunded’ product. The unfunded product may be deployed in a situation where the client doesn’t require liquidity but it wants either a to monetise receivables from a balance sheet management standpoint, or manage the risk of a counterparty to which is has too large of an exposure. Both products can be used as a liquidity, risk or balance sheet management tool. They are increasingly being deployed to manage balance sheet metrics with regards to internal cash management.
One of our key clients, a Japanese company with operations in Thailand, needed to monetise its receivables in order to add more cash to its balance sheet and improve cash on hand. Every month it wanted to sell the receivables for one of its largest buyers to BAML because it needed to increase internal cash flow, as well as have greater control over its DSO.
The Bank Payment Obligation (BPO) is a new area of interest – what are some recent developments?
The BPO sits between the open account and letter of credit (LC) space, effectively combining the assurances and security of a LC with the speed and efficiency of open account transactions. Earlier this year in April, the International Chamber of Commerce (ICC) released the Uniform Rules for Bank Payment Obligation. This was a big step forward for the industry as it provides the legal underpinning for the irrevocable conditional agreement to pay given from one bank to another.
BAML has continued to work closely with the ICC and SWIFT to incorporate all of the rules into our operations and technology systems. The rule-based engine will continue to work with SWIFT’s Trade Services Utility (TSU) and other matching engines. Despite client uptake not happening as quickly as some had hoped, we are certainly seeing more enquiries from our clients.
Are there other technology-driven trade and supply chain solutions that the bank is working on?
BAML has developed a proprietary trade finance and supply chain management platform, Trade Pro, which is fully-integrated with our global transaction services portal, Cash Pro. At the same time, however, we strongly believe in the concept of being technology agnostic, so we work closely with a range of other providers across the supply chain arena, such as Bolero and PrimeRevenue.
The bank has also been an active proponent of SWIFT’s MT 798 standards in documentary trade finance. We have encouraged a number of our clients in China, for example, to send LC applications through MT 798.
For customers, BAML is a full solutions provider across our own platform, multi-bank platforms and SWIFT.
In terms of structured trade finance, are export credit agencies (ECAs) gaining in importance?
Yes, I think so. ECAs play an important role by helping commercial lenders fill potential market gaps. For example, in a situation where the commercial market would only accept a short tenor, ECAs can help lenders extend tenors up to ten years and even beyond, to 15 years in certain cases. They also offer support to lenders funding greenfield-type projects, for example a liquefied natural gas (LNG) project in Australia or Indonesia. BAML has participated in a number of such projects in this space where we have benefited from ECA support.
BAML works with more than 20 ECAs and the major multilateral development banks such as Asian Development Bank (ADB), International Finance Corporation (IFC), etc, which help us to add to the capacity that our clients need in specific markets. The bank is also active in the capital market space. Many US EXIM Bank-backed transactions are originated, structured and booked by BAML, and other institutions in collaboration with us. Those transactions are then taken out into the US capital markets through the bond markets. Again, BAML is a full-service, multi-source provider in the ECA space.
Is supply chain finance (SCF) gaining more traction, if so why? What challenges still have to be overcome?
SCF is certainly experiencing greater traction as more corporate clients see value in rolling out a programme, predominantly high grade clients. With a good credit rating, these clients can reap the benefit of that credit rating throughout their supply chain and give strategic suppliers the opportunity to monetise receivables, which is an attractive proposition at a strategic level.
BAML has deployed SCF programmes for clients across Asia, from India through to China and Australia. Deployed correctly, such programmes can have the benefit of reducing paper and complexities around trade finance. The main challenge remains driving implementation across an organisation. Our advice to clients is that they need to get buy-in at senior management level in order for an SCF programme to be successful. This is because it needs collaboration from IT, procurement and finance and treasury teams – so at a senior level all three teams have to agree to participate.
From a bank perspective, the classical challenge is still on-boarding suppliers in multiple, geographically disparate markets, especially if the bank does not have resources on the ground in that locality. There are also other practical challenges, such as getting legal permissions on receivables and pre-shipment finance. BAML is exploring the potential of strategic partnerships as a way to provide an end-to-end supply chain proposition.
What are the big issues that corporates are trying to solve today? And how can banks help?
The overarching theme for corporates is to harness the value of the underlying transaction. They want to use transaction-based financing to solve a variety of issues, including managing risk, attaining better working capital metrics, etc.
Our teams continue to work with clients in a partnership role to determine what is important to them and how we can partner with them, in a technology effective and efficient fashion, to be able to meet their needs. These insights are the core drivers behind all of our supply chain solutions, whether on the receivables or payables side.
What are your predictions going into 2014?
For 2014, my prediction is optimistic and positive. Global trade will continue to grow at a macro level, and more importantly the value of trade financing solutions will continue to be something that is attracting the attention of our corporate clients. As a result, an increasing number of corporate and financial institution clients, in partnership with us, will want to deploy trade financing solutions.
The competition in the trade finance space continues to heat up – because it is a low risk business, it has become very attractive in today’s uncertain environment. But there are few institutions like BAML who can do this globally and in a technology-efficient fashion.