Multi-investor Structures for Supply Chain Finance: Implementation Models
In the first article of this series we analysed the rationales that may lead multiple investors to join the same supply chain finance (SCF) programme. In this sequel we will focus on the different implementation models that are most commonly used in the market to realise such multi-investor structures.
If we try to align the existing implementation models on a scale, ranging from the most restrictive to the most open, we could define the following sequence:
Most of the global institutions have bought or developed their own SCF technology in-house. Since these investments are typically worth millions of dollars, there is no doubt that big banks try to use their proprietary solutions to gain a competitive advantage against other players. But whenever such technology is not coupled with the necessary credit appetite, financial institutions try to find ways to invite other investors to join their platforms. In its simplest form, this can happen by virtue of unfunded risk participations, whereby external risk-takers issue a guarantee to cover a portion of the obligor’s default risk. The leading bank still runs the end-to-end operations and is responsible for providing the entire liquidity of the programme, but can off-load its net credit exposures towards the obligor. The external partners do not require to be actively involved in the transactions, but are remunerated with a participation fee at the end of each month or quarter, normally calculated on the basis of the actual average exposure for that period.
A more sophisticated variant exists, in which third party investors are asked to chip in with a funded risk participation. In this case the arranging bank has to set-up a process to exchange transactional data and collect monies from the relevant parties before executing any financing payment, as well as to split and distribute the re-payments at due date. A careful monitoring of all working accounts and the relevant cut-off times or intra-day limits is required in order to make this model function. The advantages for the lead bank, though, are that it reduces its own liquidity requirement and practically doesn’t have to book any exposure against the investors. Sometimes this structure is realised by creating a dedicated investment vehicle – such as a trust, a fund or an special purpose vehicle (SPV) – that sits between the arranging institution and the other investors, which has the purpose of standardising documentation and facilitating the entrance or the exit of new financing partners.
A handful of technology providers established themselves as independent SCF providers, setting up a new pool of financial investors ad-hoc for every programme. Sometimes the corporate clients determine the composition of the pool, asking their banking partners to join directly, but sometimes providers themselves take up the work of scanning the market to find enough investors. The technical implementation can vary significantly from vendor to vendor. Some require investors to log on to a dedicated web-based platform, input their financing rates, receive notifications on the actual financing requests and then execute the related payments. A programme for a large corporate buyer is often split into batches, each of them addressing a closed group of suppliers and relying on a single financing partner. This makes it relatively easy to arrange global deals where each region is assigned to a dedicated institution, leveraging on the local strengths of each partner. However, a full integration with the banks’ back-end system is rarely achieved, making the process rather tedious for the bank operators.
Other providers prefer a different model, whereby they create a SPV for each deal. The main obligor uploads its payables data onto an electronic platform (e-platform), like in the previous case, but the related trade receivables are then grouped by due date and currency, packaged in homogenous notes issued by the SPV and sold on to the investors, whose payments are then re-sorted and directed to the right suppliers. The final processing of the transactions are typically carried out via one of the established clearing houses for market securities, although the process for presenting offers and confirming the purchase of notes is often based on a semi-manual communication between the SPV and the investors.
A new form of SCF has started to take shape, following the initiative of a few new players in the US and in the UK. This model is based on the principle of electronic auction, which could roughly be described as a sort of eBay for receivables.
The idea is that receivables are presented electronically on a web platform to various investors, who can bid against each other to purchase them. The single receivables are then assigned to the one offering the highest price within a certain time limit. These solutions are perceived as the most extreme version of bank-agnostic platforms and theoretically provide the greatest flexibility in finding new financing partners. In real life, though, banks are still sceptical about such a model because of two reasons. The first, obvious one, is that the bidding mechanism automatically generates a great pressure on pricing and reduces the margins. The second one mainly has to do with the complete disintermediation of the investors, who find it difficult to exercise some sort of control on the plausibility of the underlying trade receivables and the nature of their owners.
The market for multi-investor SCF solutions is rich in innovations. Almost all best practice cases illustrate the importance of relying on a stable relationship with a strong financing partner. Such a central partner can take the lead of a programme and involve as many investors as required, applying the most suitable implementation model, while at the same time committing to keep a stake in the programme and strive for its long-term success.
The all-important task of supplier onboarding, in particular, requires key resources that only a committed banking partner can mobilise. Ideally, the arranging institution should have a large commercial network, to ensure an effective implementation of the programme across the supplier base and to offer additional financial support.