Case Study: How Rolls-Royce ‘Funded the Unfundable’

This project outlined in this case study won the Supply Chain/Trade Finance category at the gtnews Awards 2014 and was also selected for the Judges’ Choice award:

Rolls-Royce’s suppliers used to be obliged to borrow at unattractive terms, or use expensive equity to finance long-term tooling. Terms longer than a year were extremely difficult to find. All that has now changed, thanks to the company’s recent supply chain finance (SCF) collaboration with Citi that introduced a new three-year supplier tooling finance programme.

Suppliers to the engine and power system manufacturer can now finance costly new engine tooling -the ‘unfundable’ in this ‘funding the unfundable’ project – on very competitive terms. By harnessing Rolls-Royce’s strong credit rating, buttressed by its 2013 order book worth £71.6bn (US$116bn) it is now possible for even the smallest supplier to finance its tooling at competitive rates.

Project Background and Details

Rolls-Royce provides power solutions on land, in the air and in the oceans of the world. Its engines power some of the largest civil and defence aircraft transporting people around the globe. Its ship propulsion and control systems power luxury liners and keep oil exploration vessels steady in some of the planet’s most hostile conditions. Such products demand significant investment, much of which is provided by Rolls-Royce’s suppliers. Each year they invest millions in tooling for product development and industrialisation of the complex components used to manufacture Rolls-Royce engines.

This new tooling typically has little or no lending value to suppliers’ banks, but represents a huge capital outlay for the suppliers themselves, who are often placed under enormous funding pressure. They are typically forced to rely on costly equity funding at bad rates that undermine their long-term competiveness. The objective of Rolls-Royce’s ‘funding the unfundable’ project with Citi was to alleviate this pressure by providing trade finance at competitive rates for a term of up to three years. The programme was launched in all parts of Rolls-Royce, providing finance to suppliers around the world in US dollars (USD) British pounds (GBP) and euros (EUR).

The project has been delivered by extending Rolls-Royce’s highly successful existing SCF programme. The typical 30- to 90-day funding profile that was previously in place (with a one-year maximum) for trade payables has been increased to a three-year maximum. Rolls-Royce’s strong A credit rating has also meant much lower rates can now be offered to suppliers of all sizes and it is particularly attractive to small-to-medium-sized enterprises (SMEs).

Project Requirements and Timeframe

The project treasury and finance team have overcome many obstacles, from the development of appropriate IT systems within Citi, to complying with international banking and accounting regulations, such as the Basel III capital adequacy stipulations.

The expanded SCF programme had to be available to all parts of Rolls-Royce and to suppliers located in a diverse range of countries around the world. It needed to be able to deal in multiple currencies and be simple to operate. The attractiveness of the programme also required further enhancement by suppliers being able to treat the funding as ‘non-recourse’ and for Rolls-Royce to continue to recognise the transactions as trade payables.

The implementation team from Rolls-Royce’s treasury and Citi began work during 2013 and the first advance was made by the turn of the year, with many more suppliers joining in since.

Launch Supplier in the US

The first supplier to join the SCF programme in December 2013 was US-based and completed the necessary paperwork in just a few minutes using Citi’s online technology. The launch supplier had the cash in their US bank account just days after the SCF deal was concluded and have been followed by many more suppliers since.

Benefits

The ‘funding the unfundable’ SCF project at Rolls-Royce is a key step on the journey to building competitive and resilient supply chains and has delivered many benefits.

The main benefits are:

• Better rates: Rolls-Royce has been able to secure sustainable, competitive terms for suppliers – who then do not need to inflate prices to cover previous high funding costs. This is particularly helpful for SMEs.
• Increased facilities: Finance for an asset class not supported by many banks, particularly relevant for SMEs.
• Diversified funding: Suppliers can now access a new, diversified source of funding that is separate to their existing sources. This aids their resilience and the strength of Rolls-Royce’s supply chain.

Other key features include:

• Global access: As the SCF programme is available on a global basis, Rolls-Royce’s buying teams can now source new builds and programmes with greater confidence. The company has safeguarded and strengthened its supply chain by providing suppliers with liquidity even in challenging times.
• No set-up fees: For suppliers the ‘pay-as-you-go’ programme means that they don’t have to pay any set-up fees, arrangement fees or other administration expense, keeping costs to them down to a minimum.

Most importantly to Rolls-Royce it has mitigated a key business risk by strengthening the resiliency of its supply chain. In a world of financial uncertainty, this SCF programme provides the resources for suppliers to reliably deliver the engine parts it needs.