Trends in Supply Chain Finance Buckeye Financial Forum

John Loy April 2015

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Agenda

Bank of America Merrill Lynch

John Loy Director Global Trade and Supply Chain Solutions (312) 521-4719 john.loy@baml.com

History of “Supply Chain Finance”

The underlying economics – why it works

Current trends

▪ Industry

▪ Geography

▪ Structures

Future possibilities

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Working capital performance challenges

“According to the “Supply Chain Impact Survey” commissioned by Capgemini and conducted online in October 2013 by KRC Research, 87% of global supply chain managers reported top-down pressure to continually reduce costs and optimize working capital in the supply chain.”

“With billions estimated to be tied up in excess working capital, optimising the flow of funds through the financial supply chain will surely continue to be a top priority for…companies in the years ahead.” Treasury Today: Overhauling working capital management (April 2014)

Capgemini: Supply Chain Management – An integrated approach to Optimize

Working Capital (March 25, 2014)

“Apple, Coca-Cola and two dozen

other companies are signing on to a

White House effort to speed payments

to firms down their supply chains…..

[through] SupplierPay, a voluntary

program in which companies commit

either to pay small suppliers faster or

help them get access to lower-cost

capital.” Wall Street Journal: July 11, 2014

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History of Supply Chain Finance

What are we talking about- Supply Chain Finance?

Wikipedia “Refers to the set of solutions available for financing specific goods and/or products as they move from origin to destination along the supply chain. It is related to a quickly growing use of a battery of technologies and financial business practices that allow for discounting of Accounts Receivable and financing of companies' confirmed Accounts Payable”

Investopedia “A set of technology-based business and financing processes that link the various parties in a transaction – the buyer, seller and financing institution – to lower financing costs and improved business efficiency. Supply chain finance (SCF) provides short-term credit that optimizes working capital for both the buyer and the seller”

Prime Revenue “Supply chain finance, also known as supplier finance or reverse factoring, is a set of solutions that optimizes cash flow by allowing businesses to lengthen their payment terms to their suppliers while providing the option for their large and SME suppliers to get paid early. This results in a win-win situation for the buyer and supplier. The buyer optimizes working capital, and the supplier generates additional operating cash flow, thus minimizing risk across the supply chain.”

Financing the Cash Flows in the Financial Supply Chain- A Structure that lowers the overall financing costs in the financial supply chain, and providing the ability for the benefits to be

shared between the Buyer and Supplier

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History of Supply Chain Finance

Answer #1: 200 hundreds years ago, with European Banks and International Trade- Draft Acceptances

Answer #2: Specialized factoring Companies in the 1960’s made deals with large companies to provide financing to their suppliers

Answer #3: Automotive industry- late 1990’s

Where/when did it start?

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History of Supply Chain Finance

• Automotive Parts Retailers/Automotive Suppliers/Retailers Late 1990’s

early 2000’s

Early 2000- (a little later)

2004-2007

2008-2012

• The SEC makes a comment about Supply Chain Finance Robert Comerford: December 11, 2003

• We figure out how the Supply Chain Finance Industry can grow

• We figure out that it can be even more efficient

Everyone gets creative in this new ‘arbitrage’ space

Everyone freezes... to figure out what it means….

Recession: Liquidity REALLY matters for the supply chain

and it really grows

Where/when did it start in the format that is currently used?

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First appeared in the U.S., circa 2001

Initially offered by large U.S. banks

Initially adopted by retailers; followed by automotive parts distributors

Grew rapidly following the 2008 financial crisis

Helped large buyers with strong ratings protect their supply chain – both locally and internationally

Offered by most global banks and many regional banks

Current global market is approximately $500+ billion in annual spend volume and 400+ buyer programs

Most programs are in the U.S. and Europe

APAC and LATAM are quickly growing and are seen as the highest growth regions

Global market is expected to reach $2 trillion in spend over the next five years

SCF programs have broadened to include a wide array of industry verticals, like oil & gas, mining, manufacturing, consumer products and healthcare

Over the past 10 years, Supply Chain Finance has grown into a mainstream trade finance/capital structure product

History of Supply Chain Finance

Supply Chain Finance

Overall Market

Challenge for sizing the SCF industry- no published industry data/ information

Size of program sponsor decreasing

as SCF use expands- Mid-corporate

and secured sponsors are realizing

benefits

As the SCF industry developed…. …simpler structures (legal/pricing)

…clarified roles (banks, clients, third parties) …improved supplier engagement

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Supply Chain Finance- Why it Works

Credit Pricing Arbitrage

Excess credit capacity for stronger companies- less

capacity for weaker/smaller companies

Removing the Risk of Supplier Performance-

Changing ‘receivable’ financing risk

The Power of Data

And Automation

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Supply Chain Finance – How It Works

1. Buyer transmits purchase orders to supplier

2. Supplier submits invoices to buyer

3. Buyer reconciles and feeds approved invoice file into SCF platform

4. Supplier selects and requests discount/purchase from Bank on approved invoices

5. Bank discount/purchases invoices and remits payment to supplier

6. Bank debits buyer account on invoice maturity date

Bank Platform

Supplier

Purchase order

Invoice

Buyer

“WOW- that seems simple……..”

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Supply Chain Finance – Tall Challenges

Supplier sign-up

▪ Painful process…..getting less painful

Legal structures

▪ Receivables, drafts, or discounts, oh my!

Sharing the profits/revenue/savings created

▪ Being greedy in the short term backfired….

Accounting

▪ It is not all about the accounting

Presented formidable obstacles in any supply chain finance program

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Supply Chain Finance – Industry Trends

Automotive

Retailers

Consumer Goods

Technology

Manufacturing

Equipment

Oil/Gas, Utilities, Healthcare… What other industries will be next?

Why is Supply Chain Finance embraced ?

Credit price arbitrage (supplier to buyer)

Buyer/supplier relationships (long term, critical, control)

Industry followers (working capital comps)

Strategic initiative (Finance AND Purchasing)

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Trends – Supplier Geography

Supply Chain Finance- Trends Supplier Trends

USA

West Europe

China

LATAM

East Europe

India

Southeast Asia

NEXT?

2000 2015+

What about………Buyers/Sponsors?

Why is Supply Chain Expanding Geographically?

Changing Trade Flows

(following the economy)

Local Costs of Financing

(credit cost arbitrage)

Legal Jurisdiction Restrictions

(changes in laws)

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Supply Chain Finance Trends in Structures

Why are they evolving?

Legal issues

(moving to new countries)

Accounting considerations

Maximizing Cash Discounts

(but still have excess cash)

FX risks

(increases as terms extend)

Focus on segmenting suppliers

( for maximizing benefits)

US Dollars Multi-currency

Receivables Discounts/

prepayments

Receivables/Drafts/ Early pay discount

Fee Sharing/Revenue

splitting

Payment terms and costs negotiations

Self-funding

Unsecured, large, investment grade

Unsecured/ Secured,

Mid-corporate

Specific Suppliers All Suppliers Supplier Segments

Legal and operational changes

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Supply Chain Finance– Future Directions? Trends and Best Practices

Challenges Issues Future?

Supplier Enrollment Legal Documentation

“KYC”---TIME-----

•All Electronic •Industry Standard Docs (ISDA) •Non-Bank Conduits

Legal/Accounting Issues Supplier- perfection

Buyer- secured borrowers ----TIME----

•Non-perfection structures •Not needing approved payables •Acceptance of new type of •payable on balance sheet

Capacity Banks view of future

Liquidity needs of clients ---Resources---

•Pools/Funds •Use of Credit insurance •Expanded syndications

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Summary- Supply Chain Finance Trends

Whether you are a Supplier or a Buyer- Don’t be late and miss the boat!

▪Working Capital viewed as a cost of the supply chain

▪Supply Chain management focus shifting from fulfillment and risk/costs, to Costs AND Liquidity

▪ It has become a Strategic Initiative in many leading companies and across many industries/countries

▪ SCF Continues to Improve the efficiency of the Financial Supply Chain

It is here to stay, grow, and change…..

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