Presenting a live 90-minute webinar with interactive Q&A Supply Chain Finance: Structuring and Documenting Approved Payables Financing Transactions THURSDAY, JUNE 15, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Massimo Capretta, Partner, Mayer Brown , Chicago & New York David A. Ciancuillo, Partner, Mayer Brown , Chicago The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Supply Chain Finance Overview Massimo Capretta June 15, 2017 +1 312 701 8152 mcapretta@mayerbrown.com David A. Ciancuillo +1 312 701 7258 dciancuillo@mayerbrown.com
Topics • What Is Supply Chain Finance? • Typical Structures and Key Features • Purchase Price Considerations • Typical Documentation • Participation Agreements • Accounting Issues (Buyer) • Accounting Issues (Supplier/Seller) • True Sale Basics 6
Buyer-Supplier Payment Dynamics Good liquidity Stressed liquidity Low financing costs High financing costs Buyer Supplier Dynamics Dynamics Desire to hold cash and Exposure to commodity optimize working capital and FX risk = Long payment terms = Short payment terms Supply Chain Finance Strategies Seek to Leverage The Buyer’s Stronger Financial Position to Provide Lower Cost Liquidity to the Supplier and Extended Payment Terms to the Buyer 7
Key Benefits • Buyer – Longer payment terms – Vehicle for treasury to provide relationship banks with additional income stream/credit exposure without increasing direct costs – Cash flow efficiency • Supplier – Immediate payment on invoices – Lower net cost than traditional financing (including asset-based lending) 8
Receivables Based Supply Chain Platform (“STRUCTURED VENDOR PAYABLE PROGRAM”) Transaction Flow: 1. Buyer purchasing department purchases goods or services from a Supplier under a standard purchase contract Discounted Proceeds 5 2. Supplier ships goods and sends invoice to Buyer (usually via electronic platform) Notification/Payment 3. Buyer legally acknowledges (unconditional) Request 4 Commercial Shipment and obligation to pay the payment processor Contract Invoicing 1 2 (bank); obligation is pari passu to senior unsecured debt of the Buyer and will 3 Accepted Receivables be treated the same under bankruptcy law 4. Supplier and the payment processor (bank) 6 Payment at Maturity exchange notification/payment request (usually via electronic platform) 5. Payment processor sends Supplier discounted proceeds of receivable 6. Buyer sends payment to payment processor at maturity 9
Negotiable Instrument Based Supply Chain Platform (FORFAITING) Transaction Flow: 1. Buyer purchasing department purchases goods or services from a Supplier under a standard purchase contract 2. Supplier ships goods and sends invoice to Buyer Discounted Proceeds (sometimes via electronic platform) 5 3 Accepted Notification/Payment receivables / 3. Buyer has the option to extend normal Request Executes Supplier “Indorses” payment terms by paying with a negotiable Instrument Shipment and Instrument to Bank Invoicing instrument (bill of exchange or negotiable Commercial 2 4 draft) with a longer term maturity date. Contract 1 Payment at Maturity / 4. Supplier and the bank exchange Presentment of notification/payment request (sometimes via Instrument 6 electronic platform) and Supplier “indorses” Buyer negotiable instrument to bank 5. The bank sends the Supplier discounted proceeds 6. The bank presents negotiable instrument to the Buyer for payment at maturity 10
Non-Recourse Receivables Purchase (FACTORING) Transaction Flow: 1. Buyer purchasing department purchases goods or services from a Supplier under a standard purchase contract Discounted Proceeds / Sale of Receivable to Bank 2. Supplier ships goods and sends invoice to Buyer 4 3. Supplier sends the bank a purchase request 4. The bank purchases the receivable in a “true Purchase Request Commercial sale” and sends the Supplier discounted Shipment and 3 Contract Invoicing proceeds of receivable 1 2 5. The Buyer pays the receivable on its maturity date as instructed by Supplier 5 Payment at Maturity 11
Comparisons Invoice Based SCF Program Negotiable Instrument Based Non-Recourse Receivables Purchase (Factoring) SCF Program Dominant structure in Europe and US Dominant structure elsewhere Used worldwide 3 parties (Supplier, Buyer, Bank) 2 or 3 parties (Supplier, Bank and 2 parties (Supplier, Bank) – no Buyer involvement sometimes Buyer) required Article 9 of the UCC (and foreign Article 3 of the UCC; Bill of Article 9 of the UCC (and foreign equivalents) equivalents) Exchange Act (various countries) and equivalents UCC filing in the US against Supplier and Typically no UCC filing or UCC filing in the US against Supplier and equivalent in equivalent in other applicable countries equivalents other applicable countries “True sale” of receivable “True sale” of instrument “True sale” of receivable ( critical ) Internet platform almost always Internet platform common Internet platform common Buyer always notified – pays Bank Buyer always notified – pays Bank Buyer sometimes notified – can pay Bank or Supplier Can be rolled out across Supplier base Can be rolled out across Supplier Negotiated on a supplier-by-supplier basis base Accounting complexities possible Accounting complexities common Accounting complexities uncommon Intercreditor issues uncommon Intercreditor issues uncommon Intercreditor issues possible 12
Typical Purchase Price Calculation (PAID TO SUPPLIER) • Purchase Price = (Net Invoice Balance - Discount) [-] [transaction fee, if any] – Net Invoice Balance is the face amount of each invoice net of any discounts, rebates, credit memos, etc. • Discount = Net Invoice Balance x Discount Period x Discount Rate / 360 – Discount period is usually the number of days from the date of purchase by the Bank to a date 0 to 20 days following the maturity date of the invoice. Extra buffer period will be based on payment/collection history. – Discount rate is usually LIBOR + a margin. The margin will be based on the credit profile of the Buyer not the Supplier. – The difference between the Purchase Price paid to the Supplier and the Net Invoice Balance paid at maturity will be the Bank’s profit on the transaction. • 98%+ net realization for Supplier 13
Receivables Based Supply Chain Platform Typical Documentation • Paying Services Agreement (Buyer/Bank) – Buyer agrees to confirm the amount, payment due date, invoice number and other information of each Supplier invoice – Buyer acknowledges that each Supplier may sell Buyer invoices to a Bank at a discount in exchange for early payment – Buyer acknowledges that if the receivable is sold to the Bank, the obligation of the Buyer to pay the Bank is “absolute and unconditional, without any claim, abatement, deduction, reduction or setoff of any kind” • Buyer rights against Supplier not affected – Technical procedures and agreements (including data protection) for Buyer to use Bank’s online platform – Often highly negotiated by Buyers. – Equivalent document for instrument based programs. 14
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