Global Supply Chain Financial SolutionsHow Do You Structure a Transaction

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Volatility - The New Norm?

• Global Supply Chain Financial Solutions-How Do
  You Structure a Transaction?
• Moderator John Ahearn, Citi
• Terry D. Novetsky, Kaye Scholer LLP
• James Parsons, Bluecrest Capital Management Ltd.
• Roland Hartley-Urquhart, Morgan Stanley

Bankers Association for Finance and Trade
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Agenda

• What is Distribution Finance?
• Discuss need for Distribution Finance
• What are the benefits to the parties involved?

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Distribution Finance in the Supply Chain Flow
DISTRIBUTION FINANCE
1. Invoice deliver goods
Portfolio of (Distributors/Buyers)
Seller (Anchor Tenant)
3. Invoice acknowledgment
2. Invoice download
BANK
5. Distributors/Buyers pay bank on due date
4. Provides liquidity on day x
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Distribution Channel The Conflict

• Many large corporate Sellers find that there is a
  lack of liquidity and financing options in their
  distribution chain, which can frustrate their
  efforts to
• Increase credit lines to permit distributors to
  buy more of their products and thus generate
  additional sales
• Improve Seller cash flow and cost efficiencies
  related to additional sales
• Build distributor loyalty and gain a marketing
  advantage
• Sellers are seeking to expand sales and gain
  market share in fast growing markets, especially
  emerging markets
• Regional and small distributors (Buyers) face a
  working capital squeeze between the time they
  have to pay the corporate Seller and collecting
  from their end users
• Distributors access to local bank or other
  working capital solutions can be restrictive,
  expensive and tied to local market events
• Sellers are reluctant to fund extended terms to
  Distributors due to balance sheet, metric
  implications and risk
• Sellers face the need to build internal staff to
  conduct fundamental credit risk analysis and
  proactively manage credit in a new market where
  their sales growth is highest

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Distribution Finance The Solution
Seller
Distribution Finance (DF) is a
portfolio-oriented receivables purchase and
servicing program using automated technology,
that allows a large corporate Seller (banks
Anchor Tenant client) to

• Differentiate product via value-added program for
  buyers to work with a bank
• Extend longer sales terms to their customers
• Facilitate a scalable, quickly deployable program
  across various countries where the Buyers are
  located, including emerging markets
• Manage their cash flow in a more precise and
  efficient manner
• Maintain or improve Days Sales Outstanding (DSO)
  via receivables sales
• Reduce credit and collections management
• Enhance risk management via dedicated receivables
  management service
• Introduction of financial institution payment
  discipline

Distribution Finance addresses the inherent
conflict Sellers face by maximizing top line
growth while optimizing balance sheet usage and
capital costs
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Distribution Finance The Solution cont.
Buyer

• More flexible credit terms via longer payment
  terms, enhancing liquidity and working capital
  management
• Reduce cost of working capital funding given
  portfolio risk nature of program
• Establish payment record with bank that could
  lead to a lending relationship
• Improve ability to carry and manage inventory,
  facilitating downstream sales
• Improve information flow and reduce administration

Bank

• Highly specialized product offering that sets
  bank apart from the competition
• Return on capital tends to exceed other plain
  vanilla Trade product offerings
• New technology - risk management and product
  performance
• Increased cross-sell/penetration to small and
  medium enterprises (SME) market by screening
  Buyers before on-boarding as clients
• Critical component of end to end Supply Chain
• Sticky recurring revenue stream

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Transaction Flow with Purchase Order Approval
1. Purchase Order (PO)
Flow Description 1) Buyer issues purchase
orders 2) Seller requests purchase order credit
approval 3) Bank credit approves purchase
order 4) Seller ships goods and invoices to
Buyers 5) Seller sends invoice data to Bank 6)
Bank sends weekly invoice acceptance request
which includes the payment due date 7) Buyers
accept invoices 8) Funding instructions issued
from 3rd party servicer to bank treasury 9) Bank
sends funds to Seller 10) Buyers remit payment on
due date
Buyers
Seller (Anchor Tenant)
4. Shipment / Invoice
Buyers
Buyers
BANK
2. PO Approval Request
3. PO Approval

• Operations
• Bank
• Approves Invoice Funding
• 3rd Party Processor
• Facilitates Electronic Data Interchange (EDI)
  between Buyer, Seller and Account Debtors
• Collection of Account Debtor Information
• Payment Reconciliations
• Payment Tracking, Reminders Account and
  Portfolio reports/metrics
• Financial reporting

6. Invoice Payment Due Date
9. Funding (Day 30)
5. Invoice Data Files Sent
7. Affirm Payment Due
8. Funding Instruction
BANK Funding
10. Payment (e.g., Day 60 or 90)
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Supply Chain Finance Structure and Recent Market
Performance 18th Annual Conference on
International Trade Chicago, 30 October,
2008 Roland Hartley-Urquhart
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Working Capital Management
Why do it?

• Timely and relevant topic for our clients
• With debt capital markets under stress, companies
  are turning attention to the top half of the
  balance sheet to achieve higher levels of
• Liquidity
• Sales growth
• Earnings
• Supply chain finance is a toolkit of products
  that can achieve these key corporate objectives

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SCF Benefits by Working Capital Component
Strategic Drivers
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Sales Finance Key Issues

• Before structuring the deal, key points to
  consider
• Whats the relative credit cost?
• Bilateral lines with dealers vs. sales financing
• How much customization by jurisdiction?
• Global, regional or local approach?
• How far do you go?
• Balance between helping distributors and stuffing
  the channel
• Strength of the trade credit culture within the
  sellers organization
• Is there an opportunity for financing cost
  arbitrage?
• Use of receivables as a seller financing tool for
  crossover credits
• Sellers appetite for risk?
• How adaptable are distributors to economic
  decline?
• Longer inventory turns
• Seller pressure to reduce
• First loss capacity
• Availability of trade credit insurance?

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Relative Capital Cost Drives Adoption
The rift between the credit haves and have-nots
is growing
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Sales Finance Toolkit
Any number of approaches can get the job done

• Range of Potential Sales Financing Products
• ABL / first lien
• Not global
• Revolving credit
• Use of global receivables as part of the
  borrowing base
• One-off receivable sales
• Elimination of concentration risk
• Reverse factoring with notification
• Receivable securitization
• Enhancement tools
• Over-collateralization
• Multi-tranche
• Trade credit insurance

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Distribution Finance
Structuring Considerations

• Key Risks Assessed
• Servicing risks
• Overall position of sellers business
• Sellers credit and collection policies
• Dilution risk
• Portfolio performance
• Legal structure
• True sale, bankruptcy remote
• Dynamic performance triggers
• Credit enhancements
• Trade credit insurance
• Dilution reserves
• Equity and sub tranches

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Receivable Finance Structure
Example of multiseller conduit

• Source Moodys Investor Services

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Markets in Turmoil
Declining volume evidence of severe market
dislocation

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ABCP Market Revival
Relief in store from Fed's Commercial Paper
Funding Facility (CPFF)?
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ABCP Market Revival
Spreads tighten after CPFF announcement