In a simple world, one plus one would always make two. In the somewhat more sophisticated world of supply chain finance (SCF) some bankers may argue that the result is three, or at times even only half. This math’s metaphor is useful to explain the attitude of banks that are often requested to add new investors to their SCF programmes.
The pressure to create multi-investor structures comes from different sources. Let’s analyse them one by one.
In some cases, the size of the mandate makes it necessary to involve more than one financing party. A comprehensive SCF programme for a Fortune 500 company, for example, would most likely require such a large credit volume concentrated on an individual obligor, that no single bank alone would be able to deliver it.
Client’s wish for independence
Experience shows that most of the SCF programmes currently running have not yet reached their maximum capacity. Nevertheless, many of them already involve a syndicate of investors from the very beginning. This is typically the case when customers, particularly multinational corporates (MNCs), want to avoid making the programme too dependent on a single financier. Since most of the SCF structures do not foresee the specific commitment of a credit line from the financing institution, in order to circumvent accounting issues at the obligor’s side, the customer is de facto trusting his bank to fund the programme long term on the basis of a gentleman’s agreement. Given the turbulent times that the finance industry has been experiencing since 2008, there are very few big corporations that are ready to take such a leap of faith. With this in mind, the demand arises to involve multiple investors and make sure that there is always a funding pool diversified enough to sustain the programme, especially when the economic environment gets rough.
Bank’s need for active portfolio management
Even if the size of the deal is not an issue and the client is not explicitly asking for a syndicated pool of investors, banks sometimes prefer to build flexible structures and ensure they have one or more risk-takers in the secondary market ready to take over tranches of the deal. This gives the institutions enough leeway (scope/latitude) in case the need arises to reduce risk weighted assets (RWA) on certain obligors, while SCF programmes are still running under their names. Scaling down or even shutting down a large programme is a delicate issue, something that can expose the bank to a serious reputational risk in front of an entire supply chain. With a multi-investor tactic, though, the main SCF institution can dynamically reduce its engagement and increase the participation of the other partners, thus adjusting its risk portfolio without any visible impact for the clients.
Like in many other types of banking business, also the set-up of a SCF deal requires particular care to preserve the balance among established financing partners. In some cases corporate clients ask their SCF providers to involve their other house banks in the structure, just to keep the good relationship with them intact. In other cases, the bank arranging the SCF programme involves its own long-standing partners out of its own initiative, in order to split risks and revenues in the name of reciprocity.
Funding cost arbitrage
Today’s globalised economy very often requires SCF programmes to span across multiple countries, if not continents. This typically results in the need to fund suppliers in various currencies: besides euro, US dollar and British pound, there is a number of other Asian, European and South American currencies that are playing an increasingly important role for the expansion of SCF in new markets and industries. This adds another level of complexity when structuring international deals, especially considering that the current volatility in the interbank and money markets is sometimes generating big gaps in the funding costs among different institutions. A large European bank may be able to offer very competitive rates in euros, for example, but may run into serious constraints when asked to provide liquidity in US dollars. For this reason, some large SCF deals are built with a mixed investor structure, securing convenient sources of funds for all the currencies needed in the programme.
Geographical coverage and supplier onboarding
Another challenging aspect of international SCF mandates concerns supplier onboarding. Financial institutions have to be able to approach suppliers in all the relevant countries and jurisdictions, performing the necessary know your customer (KYC) procedures, providing legal documentation compliant with the local regulations and offering an adequate support in the local language. There is virtually no bank that can claim the ability to onboard suppliers effectively in every country of the globe. This explains why some corporates prefer to split their global SCF programme and assign it to multiple investors, each of them covering a region of the world where they have meaningful supplier onboarding capabilities.
The attitude of a bank asking external investors to join one of its SCF programmes can vary dramatically, depending on the reasons that led to it. Whenever this is part of the bank’s conscious deal strategy, the new investor is welcome as a true added value. In other words, the bankers reckon that one plus one makes three.
Whenever the additional investor is imposed by unwanted external circumstances, though, the deal loses attractiveness and the bankers focus on the lost revenue opportunity. And that’s when one plus one makes half.
An important topic to tackle very early and openly in any client discussion about SCF, therefore, concerns the opportunity to use a multi-investor structure. A good mix of objective business analysis and trust among the parties is required to take the right decision.
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