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Capital Markets

Fixing AR, Supply Chain’s Ignored Corner

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December 14, 2017

Europe’s UniCredit knows how to optimize the supply chain’s working capital benefits for maximum effect. 

Working capital optimization is a key priority for corporate treasurers and an important dimension of just about all transaction banking products and services. In fact, optimization has been the most relevant driver of strategic transformation in the corporate commercial banking space over the last 10 years, along with technological evolution.

Traditional transaction products today are fully commoditized because treasurers’ needs are simple, focused and driven by cash flows. Meanwhile, the desire for real-time views, simplicity and security are driving technological innovation in the space.

The problem is that banks have been unable to apply the benefits of optimization consistently across the transaction banking spectrum. Looking at the universe of large and complex multinationals, particularly in the US, there is a relatively advanced penetration on payable programs, where the convergence of corporate demands and bank innovation has brought significant advantages in terms of securing key supply chain and working capital benefits (at least for the largest and better-rated manufacturing companies). On the other hand, the area of receivables presents further opportunities.  

Fabio Della Malva“What we have observed is a much less advanced and coherent space on the receivable side, which is typically affected by the complexity of several credit risks,” says Fabio Della Malva, Managing Director in corporate investment banking at UniCredit. “The same can be said if we look internationally at additional country risks and multiple jurisdictions.”

UniCredit, one of the few pan-European commercial banks, has been building a reputation for assisting companies with products and solutions that can overcome the complexities that cross-border payments in Europe can present. The region has many jurisdictional and regulatory layers, so it is often a good idea to enlist a large local player with expertise across markets.

UniCredit, with its core home markets across Western, Central and Eastern Europe, has been able to offer a variety of solutions in the receivable finance space, including single-name forfaiting (which enables exporters to secure financing immediately by selling their receivables), factoring programs and structured portfolio solutions, along with fully fledged securitization/ABS programs.

Lately the bank has seen its expertise leveraged by US treasurers, who have been focusing on domestic and international receivables rather than seeking to squeeze a few drops of savings from supply chain’s long-tail leftovers.Massimo Ortino  

UniCredit’s Americas head of global transaction banking, Massimo Ortino, describes an example in which the bank helped a manufacturer unlock a variety of otherwise hidden benefits by developing a better path to maximizing the receivables financing value chain. Mr. Della Malva adds that the project began with “a relatively quick win,” when the bank suggested the company concentrate on its larger domestic clients, which “placated board expectations,” and also showed fast execution from concept to facility signing (startup in 4 to 5 weeks).

Mr. Ortino says the main drivers here were the dual desires of reaching a minimum sizable amount/benefit while avoiding targets that were too ambitious, and putting in place an efficient and scalable infrastructure from the legal, accounting and operational points of view. This last element is of particular importance in securing efficiency, automation and security throughout the process; for the bank, a key success factor was the ability to provide a ready-to-use and simple platform.

The second step was optimizing and scaling up the existing facility as much as possible by adding debtors and jurisdictions.

At this point, depending on the nature of the client portfolio and goals, there are typically a few different ways to optimize further. If the company’s main driver is, for example, risk mitigation versus further balance-sheet improvement, a combination with an insurance program would make sense. In the case of an international company fragmented in several domestic or regional markets, replicating the main programs in other jurisdictions or hubs, while evaluating all possible local alternative structures, could be the best choice.

Should the client portfolio be relatively concentrated, scaling up through syndication with other banks and/or insurance players is another possible solution. But in this particular case, the company’s main priority was to enhance the balance-sheet benefits by dealing with a very granular portfolio. UniCredit, using its global Structured Accounts Receivable Financing Program, which offers automation and simplicity, was able to structure a flexible and tailored solution that entailed using an insurance “wrap” and a dedicated vehicle providing an off-balance-sheet strategy for the entire portfolio.

Further, the client was able to retain its customer relationship and servicing role, all the while obtaining the large-scale collection and reconciliation benefits on top of liquidity and balance-sheet improvements.

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