Igor Zax, Managing Director of Tenzor Ltd., will presenting at 6th Annual Supply Chain and Finance Symposium, hosted by IE Business School and Banco Santander in 20-th of June Madrid. This top academic event featured professors from top universities, including Stanford, University of Chicago, University of Washington in St. Louis, Georgetown University, IE, Singapore Management University, Imperial Business School and others, corporates (such as Metro Group and BMW) and banks (Santander and HSBC). The presentation was focused nature and unique characteristics of trade receivable risk, differences it presents with other risk types, and implications of SCF structures to the risk transformation, distribution and management.

1. Trade Credit: the nature ofTrade Credit: the nature of
the risk and its implicationsthe risk and its implications
for SCFfor SCF
6th Annual Supply Chain and Finance Symposium,6th Annual Supply Chain and Finance Symposium,
Madrid, SpainMadrid, Spain
Igor Zax, CFA, Sloan Fellow (LBS)
Managing Director, Tenzor Ltd
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2. Receivable risk-uniqueReceivable risk-unique
characteristicscharacteristics
 Trade receivable presents a mixture of four
different types of risk:
– Credit risk - ability and wiliness to pay undisputed debt
– Dispute risk - existence or amount of debt may be
affected by contractual disputes
– Fraud risk - buyer, supplier, other providers
– Timing risk- delay in payment with or without a reason
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3. Trade Credit RiskTrade Credit Risk
characteristicscharacteristics
 Short term revolving nature.
– Most of the risk models are calibrated on loan data-
short term risks have different nature
 Structural aspects
– Normally at operational subsidiary level, often different
from the “normal” corporate debt
 Continues Nature
– Unlike loan/bond credit decision made by a supplier
often on a daily basis. Key supplier default may affect
underlying ability of the company to produce cash
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4. Trade Credit RiskTrade Credit Risk
characteristics- cont.characteristics- cont.
 Security
– While most of trade creditors are unsecured, clauses like
Retention of Title provide some degree of protection--actual
ability to enforce depends on jurisdiction, nature of goods,
type of locations, etc.
 Supplier Dependency
– In pre-insolvency and even in insolvency (where some of the
subsidiaries may still be a going concern) suppliers tend to
be treated unequally, with those that are indispensable
having better terms, given that their withdrawal may
disproportionately harm all creditors.
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5. Agency Problem-Supplier vs.Agency Problem-Supplier vs.
FinancierFinancier
 The nature of the risk changing when it is passed
from supplier to financier?
 Framework of supplier/financier cooperation
– Difference in knowledge
– Difference in approach/regulatory framework
– Different interests
– Co-operation models and game theory approach to
supplier/financier issue
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6. Dispute and Fraud RisksDispute and Fraud Risks
 Frequency and Severity
– While there is limited data, anecdotal evidence (such as
performance within securitization conduits) shows that these risks
are often larger than credit
 Correlation to Credit Risk
– Many high profile fraud cases happen with the company entering
credit distress
– Significant product issues are both causing large dilutions (through
product recalls etc.) and increasing the credit risk of the supplier.
Similarly, distressed companies tend to have lower focus on
quality etc., thereby causing higher dilutions.
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7. Supply Chain Finance-Supply Chain Finance-
definitiondefinition
 SCF Definitions
– Normally refers to financing of approved payables
– In 2016 an attempt by Global Supply Chain Forum (led by ICC
and industry associations) to broaden definition to include invoice
discounting, factoring, forfeiting, payables finance (what was
“traditionally” named SCF, loans against receivables, distributor
finance, loans against inventory and pre-shipment finance
(http://www.iccwbo.org/Data/Documents/Banking/General-
PDFs/Standard-Definitions-for-Techniques-of-Supply-Chain-
Finance_Global-SCF-Forum_2016/)
 Separation of credit risk creates a different asset
class where payable is confirmed
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8. Supply Chain Finance: risk profileSupply Chain Finance: risk profile
 Relying on approved payable as oppose to seller
information potentially eliminates both
performance and fraud risk if correctly
documented and implemented
 Individual risks
– Typical program relies on large corporate buyers
– Both rating agency and internal models do not differentiate the
risk from “traditional” loans and bonds
– Ability to enhance may interfere with accounting treatment
– Risk offloading - syndication, credit derivatives, insurance
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9. Supply Chain Finance-Supply Chain Finance-
portfolio approach and its riskportfolio approach and its risk
 In addition to the buyer centric model, confirmed
payables may be used for multiple buyers from the
same seller
 Combining benefits of portfolio diversification
with separation of credit and performance risk
– Ability to apply various tools to historic portfolio performance
– Understandable product for insurance and potentially re-insurance
market
– Low severity of loss
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10. SCF (approved payables) -SCF (approved payables) -
accounting, rating and legalaccounting, rating and legal
challengeschallenges
Accounting treatment by seller of goods -
transfer of financial asset - US GAAP and
IFRS
Accounting treatment by the buyer
Rating agency challenge of buyer treatment
post Abengoa
Rating agency challenge on securitizations
and other receivable sales
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11. Non-receivable forms of SCFNon-receivable forms of SCF
Other forms of converting contractual risk
to credit risk - multiple obligations
Example - PO financing.
– Buyer credit risk of paying when delivered
– Risk of non-performance
– Seller credit risk based on recourse to them for
non-performance
– How do one manage combined risk? What are
the correlations?
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12. Performance risk in complexPerformance risk in complex
chainschains
 Platform companies and multi-layered chains
 Multiple dependencies
 Integration - risk migrant or risk multiplier?
 Could performance risk be converted to credit?
 Could data analytics help measuring performance
risk?
 Could financial institutions/regulators absorb
performance risk based products?
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13. © Tenzor Ltd 2009-2016
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14. Thank You and Good Luck!Thank You and Good Luck!
Igor Zax, CFA, Sloan Fellow (London
Business School)
Managing Director, Tenzor Ltd. (London)
Tel: +447775708426
E-Mail: igor.zax@tenzor.co.uk
Web site: www.tenzor.co.uk
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www.tenzor.co.uk Confidential
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