Working Capital – Seeing a Broader Picture The article by Igor Zax, addresses working capital management within changing economic and industry environment, its links to business strategy, supply chain, distribution and industry models.
Published in Global Treasury Briefing and GT News – publications of AFP (Association of Financial Professionals).
Igor Zax, managing director of Tenzor Ltd, published a new article, Buyer Confirmed Receivables - Wider Market Implications , in the World Supply Chain Finance Report 2016, a major publication by BCR/Factorscan. The article is focused on use of buyer confirmed receivables across a variety of financing products, such as credit insurance, secularization, alternative fiance, distribution finance, as well as it's technological and strategic implications.
Are Collateralized Loan Obligations the ticking time bomb that could trigger ...Kaan Sapanatan, CFA, CAIA
After my recent trip to New York, where I met with investment advisors from various Investment Banks and Large Alternative Investment Shops, 3 letters really resonated in my ears on my flight back home.
And those 3 letters were C… L… O…
As I got back home I started digging more into it.
One thing that really stood out for me was that; the Investment Banks never mentioned a word on Collateralized Loan Obligations, whereas without an exception every Alternative Investment shop talked about CLOs with great passion, and would elaborate “How much value they see in them and how great the returns are”
Coincidently recently there have been some concerns raised on “Leverage Loans and CLOs” by some powerful voices such as; former Federal Reserve Chair Janet Yellen, IMF, Moody’s and so on.
In fact, I had read some of the comments as part of my daily news screening, but at the time it didn’t catch my attention enough to further look into it.
The more research I did, the more clear it became that “Ten years after the global financial crisis, investors are once again showing increasingly risky behavior as they search for sources of high yield in response to a decade of low-interest rates”.
Please find my research in the presentation. I would be very happy to discuss and share some thought regarding the topic.
Kaan Sapanatan
Igor Zax, managing director of Tenzor Ltd, published a new article, Buyer Confirmed Receivables - Wider Market Implications , in the World Supply Chain Finance Report 2016, a major publication by BCR/Factorscan. The article is focused on use of buyer confirmed receivables across a variety of financing products, such as credit insurance, secularization, alternative fiance, distribution finance, as well as it's technological and strategic implications.
Are Collateralized Loan Obligations the ticking time bomb that could trigger ...Kaan Sapanatan, CFA, CAIA
After my recent trip to New York, where I met with investment advisors from various Investment Banks and Large Alternative Investment Shops, 3 letters really resonated in my ears on my flight back home.
And those 3 letters were C… L… O…
As I got back home I started digging more into it.
One thing that really stood out for me was that; the Investment Banks never mentioned a word on Collateralized Loan Obligations, whereas without an exception every Alternative Investment shop talked about CLOs with great passion, and would elaborate “How much value they see in them and how great the returns are”
Coincidently recently there have been some concerns raised on “Leverage Loans and CLOs” by some powerful voices such as; former Federal Reserve Chair Janet Yellen, IMF, Moody’s and so on.
In fact, I had read some of the comments as part of my daily news screening, but at the time it didn’t catch my attention enough to further look into it.
The more research I did, the more clear it became that “Ten years after the global financial crisis, investors are once again showing increasingly risky behavior as they search for sources of high yield in response to a decade of low-interest rates”.
Please find my research in the presentation. I would be very happy to discuss and share some thought regarding the topic.
Kaan Sapanatan
This presentation by Müge Adalet McGowan, Senior Economist, Economics Department, OECD, was made during the discussion “Barriers to exit” held at the 132nd meeting of the OECD Competition Committee on 4 December 2019. More papers and presentations on the topic can be found at oe.cd/bte.
Stand on the Sidelines, or Boost Competitiveness? How to Make Bold Moves on t...Accenture Insurance
Sweeping changes across consumer behavior, technology innovations and big data are reshaping traditional insurance business models and what it takes to compete. The most successful insurers are the ones that will proactively adapt their game plan to the evolving environment and rules of competition. This piece explores three strategies to better position insurers for the future.
Discussion of strategies for increasing profits without focusing on expense reduction but instead on areas with leverage like claims. Specific examples for gaining an edge are discussed.
Quantifi Whitepaper: The Evolution Of Counterparty Credit Riskamoini
Written by David Kelly (Head of Credit and Counterparty Risk Product Development, Quantifi) and Jon Gregory (former Head of Counterparty Risk at Barclays Capital)
This is a free e-book from the London School of Economics. It includes several stand alone chapters. Each one of them is written by a different expert or professor. The main underlying topics include how to manage and prevent future financial crisis. And, what would be the best financial regulatory framework to do just that.
Quantifi whitepaper basel lll and systemic riskQuantifi
One of the key shortcomings of the first two Basel Accords is that they approached the solvency of each institution independently. The recent crisis highlighted the additional ‘systemic’ risk that the failure of one large institution could cause the failure of one or more of its counterparties, which could trigger a chain reaction.
Basel III addresses this issue in two ways:
1) by significantly increasing capital buffers for risks related to the interconnectedness of the major dealers and
2) incentivising institutions to reduce counterparty risk through clearing and active management (hedging). Since Basel III may not explicitly state how some of the new provisions address systemic risk, some analysis is necessary.
The group insurance market shows real promise but, as of yet, most carriers are still trying to determine the best path forward. Moving from being in a quiet sector to the front lines of new ways of doing business has shaken the industry and confronted it with challenges –and opportunities – many could not have foreseen even a decade ago.
This presentation by Jocelyn Martel, Professor ESSEC, was made during the discussion “Barriers to exit” held at the 132nd meeting of the OECD Competition Committee on 4 December 2019. More papers and presentations on the topic can be found at oe.cd/bte.
SUPPLY CHAIN FINANCE IN THE CONTEXT OF WORKING CAPITAL MANAGEMENTIgor Zax (Zaks)
Igor Zax, Managing Director of Tenzor Ltd., published a special report, Supply Chain Finance in the Context of Working Capital Management .
The report, published in conjunction with BCR Publishing, covers industry structure, risk management, financing and operational aspects, the way companies viewed the product, as well as trade offs between dynamic discounting and supply chain finance products.
Receivables Finance in the Context of Working Capital Management by Igor ZaxIgor Zax (Zaks)
Igor Zax, Managing Director of Tenzor Ltd, published a new article, Receivables Finance in Context of Working Capital Management in TRF News (Trade and receivable Finance News, a major publication by BCR).
Editorial comment states “Igor Zax’s article in today’s trfnews, ‘Receivables Finance in the Context of Working Capital Management’, reminds us of the value of looking back at the history of modern supply chains and how working capital management, and hence factoring and supply chain finance, has developed from this. It also reflects on the potential frailty and dangers that over exposure to some supply chain structures can bring.
On late payments he says: “just a couple of weeks delay on 30 day terms increases working capital consumption by one-and-a-half times.” I wonder how many factors use such direct terms in their advertising material. If they do not, perhaps they should consider it, particularly as the trend is for larger companies to use receivables finance, and it is those companies in particular that tend respond well to the use of such analytic sound bites.”
Distribution Finance- article by Igor Zax at Trade and Forfeighting ReviewIgor Zax (Zaks)
The article by Igor Zax, MD of Tenzor Ltd ( www.tenzor.co.uk ) is focused changes in distribution finance landscape and the way new developments such as Supply Chain Finance, Dynamic Discounting, credit insurance products and overall changes in supply chain management can revolutionize this area.Published at TFR (www.tfreview.com)
This presentation by Müge Adalet McGowan, Senior Economist, Economics Department, OECD, was made during the discussion “Barriers to exit” held at the 132nd meeting of the OECD Competition Committee on 4 December 2019. More papers and presentations on the topic can be found at oe.cd/bte.
Stand on the Sidelines, or Boost Competitiveness? How to Make Bold Moves on t...Accenture Insurance
Sweeping changes across consumer behavior, technology innovations and big data are reshaping traditional insurance business models and what it takes to compete. The most successful insurers are the ones that will proactively adapt their game plan to the evolving environment and rules of competition. This piece explores three strategies to better position insurers for the future.
Discussion of strategies for increasing profits without focusing on expense reduction but instead on areas with leverage like claims. Specific examples for gaining an edge are discussed.
Quantifi Whitepaper: The Evolution Of Counterparty Credit Riskamoini
Written by David Kelly (Head of Credit and Counterparty Risk Product Development, Quantifi) and Jon Gregory (former Head of Counterparty Risk at Barclays Capital)
This is a free e-book from the London School of Economics. It includes several stand alone chapters. Each one of them is written by a different expert or professor. The main underlying topics include how to manage and prevent future financial crisis. And, what would be the best financial regulatory framework to do just that.
Quantifi whitepaper basel lll and systemic riskQuantifi
One of the key shortcomings of the first two Basel Accords is that they approached the solvency of each institution independently. The recent crisis highlighted the additional ‘systemic’ risk that the failure of one large institution could cause the failure of one or more of its counterparties, which could trigger a chain reaction.
Basel III addresses this issue in two ways:
1) by significantly increasing capital buffers for risks related to the interconnectedness of the major dealers and
2) incentivising institutions to reduce counterparty risk through clearing and active management (hedging). Since Basel III may not explicitly state how some of the new provisions address systemic risk, some analysis is necessary.
The group insurance market shows real promise but, as of yet, most carriers are still trying to determine the best path forward. Moving from being in a quiet sector to the front lines of new ways of doing business has shaken the industry and confronted it with challenges –and opportunities – many could not have foreseen even a decade ago.
This presentation by Jocelyn Martel, Professor ESSEC, was made during the discussion “Barriers to exit” held at the 132nd meeting of the OECD Competition Committee on 4 December 2019. More papers and presentations on the topic can be found at oe.cd/bte.
SUPPLY CHAIN FINANCE IN THE CONTEXT OF WORKING CAPITAL MANAGEMENTIgor Zax (Zaks)
Igor Zax, Managing Director of Tenzor Ltd., published a special report, Supply Chain Finance in the Context of Working Capital Management .
The report, published in conjunction with BCR Publishing, covers industry structure, risk management, financing and operational aspects, the way companies viewed the product, as well as trade offs between dynamic discounting and supply chain finance products.
Receivables Finance in the Context of Working Capital Management by Igor ZaxIgor Zax (Zaks)
Igor Zax, Managing Director of Tenzor Ltd, published a new article, Receivables Finance in Context of Working Capital Management in TRF News (Trade and receivable Finance News, a major publication by BCR).
Editorial comment states “Igor Zax’s article in today’s trfnews, ‘Receivables Finance in the Context of Working Capital Management’, reminds us of the value of looking back at the history of modern supply chains and how working capital management, and hence factoring and supply chain finance, has developed from this. It also reflects on the potential frailty and dangers that over exposure to some supply chain structures can bring.
On late payments he says: “just a couple of weeks delay on 30 day terms increases working capital consumption by one-and-a-half times.” I wonder how many factors use such direct terms in their advertising material. If they do not, perhaps they should consider it, particularly as the trend is for larger companies to use receivables finance, and it is those companies in particular that tend respond well to the use of such analytic sound bites.”
Distribution Finance- article by Igor Zax at Trade and Forfeighting ReviewIgor Zax (Zaks)
The article by Igor Zax, MD of Tenzor Ltd ( www.tenzor.co.uk ) is focused changes in distribution finance landscape and the way new developments such as Supply Chain Finance, Dynamic Discounting, credit insurance products and overall changes in supply chain management can revolutionize this area.Published at TFR (www.tfreview.com)
Trade Credit Insurance White Paper December 2008jlebendig
Get our most recent white paper...An Overview of Trade Credit Insurance here. Great reading, insightful and it will answer more of your questions. Don\'t have credit insurance yet? What are you waiting for? Contact me to discuss your options for protecting your company.
CBIZ Quarterly Manufacturing & Distribution “Hot Topics” Newsletter (Sep-Oct ...CBIZ, Inc.
This issue delivers links to key resources, NAM’s Manufacturers’ Q3 Outlook Survey and four articles on key industry topics — 3 Ways Manufacturers Can Bridge Talent Gaps & Improve Product; Is It Time to Consider Group Captive Insurance?; Equal or Equitable – The Family Business Owner’s Dilemma; and Special Purpose Acquisition Companies (aka SPACs) Are Really Hot!
Carriers have historically been backwards-focused and have tended to maintain established processes without question. They also have the propensity to be risk-averse. These characteristics need to change. Carriers must be willing to try new things without betting the ranch or subjecting the company to undue risk.
The New Hedge Fund-Prime Broker RelationshipBroadridge
The financial crisis has changed the relationship between hedge funds and prime brokers. With the default of some leading providers, funds have realized that they should diversify their prime broker relationships and require more transparency on operational processes of prime providers. However, as the funds industry regains momentum, they are looking to their prime brokers to provide services that will support business expansion. Hence, prime brokers need to adapt their offering and IT infrastructure to respond to the changing market.
In the last few years, the financial markets have undergone dramatic change. While some of this is down to natural evolution, much of the change can be directly attributed to new rules introduced in the wake of the 2007 crisis. Regulators, legislators and central bank governors have been determined to avert another bubble bursting or an unexpected event that could threaten markets. Lawmakers have targeted key financial practices for reform, radically altering the expectations and behavior of industry participants. The combination of the Dodd-Frank Act, European Markets Infrastructure Regulation (EMIR), MiFID ll and Basel lll signify the biggest regulatory change in decades. These reforms have resulted in major change to how financial products are traded, settled, collateralized and reported, resulting in deep and ongoing structural changes to the markets.
There is no doubt that these new rules are directly impacting buy-side firms — be they asset managers, hedge funds, insurance companies or pension funds. But while the changes have certainly brought challenges, they have also brought opportunities. Firms that can proactively evaluate structural and operational dislocations in the marketplace and tailor business models to leverage the opportunities while addressing the challenges will be in the best position to stand apart from their competitors. Revised business models call for revisions to supporting processes and systems. Buy-side firms should look to re-architect their processes and technology infrastructure, with a goal to strengthen risk control and oversight, enhance transparency and improve efficiency of front-to-back office control functions.
The credit crisis, and the regulatory response it spawned have fundamentally reshaped financial markets for buy-side firms. But while the changes have brought about challenges, they have also ushered in opportunities. The key to success will be the speed with which firms are able to understand the changing marketplace and adapt their business models to align with the changes.
Unlocking the Performance Levers of Commercial UnderwritingCognizant
As insurance underwriters are called upon to do more, automation and lean processes -- such as decision support analystics -- are the keys to boosting effectiveness and efficiency.
Supply Chain Finance and Artificial Intelligence - a game changing relationsh...Igor Zax (Zaks)
Igor Zax (Zaks) , CFA, President of Tenzor Ltd. and Alexei Lapouchnian, Ph.D. published a new article, Supply Chain Finance and Artificial Intelligence -a game changing relationship? in Receibable Finance Technology Yearbook 2018 by BCR Publishing. The book would be officially launched at RFIx Receivables Finance International Convention 14-15 March 2018 in London, UK.
Trade Credit: the nature of the risk and its implications for SCFIgor Zax (Zaks)
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.
Igor Zax, Managing Director of Tenzor Ltd., made a presentation on Turnaround and Restructuring in Emerging Markets at London Business School, arranged by the LBS Turnaround Management and Restructuring Club 17-th of March 2016. The presentation was focused on specific challenges restructuring and turnaround practitioners facing in Emerging Markets and the ways to overcome them.
Buy and Build Strategies- Presentation Slides by Igor Zax at Private Equity O...Igor Zax (Zaks)
Igor Zax, Managing Director of Tenzor Ltd., chaired Private Equity Deal Origination Conference 25 November 2015. The event was hosted by IIR/Informa and featured will major PE houses such as Bain Capital, LDC, Riverside, and August Equity, as well as Houlithan Lokey, Cavendish Corporate Finance, KPMG, Grant Thornton, White and Case and others.
Igor Zax also presented a panel on Buy and Build Strategies, talking about successful identification of platform companies, putting together effective management teams, financing initial purchase and add-on acquisitions.
Alternative invoice finance- areas for innovationIgor Zax (Zaks)
Igor Zax, Managing Director of Tenzor Ltd., published a new article, Alternative invoice finance- areas for innovation in Trade and Receivable Finance news (TRF News).
The article is published ahead of Alternative and Receivables Finance conference in London 11 May 2015 (organized by BCR Publishing), where Igor Zax will moderate a panel on Optimizing product innovation and market differentiation in the receivables and alternatives space, that will include senior representatives from C2FO, Secured Trust Bank, Funding Options and Demica
Distressed M&A: Some Strategic and Financial Trends and ConsiderationsIgor Zax (Zaks)
This article by Igor Zax, currently Managing Director of Tenzor Ltd. was first published in Issue 2, Volume 6, 2009 of International Corporate Rescue journal, and looks into opportunities created for distressed M&A due to evolving industry structure and working capital issues.
Operational Turnaround –Focus on Working Capital and Supply Chain-lecture by ...Igor Zax (Zaks)
Igor Zax CFA, founder of Tenzor Ltd, gave a new guest lecture Operational Turnaround –Focus on Working Capital and Supply Chain as part of a course “Mergers, MBOs and Other Corporate Reorganisations” by professor Paolo Volpin at London Business School 23 March 2012.
The lecture covers principles of distressed investments, corporate turnaround and operational due diligence. It also focuses on supply chain and working capital implications, use of asset backed lending, vertical integration and business model re-design.
Designing a Corporate Credit Policy- by igor Zax in GT NewsIgor Zax (Zaks)
Igor Zax, managing director of Tenzor Ltd, published a new article, Designing a Corporate Credit Policy in GT News (major treasury publication by AFP).
The article discussed effects of granting credit to customers, credit origination process,credit risk management, dilutions/late payments and their effects, concentrated A/R, effect of A/R policy on return on capital.
Supply Chain Finance-Where Will The Future Lead -by Igor ZaxIgor Zax (Zaks)
Igor Zax, managing director of Tenzor Ltd, published a new article, Supply Chain Finance Where Will the Future Lead in GT News (major treasury publication by AFP).
The article discussed advantages and implications of seller centric approach to SCF, as well as use of SCF within overlall context of Supply Chain co-operation.
Reprinted with permission.
Igor Zax interviewed on Credit Insurance for Secured LenderIgor Zax (Zaks)
Igor Zax, Managing Director of Tenzor Ltd., was interviewed about credit insurance, among other industry leaders in Secured lender, a publication of Commercial Finance Association.
The article,
Trade Credit Insurance Proves to be a Useful Financial Tool
was written by, Eileen Wubbe, Senior Editor and also includes interviews with senior officers of credit insurers (Atradius, COFACE, EULERHermes), insurance brokers (Marsh, Arthur J. Gallagher) and Financiers (GE, EX-Works Capital).
Igor Zax also moderated credit insurance panel at Factoring and Trade Finance World, a major conference by Commercial Finance Association, that will be held in Miami 2-4 March 2015.
Credit insurance common misconceptions and can it be a useful tool finalIgor Zax (Zaks)
Igor Zax, Managing Director of Tenzor Ltd. presented 4-th of November 2014 a webcast “Credit Insurance: Common Misconceptions, and Can it Be a Useful Tool”, hosted by Commercial Finance Association (CFA), the international trade association dedicated to the asset-based lending and factoring industries.
The webcast was attended by major banks, asset based lenders, export credit agencies, insurance brokers and credit insurers
Igor Zax, founder and MD of Tenzor Ltd., moderated a panel at a conference “Private Equity in Central and Eastern Europe”, London, 15 October 2010, organised by C5. The presenation, Valuations – Practical Questions for PE Investor, focuses on shortcomings of traditional valuation techniques, exit strategies, criteria and motivations of investors.
Антикризисные Программы - Не Только Банки и ЗаемщикиIgor Zax (Zaks)
Презентация Игоря Закса на конференции "Корпоративная Финансовая Реструктуризация в России и СНГ" - Москва 1-2 Декабря 2009ю Дополнительная информация на www.tenzor.co.uk
Taking A Holistic Approach To Working Capital Pilots LogIgor Zax (Zaks)
The article analyses strategic approach to working capital, conceptual framework (outsourcing of financing), financing tools, redesigning supply chain, changing product mix and adjusting business model. It also addresses implications for private equity owned businesses
Taking A Holistic Approach To Working Capital Pilots Log
Working Capital – Seeing a Broader Picture
1. 08/09/2009 15:16Working Capital - Seeing a Broader Picture
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Working Capital - Seeing a Broader Picture
Igor Zax, Tenzor - 07 Sep 2009
How should companies address working capital management following global changes in the economy and in industry
structures?
The current financial crisis has highlighted the critical importance of working capital. However, for many companies, working capital
management is still viewed as a purely operational issue, concerned with collection efficiency, inventory management and the payables
process, as opposed to being a core part of corporate strategy.
However, the economic environment in many industries has changed enormously since the time when a company was ‘only’ buying raw
materials, manufacturing and selling goods.
In 1991, Richard Coase received a Nobel Prize in economics for a theory of the firm, based mainly on the concept of transaction cost -
i.e. the overriding reason for a firm’s existence is because there are costs of putting together different market participants, costs that might
be lower within a single firm structure than in the broader market. With this realisation, supply chain management and co-operation
become much more important, with better technology and information facilitating the change. In fact, many industries have developed a
model where original equipment manufacturers (OEMs) have become ‘platform companies’. The concept of a platform company was
defined by research firm GaveKal in 2005 as a company that: "Produces nowhere but sells everywhere...Platform companies know where
the clients are and what they want and where the producers are. Platform companies then simply organise the ordering by the clients and
the delivery by the producers (and the placing of their logo on the product just before delivery)."
Modern technology applied to supply chain collaboration arguably makes it possible for many companies to operate without significant
negative operational consequences. However, the last time the system came under stress, even well-run, hi-tech companies suffered
massive inventory write-downs, due to the ‘bullwhip’ effect, caused by information distortion in the supply chain.
However, with the financial crisis and the resulting changes taking place in the wider economy, there is a strong likelihood of reversal in
this trend because:
1. Transaction costs are going up substantially.
2. The cost of credit has gone up and, even more importantly, its availability has been reduced.
3. The ability to mitigate credit risk has been affected by both the withdrawal of credit insurance and the increased difficulty in
obtaining traditional financial products such as bank guarantees and letters of credit. A company with a high degree of
consolidation in either sourcing or distribution, which is often the best arrangement from an operational point of view, represents
a high concentration in terms of both credit and operational risk. While the platform company model should provide substantial
risk mitigation, the reality is that often most of its business partners would not have enough capital to absorb a material shock.
In practice, in many industries, we can see companies that look good based upon their stand-alone financials may be almost fully
dependant on a few players on the supply side, such as contract manufacturers, as well as on the distribution side. Even supposedly
diversified companies can have massive exposure to companies operating under very similar business models with expected high default
correlation.
Outsourcing financing?
In fact, consciously or unconsciously, platform companies have outsourced their own financing up and down the chain.
This even happens at macro level. Asian manufacturers were indirectly funding their US channel / consumption through lending by their
governments to the US government. In 2004, Grant’s Interest Rate Observer described this as: “an unholy partnership with its Asian
creditors. They would produce; we would consume…the US and its lenders have entered into the biggest vendor-financing scheme in the
history of borrowing and lending”.
In traditional cases (i.e. direct selling to a large number of diversified customers) the receivables side of working capital would often entail
the lowest relative risk of the three components. This is providing there is a prudent credit policy, a low concentration at company or
industry level and no major operational issues, such as product quality. If payment terms are relatively short, say, 30 days and the
average default rate in the whole economy goes up to 12% per annum (the worst-case scenario), bad debt only represents around 1% of
total sales.
With a reasonable credit policy, including the ability and willingness to withdraw supply before any bankruptcy occurs, any such losses are
likely to be substantially lower.
However, this risk increases significantly if there is a high company or industry concentration within receivables. For example, if one
customer represents 50% of a supplier’s sales, the customer's bankruptcy may even lead to the bankruptcy of the supplier due to an
immediate loss of the receivable, probably a similar level of loss on any customer-specific unsold inventory, and 50% drop in sales and
margins overall unless a suitable replacement or replacements can be found quickly. In addition, industry or regional concentration could
well lead to a high correlation between defaults, and an abnormally high default rate compared to the broader economy.
The credit risk of customers is insurable, at least in theory. Having a credit insurance policy will smooth the impact of defaults, even more
so where there are any industry or regional concentrations, as outlined above. Even though the availability of cover has been reduced, on
a highly diversified portfolio, both by industry and geography, it is still manageable - overall reduction of cover will rarely exceed 10%. If
2. 08/09/2009 15:16Working Capital - Seeing a Broader Picture
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a highly diversified portfolio, both by industry and geography, it is still manageable - overall reduction of cover will rarely exceed 10%. If
there are losses, the insurance premiums will go up in the longer term, but the short-term effect is mitigated. However, especially in
current market conditions, obtaining insurance on a very highly concentrated portfolio of buyers is likely to be more difficult and expensive
compared with more diversified sales. On a highly concentrated portfolio, therefore, the effect of the withdrawal of cover is likely to be
correspondingly more dramatic.
A delay in payments from customers, as distinct from outright non-payment, represents a more serious situation. Firstly, there are
immediate cash flow implications, which are very significant at a time of reduced credit/financing availability. Secondly, if tolerated, this
means a substantially higher exposure to particular names, which, again might be especially important in concentrated, uninsured
exposures, where such cases most frequently occur.
The core issue is where such longer payment times are not caused by customer internal issues, such as a customer trying to improve
their own working capital, but by the supplier itself. This could be caused by quality problems, contractual disputes or slow or unreliable
logistics. This normally means the risk is not insurable, as insurance normally just covers the credit risk of the buying customer, such as
bankruptcy or inability to pay - it does not cover non-payment due to contractual dispute. It also means that the risk is not financeable, or
not financeable at an affordable rate. It may also indicate significant communication and operational breakdown within the selling
organisation.
Maintaining A/P
The accounts payable (A/P) element is an extremely important part of a company’s financing, and technically often the easiest to lose,
rather like an overdraft. The withdrawal of cover by suppliers could potentially trigger an almost instantaneous bankruptcy, even for a
relatively healthy company. In the banking industry, the equivalent would be a run on a bank - suppliers are in some ways the equivalent
of depositors, but without deposit protection schemes. Historically, academic studies showed that trade credit increases during periods of
monetary contraction as suppliers help their customers when other credit is not available. However, with around 35% of European
companies using credit insurance, the decision to cancel a limit is often made by the insurer rather than the supplier. Technically, a
supplier would normally be under no obligation to withdraw credit if there were no overdue insured receivables - new supply deliveries
would just go uninsured. But in practice, most suppliers would choose not to extend credit if their insurer withdrew cover. In fact, some
suppliers do not even have the infrastructure to make credit decisions, as they effectively outsource the whole process to the insurer. The
withdrawal of cover has triggered a number of high-profile distressed cases. If longer terms were based on available financing, such as
factoring, invoice discounting and securitisation and this financing is subsequently withdrawn, suppliers may well have a strong incentive
to reduce terms, but this is less of an issue, given that only some 5% of total receivables is financed by these methods.
Many credit analysts seem to ignore a company’s vulnerability to supplier credit, broadly assuming working capital to be constant in their
models. Recent events, particularly with withdrawal of credit insurance cover for certain retailers, shows this risk should never be ignored.
Working Capital - Measures Beyond General Operational Efficiency
In addition to general operational measures (collection practices, dispute resolution, inventory controls, better forecasting accuracy, to
name a few), we believe the following measures should be considered:
Use of financing tools, where allowed and efficient.
Redesigning the supply chain in distribution, manufacturing and service companies.
Changing the product mix.
Changing the business model.
Use of financing tools
The receivables book (especially in a low-dispute environment, where it is possible to obtain confirmation of contractual performance
before the due date), combined with credit insurance, where available, may allow a company to finance itself in respect of these assets,
often at rates below anything else available at the market. This option may be especially valuable in two situations:
1. A highly concentrated portfolio with several high-quality, investment grade buyers, preferably with the ability to obtain
confirmation of goods acceptance (either on its own, normally easy to do on high value shipments, or through the supply chain
financing programme of the buyer).
2. A highly diversified portfolio, which can be enhanced through credit insurance or over-collaterisation.
As always, the terms of the deal are critically important, in particular the exact circumstances of lender recourse, deal triggers and credit
line consumption (i.e. if the lender marks such a facility against the seller’s credit line, it will not be available for other needs.) This would
not be an issue where such credit lines are readily available, but when financing is scarce, one needs to ensure this is an optimal use.
Using receivables financing and effectively selling the terms to buyers can be a very profitable business, but it requires a careful analysis
of what could happen if you change terms assuming financing will be available, only for it to be restricted or withdrawn at a later date.
Similarly, a company with a good credit standing and sufficient credit facilities can offer financing to its own suppliers through a supply-
chain financing programme. This could have multiple benefits including margin. An early payment discount (EPD) could significantly
exceed the cost of the programme and lowers the potential risk of supplier default as the supplier’s own working capital would be
healthier. However, if a supplier’s credit is wholly or largely based on financing tools, either arranged directly by the supplier, in typical
factoring, or obtained indirectly through the buyer that it is short term funding with various triggers. The potential risks of this arrangement
need to be carefully analysed and understood.
3. 08/09/2009 15:16Working Capital - Seeing a Broader Picture
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The other interesting aspect of a new supply chain structure is the ability to select the best point of financing in the chain. For example,
many leveraged buyout (LBO) companies may not raise additional debt or sell assets with receivables included above a certain covenant
threshold without asking for a waiver, which is usually a complicated and expensive process. However, their distributors or suppliers are
not subject to similar restrictions. For example, where an LBO company sells to a distributor on 60-day terms, and the distributor in turn
has 30 days’ inventory and 30 days’ receivables from customers (i.e. the distributor has a zero-day cash-conversion cycle). If the
distributor is able to arrange independent finance for all of its receivables, it can pay the LBO company in 30 days, although it would need
to pass on the cost of such financing back to the LBO company, perhaps via a discount received for early payment. The net effect is a
leveraged company effectively with secured financing (through working capital) of half of its receivable book, without any priority issues or
covenant breaches. This is one way to provide what is effectively debtor in possession (DIP) financing without formally [leveraging] the
company.
In fact, an efficiently-financed distributor - who acts as the intermediary - may be a solution for a supply chain problem where the supplier
is unable to implement its own receivables financing programme, including participation in the buyer’s SCF programmes, because of
covenants or other reasons, while the buyer is unable to pay earlier.
Redesigning the supply chain in distribution, manufacturing or service companies.
If we consider one of the core functions of a supply chain to be the outsourcing of financing, we need to select partners who are efficient
at this. For most CEOs, the design of the distribution structure is viewed as a marketing question, based solely on the ability to sell
product. This could subsequently become a challenge for the credit and collections departments, as to whether they can collect anything
and, if so, when. In one of my previous roles, changing most of the distribution structure in a particular region, in a joint project between
sales and finance, led not only to a significant reduction of risk and better cash flows, it also led to an a sizeable increase in sales and
customer satisfaction. In particular, the shape of the distribution structure should be a function of the ability to finance. If a company has
either its own funds or the ability to put together an effective receivables finance program, it would be better with direct sales, as this leads
to substantially lower concentrations, better risk management and better access to finance. If, however, a company does not itself have
access to competitively-priced financing, then having in the chain a large and well-financed distributor - and one not constrained by
covenants and therefore able to finance its receivables portfolio as and when it wishes - may be a more efficient way to outsource
financing (see example above).
On the supplier’s side, the ability to extend terms to a private equity-owned or a distressed company is often more a function of risk
appetite than cash flow. As credit insurance is used by 35% of European companies, it is critical to map insurance coverage for current
and prospective suppliers, in order to understand the impact of a potential withdrawal. It also helps distinguish between suppliers who rely
solely on insurance and those who follow their own independent assessment. The company will need to ensure good communication and
information flow with both. In addition, it is vitally important to analyse and monitor the performance risk of suppliers. This includes, but is
not limited to, their credit risk. Even if supplier goes into administration or other insolvency regime, it might not necessarily be in creditor’s
best interest to stop supply. For example, if a particular subsidiary would be better sold as a going concern, it is likely that supply would
continue. But there might be other risks that could outweigh credit risk, for example if contractual penalties are lower than the cost of
continuing supply.
The degree to which working capital affects supply chain redesign can differ from company to company, with availability and cost of
working capital and risk tolerance being key considerations.
Figure 1: Distribution Example 1
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Figure 2: Distribution Example 2
Changing the product mix
Not every company monitors even basic profitability by individual product line, and even fewer appear to monitor working capital
implications. While the precise extent may be industry-specific, it is generally recognised that particular parts of the product mix place a
large drag on working capital. This can be caused, for example, by longer production times, by associated services to the customer, such
as installation, system integration, training, complicated customer logistics, consolidation issues (i.e. you can only bill when all
components of the order are in place), by the need to pre-pay the supplier, etc. These product lines may or may not be essential and/or
highly profitable - in which case a detailed structural analyses could help to re-define the business. With working capital becoming a
scarcer resource, the design of appropriate monitoring and evaluation systems, including implied costs, risk scoring, etc. to link working
capital to product mix decisions, should be a high financial priority for many companies.
Changing the business model
Finally, the business needs to review its business model. The classical model is capital- intensive: you buy materials, thereby creating
A/P, store/process these materials, creating inventory, and then sell the end product, creating accounts receivable (A/R). This model,
however, may not be optimal from either a risk and or a cost standpoint. One alternative would be to move to a service-based model,
where business is redefined as providing a service, rather than purely buying or selling. In the case of a distribution company, this would
be a move to a commissionaire/agent structure, where the company is selling goods on behalf of a supplier for a fee, handling marketing,
logistics, collections, etc. as necessary, but never taking legal title to the underlying products.
In the case of a manufacturing company, it could move to a type of contract manufacturing structure, where the company receives
components from a customer and processes them for a fee. Many individuals do this when ordering a suit or a dress, for example, bringing
the material and paying for a service. It is also used widely in the commodities sector - one example would be tolling contracts in
aluminium industry. Strangely, so far it has been less used in the electronics industry, where a majority of contract manufacturing is done
on a buy-sell model (even when OEMs are procuring components for contract manufacturers). Obviously, a change of model requires
consideration of both legal aspects, such as the European Agents Directive and tax aspects, which are beneficial in some jurisdictions, if
correctly structured. In general, however, this structure reflects current supply chain design, and is also substantially more economical on
working capital and significantly reduces risk throughout the chain.
Vertical Integration
Ultimately, many companies are faced with the whole of their supply chain (upwards or downwards) becoming exceptionally high risk,
involving high concentration, large switching costs and the inability to mitigate these risks. In such cases, vertical integration is likely to be
the most sensible strategy, especially where other companies involved in the chain are available at low valuations. From a working capital
prospective, such acquisitions may even be cash-flow positive, particularly where a distributor cannot finance its own receivables. This
may be because of the high degree of its performance risk, meaning most banks would be unwilling to offer credit facilities, but once it is
acquired it may be financed by the acquirer. Arguably, the best option would be for its receivables just to be dropped into the acquirer’s
financing/insurance programmes.
Similarly, one needs to look at the relative cost of vertical acquisition for a company’s own suppliers. If a supplier’s credit risk is high, if the
cost of switching to another supplier is high, and if the supplier’s weak credit drives costs up, as its own suppliers in turn do not want to
give it credit. If other financing is very expensive if at all available, and if the acquisition cost is lower than the switching cost, especially if