F O C U S{ T H E M A G A Z I N E F O R E U R O P E A N T R E A S U R E R S }
SPRING VIEWSSpecial report: The changing
face of working capital
ONLY COLLECT
How to centralisecollections
NO PAPER
JUST DATA
The benefits of the BPO
WILL ABSPP
GET BUY IN?
Crunch time for ECB plan
WORK THAT
CAPITAL
New ways with assets
KEY CHANGE
Why Cofidis switched focus
APRIL 2015ISSUE THREE
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2 ISSUE THREE
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Recipient should seek independent legal, financial and other professional advice before investing in any product, subscribing to any service or entering into any transaction described herein. Neither BNP Paribas SA nor any of its affiliates will be responsible for the consequences of the recipient relying upon any information contained herein or for any potential error or omission. This document may not be reproduced or disclosed (in whole or in part) to any other person nor be quoted or referred to in any document without the prior written permission of BNP Paribas SA.
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Focus is produced for BNP Paribas by Cedar Communications Ltd, 85 Strand, London WC2R 0DW United Kingdom. T: +44 (0)20 7550 8000, F: +44 (0)20 7550 8250W: cedarcom.co.uk ©2014 Cedar Communications Ltd
For BNP Paribas
Editor in chief Thierry Bujon de l’EstangEditors Cathy Vuong, Anne SellesContributing writers Pierre de Corta,Frédéric Tollu, Helen Sanders, Mahesh Bhimalingam
For Cedar
Consultant editor Mark JonesCreative director Stuart PurcellAccount manager Dan GeoffreyAccount director Hannah SaundersProduction controller Teri SavilleProduction director Vanessa SalterDigital director Robin BarnesCEO Clare Broadbent
C O N T E N T S
Cover
: Gett
y
F O C U S
04COLLABORATION IS KEY
Towards a more holistic working capital strategy
12THE ROAD TO RECOVERY
Why Cofidis made debt collection a priority
06DON’T JUST BANK ON IT
The many ways to finance working capital
14
TIME TO CASH IN
The compelling benefits of centralising collections
1OINNOVATION AT WORK
BP’s lessons from the first live BPO in Europe
16 THE ECB’S POLICY PUNT
Will the ABSPP kickstart European securitisation?
WWW.BNPPARIBAS.COM 3
WORKING CAPITAL
W E L C O M EEurope seems to be gradually emerging from a prolonged period of turmoil, spanning two
financial crises and a severe economic downturn. But while they see encouraging signs of
stabilisation, European treasurers are facing unique challenges in managing their working
capital requirements.
One set of challenges stems from the ever-expanding regulations imposed on banks in
order to try to prevent new crises. These regulations are already having material
consequences for companies as banks adapt their models to the new environment;
consequences which are often still not fully understood by business. Liquidity ratios brought
in by Basel III and their impact on the value of deposits, increased capital requirements
which render some previously profitable businesses suddenly unattractive, the exiting of
some banks from regions or industries… the list of the changes that will impact on corporates
is long and growing.
From a macroeconomic standpoint, the prevailing deflationary environment – driven
by the reduction in oil prices and the negative bond yields in the aftermath of quantitative
easing by the ECB – creates another set of challenges, notably on the liquidity investment
front. Then there is the volatility in the currency markets…
So it is no surprise that European treasurers are exploring new ways to resolve complex
working capital needs. To address those needs, a collaborative approach which considers
every function of the business in the round is key to success.
As the banking system is fast evolving, true cooperation between companies and banks
is required to develop the innovative solutions – such as Bank Payment Obligation – needed
to optimise working capital.
As we highlight the working capital challenges that European corporate treasurers are
facing in this third issue of Focus, we hope you will find valuable information to enrich your
global approach to treasury and serve your organisation in the new fiscal environment.
Jacques Levet
Head of Transaction Banking EMEA
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COLLABORATE TO COMPETEWorking capital can be the difference between success and failure. So how do companies minimise requirement and maximise liquidity?
WWW.BNPPARIBAS.COM 5
WORKING CAPITAL
C CC, DSO, DIO, DPO – companies of all
shapes and sizes are focusing
forensically on key performance indicators
as the realisation is dawning – often
painfully – that reducing the need for
working capital can be key to survival.
But most organisations still rely on an
old-school, tactical approach to try to reduce
demand, rather than draw up a coherent
plan for working capital efficiency.
What are the reasons for this, and how
should companies move on from the
“KPI-is-king” approach?
Forget fragmentation Traditionally, different company departments
are measured on individual metrics that
contribute to the working capital cycle –
finance and treasury monitor DPO and DSO;
procurement teams are measured on supplier
payment terms and cost of goods received;
and sales teams are measured on payment
terms and customer payment performance.
Here, each department is measured and
incentivised according to different KPIs, and
while decisions may positively influence their
own departmental KPIs, it may be to the
detriment of the company’s overall working
capital objective. (For example, if sales is
measured on gross margins and revenues
alone, there may be a negative impact on
working capital.)
But with liquidity at a premium since the
global financial crisis, compounded by a low
interest rate environment and increasing
regulatory constraints, cash-rich companies
need to minimise working capital
Treasury is the natural focal point for a more holistic working capital strategy
requirements in order to invest cash over a
longer time horizon. Equally, debt-based
corporations need to diversify funding
sources and leverage financial assets and
transactions as collateral.
And companies of all sizes are building
business in new territories where cash may
be ‘trapped’ for tax or regulatory reasons, and
where risks may be difficult to assess.
So, organisations everywhere need a
working capital strategy that is holistic and
collaborative. But how is this achieved?
Go strategicThe answer is: by every means necessary.
Treasurers and CFOs are already using a
variety of techniques to reduce reliance on
external financing for working capital. Part of
a succesful approach is to extend supplier
payment terms, achieve earlier and more
predictable payment, and get proactive to
reduce overdue collections. And companies
are adopting new systems to support these
activities, such as streamlining payment and
collection processing (see article on page 14.) But, while these initiatives can improve
flows and individual metrics, they may not
reduce the amount of working capital needed
to fulfil daily financial obligations – and they
won’t help create a more resilient, flexible
supply chain that boosts competitiveness.
Slash through silosInstead, companies need to take an integrated
approach towards working capital. By doing
so, all parties involved will benefit from the
skills and expertise of other teams.
Ultimately, this promotes group-wide
objectives, rather than mere departmental
ones. For example, treasury and finance
teams’ analytical skills and practical
knowledge of payments, collections and
liquidity are keys to managing costs and
profitability. Procurement maintains key
supplier relationships and understands
supplier dynamics, as well as offering
expertise in negotiating contracts and
monitoring supplier performance and risks.
Production teams are aware of the
operational challenges in delivering customer
orders and the mechanisms required to adapt
the production cycle to adverse events. Sales
teams understand the competitive pressures.
By adopting a more collaborative approach
between treasury, sales, production and Gall
erys
tock
procurement, companies can balance
commercial, operational and liquidity risks
upfront – and influence supplier and
customer relationships positively.
For example, treasury can introduce
procurement to supply chain financing
solutions that strengthen supplier
relationships, extend payment terms and
help price negotiation. Sales teams might
benefit from factoring and other
receivables financing techniques that
enhance DSO, reduce customer credit risk
and free up credit limits.
But as well as needing to get individual
departments to see the benefit of
collaborating for the greater good, there can
also be geographic and cultural barriers to
collaboration. So, top-level sponsorship is
needed to align objectives and decision-
making across different business functions
– and management has to instil a
group-wide focus on working capital,
rather than solely on specific KPIs.
Treasury is the natural focal point for a
more holistic working capital strategy, given
that its skills in liquidity, risk management,
and payments and collections management
touch on all the other areas.
Working with the right banking partner
can be instrumental by offering expertise and
insights into best practices, visibility over
cash and risk globally, innovative financing
and investment solutions, and technology to
support automation and integration across
the working capital cycle.
And, with stronger supplier relationships,
fewer late payments, more attractive
commercial terms for customers and
better alignment across the financial
supply chain, the benefits flow to every
part of the organisation. O
�Pierre de Corta is the Head of Factoring & Supply Chain Financing at BNP Paribas, the Working Capital Sales team for Large Corporates. Pierre has more than 20 years’ experience in working capital financing.
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OPEN UP, CASH IN
Not so long ago ‘alternative’ methods of working capital financing were considered emergency-only, but now borrowers and lenders are turning on to the benefits
WWW.BNPPARIBAS.COM 7
WORKING CAPITALG
ett
y
One enduring legacy of the 2008
financial crisis for corporates is the
need to make working capital optimisation
a primary objective. This has led to an
increasing focus on ‘alternative’ financing
methods to leverage financial assets and
transactions more effectively.
Those methods grew in popularity during
the immediate aftermath of the crisis as
bank liquidity became more constrained.
Indeed, some companies owe their survival
to their ability to leverage their financial
assets as a source of financing.
And with ongoing liquidity constraints –
particularly as banks adopt Basel III
requirements – companies of all sizes are
trying to reduce their reliance on bank
facilities to finance working capital.
As a result, the value of ‘alternative’
techniques is transcending emergency
financing and becoming a key part of a
company’s financing portfolio, enabling
treasurers to unlock ‘trapped’ cash, reduce
cash conversion cycles and improve
financial ratios (figure 1) without
extending bank credit lines.
But working capital financing is not a
one-size-fits-all, one-stop solution. Rather, it
encompasses a range of solutions, with
distinct benefits for every kind of company
according to its working capital profile.
Identifying the alternativesWorking capital financing leverages one of
the three groups of assets in the financial
supply chain: receivables, payables and
inventory. Of these, receivables offers the
most options, including factoring,
discounting, total pool purchase and
securitisation, but there are solutions for all
three asset types.
In this article.... There are many different ways to finance working capital outside traditional bank facilities, from factoring to inventory management solutions that leverage work-in-progress; which methods treasury should consider will vary according to company working capital profile.
In favour of factoringThe best-known receivables financing
technique is factoring, most often used by
small to medium sized companies. In
traditional factoring, the company sells
one or more receivables to a bank or
financing company (the factor) and
receives immediate payment. The amount
received is based on a percentage of the
market value of the receivables and will be
higher or lower according to the credit
quality of the customer.
In more sophisticated factoring, the
credit risk is transferred to the factor
(non-recourse), but in others the factor has
recourse to the borrower in case of customer
non-payment. Terms differ according to the
debt profile of the lender’s customers. Parties
can also build a factoring solution into the
arrangement to manage risk.
Unlike some forms of receivables
financing, traditional factoring is disclosed to
the company’s clients (the debtors), who
typically pay the factor directly. For some
companies – particularly larger businesses
– disclosure to customers is a disadvantage,
but companies with resource constraints are
increasingly adopting factoring as it enables
them to outsource collection.
Similar to traditional factoring, invoice discounting offers working capital
ACCOUNT RECEIVABLES
MONETISE TRADABLE INSTRUMENTS
FIGURE 1 ADVANTAGES OF ALTERNATIVE FINANCING TECHNIQUES
IMPROVE WORKING CAPITAL METRICS
LIGHTEN BALANCE SHEET
RETAIN THE RIGHT ACCOUNTING TREATMENT
BALANCE SHEET MANAGEMENTTREASURY MANAGEMENT
P DSO
ACCOUNT PAYABLES N DPO
INVENTORIES P DIO
FREEING UP CASH TRAPPED INTO WORKING CAPITAL
REDUCING CASH CONVERSION CYCLE
OFF-BALANCE SHEET CASH
OFF-BALANCE SHEET ACCOUNT PAYABLES
OFF-BALANCE SHEET CASH
IMPROVING FINANCIAL RATIOS
BANK DEBT RELIEF AND IMPROVING GEARING
BENEFITSO TIME VALUE OF CASH OPTIMISED TOWARDS SUSTAINABLE IMPROVEMENTS RATHER THAN ONE-OFF CASH RELEASE
O ENHANCED LIQUIDITY THROUGH ALTERNATIVE SOURCE OF FUNDING
O GLOBAL REDUCTION OF FINANCIAL COSTS RESULTING FROM IMPROVED BALANCE SHEET STRUCTURE
advantages by accelerating the payment of
customer invoices at a discount. This solution
is provided by banks and some independent
factors. Like factoring, the level of discount to
a receivable depends on the credit quality of
the customer. Although invoice discounting
can be on a recourse basis, most companies
prefer non-recourse to leverage favourable
off-balance sheet treatment and risk transfer.
A key benefit is the ability to choose
whether to disclose the sale of the receivable
to the customer. If undisclosed, the company
is responsible for repaying the bank or factor
the funds collected. Invoice discounting
tends to be used for larger transactions
than traditional factoring.
A variation of invoice discounting is total pool purchase (TPP), where an entire
portfolio of receivables is purchased, as
opposed to individual invoices. Here the
credit risk assessment is based on the entire
pool, as opposed to individual customers,
giving greater flexibility for companies that
have debtors of differing credit quality by
individual receivable. Since credit risk is
assessed on the global portfolio, some
companies enjoy the flexibility to add
different quality debtors to the pool. As in
discounting, TPP also improves the balance
sheet and removes debtor risk if structured
on a non-recourse basis. As it leverages
i
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8 ISSUE THREE
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bank financing, it can be an alternative
to securitisation for companies not seeking
outside investors.
Securitisation is a mature technique for
converting a pool of illiquid financial assets
into a liquid, tradable financial instrument.
Assets range from short term (trade
receivables) to medium and long term (credit
card debt, auto loans/leases, student loans,
mortgages and so on). They are sold into a
special purpose vehicle (SPV) that then
issues securities in the capital markets.
Using an SPV isolates the assets from the
company, therefore the repayment profile
and risk of the assets form the basis of the
credit rating for the security rather than the
credit risk of the company. The securities are
tranched and are either retained or sold to
the capital markets investors with different
risk appetite to achieve different financial
objectives of the originator.
Securitisation of trade receivables can be
a useful form of financing for corporations
and financial institutions with sizable
receivables portfolios (typically greater
than €50 million) originating in one or
several countries. This includes B2C
receivables as well as B2B, to which
factoring, discounting and TPP are limited.
Similar to discounting and TPP, the
company usually remains the servicer of
the receivables and the sale of receivables is
generally not visible to customers.
Securitisation can be a very attractive
option to diversify funding risks, raise large
amounts of money in the markets, reduce
funding cost and/or achieve specific
balance-sheet objectives.
As securitisation is based on the quality of
the underlying assets rather than the credit
profile of the company, it is particularly
attractive to companies that are not rated, or
whose credit rating would attract higher
financing rates. Securitisation also allows
companies to leverage their B2C receivables,
whereas factoring, discounting and TPP are
limited to B2B. An advanced financing
Some companies owe their survival to their ability to leverage their financial assets as a source of financing
technique, securitisation requires the provision
of reliable historical and portfolio data and the
structuring process normally lasts four to six
months and involves other parties such as
arrangers, legal and tax counsels, etc.
Supplier side financing While factoring uses receivables to finance
working capital, reverse factoring (or
‘supplier financing’) (SF) uses payables.
Suppliers send invoices to the buyer (who
is the borrower) in the normal way. The
buyer approves the invoice and sends it to
the financier (typically a bank), who is then
DEAL SIZE
TENOR
RECEIVABLE TYPE
FUNDING SOURCE
ASSESSMENT
RISK MANAGEMENT
SERVICING
TYPICAL CLIENT
PROFILE
FIGURE 2 RECEIVABLES FINANCINGTRADITIONAL
FACTORING
INVENTORY
DISCOUNTINGTOTAL POOL
PURCHASESECURITISATION
EUR 1 -3 million > EUR 5 million EUR 20 to 250 million > EUR 50 million
Up to 180 days 30 days to 2 years up to 180 days up to 180 days
B2B Receivables B2B Receivables B2B Receivables B2B or B2C Receivables
Bank balance sheet Bank balance sheet Bank balance sheet Capital markets
- Individual screening and
credit analysis conducted
on each debtor
- Possible to apply different
funding conditions to
different debtors (such as
recourse or non-recourse)
- Payments made to
specific accounts
Credit risk per debtor is
analysed where number of
debtors is small
Analysis conducted on
portfolio to review:
- Concentration risk
- Aging of portfolio
- Historical losses
- Provisions and late
payment
- Portfolio analysis conducted
on quality of debtors
- No individual screening
conducted on each debtor,
subject to concentration limit
on one single debtor
Optional recourse
or non-recourse
Optional but typically
non-recourse
Optional but typically
non-recourse
Optional
- Receivables typically paid
to factor with disclosure
- Factoring can act as
collection and servicing
Sale of receivables is
generally undisclosed
to buyer
- Sale of receivables is
generally undisclosed
to buyer
- Company remains
responsible for servicing
Client typically remains
servicer
Small to medium companies Medium to large companies
with significant level
of trade receivables
interested in improving
balance sheet
Medium to large
companies with portfolio
of debtors/obligors lacking
concentration in similar
types of receivables
Corporation or financial
institutions with a sizeable
granular portfolio
responsible for paying suppliers. Suppliers
can opt to be paid on the invoice due date or
to discount the amount to receive early
payment, often within five days of invoice
approval. The buyer pays the bank on an
agreed future date.
By offering suppliers more attractive forms
of financing, SF programmes benefit buyer
and seller, increasing the resilience of the
supply chain by preventing supplier failure
through lack of access to liquidity and
improving supplier relationships.
Larger suppliers with a stronger credit
profile than the buyer are often attracted to
SF programmes even if they can access
comparable or better financing rates due to
the working capital and risk benefits of early
payment, while avoiding drawing down on
their own financing sources.
Supplier financing programmes are
often above €5 million in value and can
extend for up to two years. Large
programmes may be syndicated across
multiple lending banks.
WWW.BNPPARIBAS.COM 9
WORKING CAPITAL
company. This offers the maximum
off-balance-sheet inventory benefit.
Pre-Receivables structure: an inverted
just-in-time solution in which the bank or its
trading vehicle buys the finished inventory
from the client company and sells it to the
company’s customers on a just-in-time basis.
Making the right callJust as companies often have more than
one financing bank, many find that more
than one alternative financing technique
is appropriate to their business – the
most successful companies often use a
combination of solutions.
Various factors will influence treasurers’
decisions, including the metrics on which
treasury is measured, such as return on
capital employed, weighted average cost
of capital and peer benchmarking. Bank
covenants will also influence the choice of
financing solution.
Other considerations will be specific to
the assets themselves and the regions and
Leveraging the WIPThe most straightforward way to leverage
‘inventory’ is through an asset-based lending
facility, but another viable option is an
inventory management solution, where a
company sells its work-in-progress (WIP)
inventory to a third party that owns that
inventory until it is required in production.
Only a few banks offer these solutions, but
they can be invaluable in unlocking cash held
in inventory for earlier use. The assets have
also now been moved off the balance sheet.
Inventory management solutions include:
Flash Title: the bank or a bank-owned
trading vehicle buys inventory from the
supplier and instantaneously sells it to the
company on extended payment terms.
Sale on Delivery: the bank or bank-owned
trading vehicle buys inventory and holds
title while in transit, selling either at the
inventory’s destination or port.
Just-in-Time: the bank or bank-owned
trading vehicle buys, owns and holds
inventory, selling it as directed by the client Gett
y
currencies involved will also have an impact
with regard to meeting specific regulatory
requirements, cross-border liquidity
constraints and currency convertibility.
Working with a banking partner with
the skills, experience and range of solutions
to understand the company’s global financial
strategy, working capital needs and financial
assets is essential to an effective working
capital strategy.
As new accounting rules and regulations
take effect in the wake of Basel III, these
forms of financing will become more and
more attractive to both borrowers and
lenders. They will then no longer be
considered ‘alternative’ forms of financing,
but mainstream or even default ways of
financing working capital. O
Key change: New techniques avoid extending bank credit lines
�Frédéric Tollu, Head of Global Trade Solutions Europe, joined the BNP Paribas Group in 1990 and has been instrumental in developing trade business worldwide.
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THE POWER OF THE PROCESSIn 2014 BP carried out the first live BPO, exchanging only data and no paper. What advantages does this new payment system offer?
WWW.BNPPARIBAS.COM 11
WORKING CAPITALG
ett
y
�Michael Van
Steenwinkel is a chemical engineer and petroleum economist. As Global Credit Manager at BP Petrochemicals, he has worked on BPO from a corporate perspective since 2011.
W orld trade has seen a startling increase
in open account transaction over recent
years: today more than 80% of total world
trade by volume is settled by clean payment.
This means speed and flexibility are huge
challenges for every company in every
sector – and banks have to keep pace by
offering clients fully automated processing
combined with payment assurance and
financing options.
BPO is a new method of trade financing
that enables banks to offer their corporate
customers flexible risk mitigation and
financing services across the supply chain.
So, last April, in collaboration with BNP
Paribas, BP performed the first live BPO
transaction in Europe in an operation that
was awarded Trade Financing Deal of the
Year 2014 by Trade & Forfaiting Review. BP’s
Michael Van Steenwinkel discusses the
benefits of the new approach.
Which trade tools were you using before?Given the counterparties we are dealing with
and the countries involved, the vast majority
of our secured payment transactions are
processed through documentary letters of
credit, stand-by letters of credit, bank
guarantees or documentary collections. It
is a must in our sector. We need to monitor
credit risk – not only corporate credit risk,
but country risk, too.
What triggered your decision to use BPO? Generally speaking, the more flexibility we
have in our international trade and bank
operations, the better for the organisation at
all levels. Documentary operations take
time; time for issuance, time for
amendments and time for payment. No
specific event made us think about BPO,
but we consider speed and flexibility to
be the main advantages of the solution.
How does BPO help you? What are its main benefits?Our business model requires strong and
accurate risk mitigation. To ensure the
company’s objectives are met, we need to
be paid on time in a quick and flexible way.
The ease and speed of making amendments
is important. To give you an example,
when a documentary letter of credit gets
issued, it can easily take up to two or three
days before an amendment is made. With
the BPO, making amendments – which
happens quite frequently – can be done
in a few hours.
Another advantage is that the credit
lines of the importers are used for a shorter
time than with the documentary letter of
credit or with a stand-by letter of credit.
What milestones do you have to reach before performing a live transaction?We must bear in mind that the BPO is a
new product. With new products there’s
always development issues at different
levels. A first level is education: a lot of
people don’t know the product yet and
stepping into the unknown is sometimes a
tough thing to do. A second aspect is around
readiness of all parties involved; not only
corporates but banks, too, need to be ready
and able to step into the new adventure.
Did BPO mean a different set-up and approach for your team?Once people were informed, trained and
aware of the new process, they adapted.
The BPO helped them to focus on
value-adding things. Only data are
exchanged; paper copies remain outside
the banking system, so documents are
available quicker and the customer has
faster access to the goods.
How did your counterparts react to the new process?All stakeholders benefit from the flexibility
and speed compared to traditional
documentary operations. It also means lower
costs for our clients, since their banking lines
have a quicker turnaround. We now have a
recurring stream of BPOs with one customer
– experiences are positive on both sides.
To whom would you recommend the BPO?In my view, the BPO is valuable for many
sectors and many types of companies. From
the moment you want to mitigate the credit
risk of the corporate without having to
worry too much about the country risk (for
which you would typically use a confirmed
letter of credit or stand-by letter of credit),
the BPO solution is a very usable product.
What is your experience of using banking-related digital tools? What issues need to be addressed?So far, my experience has been limited but
positive. It is hard to predict what the
future will bring. The BPO is a new
product, so a lot of aspects need to be
worked out over the next few years and
incorporated into URBPO [Uniform Rules
for Bank Payment Obligation, which will
establish uniformity of practice in the
market adoption of the BPO]. I also see a
need to expand the offer towards a
‘confirmed’ BPO or towards the BPO
offering financing to its counterparts.
The fact that it is an electronic product
definitely creates opportunities for
dematerialisation. In a parallel way, the use
of e-documents (like electronic bills of
lading) would be a good extension of the
concept of digital tools in the banking
world. I do think this will become part of
the BPO at some point. O
Wheels of industry: BPO can greatly speed up trade
BPO in brief Bank Payment Obligation (BPO) is an irrevocable undertaking by one bank to pay another at sight or at maturity in which only commercial data are exchanged, thereby bypassing the need for paper records.
i
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C ofidis designs, sells and manages
financial products and services, with
broad experience in consumer financing and
payment solutions. Its central treasury is
located in Lille. It is in charge of improving
the use of credit lines, management of excess
liquidity and the funding needs of the group,
with European subsidiaries managing
day-to-day local payments and collections.
The set-up is designed to optimise the
group’s working capital.
How does Cofidis treasury work in Spain?The treasury team in Spain manages daily
payment and collection flows, while the
central treasury team manages credit
lines, financing and derivatives hedging.
Locally, we have a weekly and monthly
treasury planning where we take into
account all the payment and collection
flows that we are expecting in a given
period. We share this cashflow planning
with our central treasury, who attends to
our funding needs.
In practical terms, payments and
collections are managed in two completely
separate flows. On the collections side, the
larger part of our collections are fully
known from the first day we sign a new
loan with a client, so we have a clear
COLLECTIONS BEAR FRUIT
How did payment solutions provider Cofidis Spain react to the 2008 crisis?
Finance manager Antoni Arjona says the company had a complete change
of focus – and debt recovery was key
WWW.BNPPARIBAS.COM 13
WORKING CAPITAL
collection calendar with agreed terms and
dates with each of our 800,000 clients in
Spain. Our collections are launched on the
first day of the month via direct debit. We
sweep the funds collected to a local cash
pool on a regular basis and inform central
treasury, who can then include them in the
group’s liquidity position. It is very
important for us to avoid any disruption to
the collection process, so we concentrate
our efforts on automating and optimising
the operation as much as possible.
On the payments side, there are also two
separate flows that are managed
independently. On the one hand, there are
the normal business flows of the company:
Cofidis Spain knows amounts and due dates
of monthly payments to suppliers, taxes,
employees, etc. These payments are ordered
from a dedicated payments account. But we
also have the flows of payments to fund our
clients’ consumer finance needs, which are
managed separately.
The payments account gets funded by our
collection’s account via our local cash
pooling. As soon as our estimations start
showing liquidity needs, we agree the
provision of funds with our central treasury.
Through this funding and the control of the
maturity of the funding disposals, we
manage the liquidity needs or excesses. If
unexpected need for additional funding
arises, our central treasury sends us the
required liquidity upon demand.
How do you manage collections? How did the migration to SEPA DD affect you?For Cofidis Spain, direct debit is the main
means of payment in the collection process.
Our set-up has significantly changed with
SEPA DD and we have had to change or
adapt many aspects of our organisation.
These included legal (contracts and
mandates were adapted to SEPA
regulation), IT (systems for generating
remittance files, reconciling account entries
and dealing with all types of rejects,
returns and refunds needed to be adapted
to SEPA), and commercial (educating
commercial teams and clients on what
SEPA meant), to name just a few.
Our systems are designed to be ready to
reconcile all the movements in our collection
accounts automatically. We initiate the
collection process by submitting our direct
debit remittances to the bank. Once the
collection is sent, we keep close track on the
account statements. Every account entry is
read and identified by our systems on a daily
basis. When collections are completed
successfully, systems update the outstanding
debt balances of our clients.
Whenever there is disruption in the
collection process, our systems trigger the
actions needed to correct the failure. With
each rejection, return or refund file, our
systems identify the original direct debit,
read the reason code for each particular ‘R’
transaction, and trigger the action needed.
Our systems were automated before SEPA
and we now have them in SEPA, although
some aspects are still complicating the
smoothness of our collection process.
Smoothness here is absolutely key for us and
small discrepancies can impact on that,
requiring manual intervention.
What’s your take on the new initiatives emerging with SEPA, such as e-mandates?These initiatives are positive, although our
view is that the mandate needs to be
flexible; it must adapt to what the client
needs and what the business of the issuer
of the SEPA DD is. The mandate in effect is
the consent by the debtor to have his or
her account debited by the creditor. This
agreement allows many formats and
many ways of getting registered. In
Cofidis, mandates were part of the debt
contract, but following SEPA regulation
they are now a proper and independent
document, signed by the client together
with the debt contract.
Did your business suffer during the crisis? What has changed since?Yes, our business suffered with the crisis,
like many others. Although business
decreased during 2008-2010, since 2012 we
are seeing months of improved numbers.
What has really changed in Cofidis is
the way we manage the business itself.
We have moved from focusing mainly on
We have moved from focusing on managing the financing to focusing on managing the debt recovery process
Antoni Arjona is Financial Director of Cofidis in Spain. He joined the company in 2012 with initial responsibility for treasury and insurance services, becoming Financial Director in October 2013. G
ett
y
the management of the financing to
focusing on the management of the debt
recovery process. We like to say we
accompany our clients, as we are with
them through all the process. We want to
be close to our client, we want our client
to feel that we are close to them and that
we understand their needs.
We can adapt the debt collection cycle to
the needs of our clients, offering them
flexible payment terms, and that is what we
do. We have clients that are able to pay back
their debt but may suffer some difficulty
that impedes the process, so we want our
clients to be aware of the issues and feel that
we are helping them to repay those debts.
We are very proud of the result this is
bringing to our business, as it certainly helps
the collection cycle’s efficiency.
Cofidis has some 800,000 clients in Spain
today and is a leader in the consumer
finance business. The speed in approving the
financing package to our clients and the
channels through which the debt can be
requested and set up are key competitive
advantages of the group.
The efficiency in the debt collection process
is crucial for us: every aspect of our collection
cycle needs to run like clockwork. O
The SDD
SEPA has brought harmonised payment instruments across the Eurozone. One of the most important features is the cross-border SEPA direct debit (SDD), now used by many companies. This makes payments more convenient for customers and more predictable for their suppliers, without the need to manage separate direct debit schemes in each country.
W hile centralising payments is
well-established as a way to reduce
costs, streamline processes and connectivity
and improve working capital metrics,
centralising collections, including ‘collections
on behalf of’ (COBO), has proved far more
challenging. Although obstacles remain,
centralising collections is becoming far more
achievable, and the value proposition more
compelling.
Obstacles to centralisationDespite the organisational and technology
implications, centralising payments is
relatively straightforward. After all, a
company is in control of timing and method
used to pay its suppliers, so barriers are
typically internal, which can be overcome
through strong management support. In
contrast, the timing and payment method
used by customers is beyond the company’s
control. This makes it difficult to develop
economies of scale, particularly given the
diversity of payment instruments and
formats. Secondly, commercial sensitivities
about disconnecting credit and collection
teams from local sales operations often arise.
A compelling value propositionDespite the perceived challenges, the benefits
of a centralised collections model and COBO
can be compelling:
Monitoring credit. By establishing
consistent credit controls, companies can
reduce and achieve greater visibility and
control over credit risk and leverage
sophisticated credit metrics and analytics.
For multinational businesses where entities
work with the same customers in different
parts of the world, it is far easier to manage
credit risk at a group level.
Reducing bad debts. Fragmented
collection processes and technology typically
result in inconsistencies in the way that
overdue collections are managed. By
investing in centralised technology and
processes, collection actions can be
undertaken more promptly, with far greater
control and visibility.
Improving customer relationships.
Although sales teams may be concerned that
remote collections teams lack awareness of
customer sensitivities and could damage
these relationships, the opposite is often true.
By reconciling collections and releasing
customer credit limits promptly, errors in
chasing up correctly paid invoices are avoided
Collections centralisation is here – and has some
big benefits for corporates
COLLECT, CONNECT, COMPETE
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14 ISSUE THREE
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Gett
y
Payment infrastructures in many emerging markets are leading to greater opportunities for collections centralisation
domestic and cross-border payments.
Collection accounts can also be located in the
Eurozone country of a company’s choice. One
of the most important new instruments is
the cross-border SEPA direct debit (SDD).
Although there are still some issues to
overcome, such as mandate management,
SDD is convenient for customers and ensures
more predictable collections for suppliers,
without the need to manage separate direct
debit schemes in each country. The B2B SDD
scheme allows this benefit to be extended
across business as well as retail customers.
In addition to the opportunities developing
in Europe, the potential for multi-currency
collection factories is also increasing. XML ISO
20022 is becoming a universally accepted
common standard, streamlining the
exchange of information between systems
and counterparties. The use of cards is
growing internationally, including for supplier
payments, with benefits on both sides of the
transaction. Payment infrastructures in
many emerging markets are becoming more
sophisticated, standardised and automated,
leading to greater opportunities for collection
centralisation.
Driving innovation for competitive advantageAs collections centralisation is a relatively
new concept, not all banks have the expertise
or solutions to support a centralised
collections framework. Without substantial
local and regional solutions and expertise,
challenges may also lie in understanding and
reconciling diverse regulatory environments.
The benefits of doing so can be considerable,
however, with improved control and visibility
over working capital, lower costs, and
significant competitive advantage. O
and sales teams can do more business,
leading to improved revenues with the
customers with the best payment
performance. In some companies, sales teams
remain the key interface with customers for
overdue collections or dispute resolution, but
improved processes and auditability mean
that these actions take place more
systemically with greater accountability.
Rationalising technology. By
implementing a single technology hub for
credit, collections and bank connectivity,
companies achieve improved control and
efficiency and can justify the use of more
sophisticated technology, such as intelligent
credit scoring and monitoring, flexible,
automated processes, comprehensive
analytics and reporting, and automated
reconciliation.
Simplifying bank relationships. Channelling collections through one or only
a few bank accounts is a crucial way of
reducing bank account, transaction and
connectivity costs, and the time taken to
maintain bank relationships. Centralising
collections makes it easier to automate bank
account reconciliation with more consistent,
timely information. This is further enhanced
through the use of virtual accounts (shadow
account numbers per entity/ customer that
link to a physical bank account) to enable
accurate, automated account posting. A
related solution involves using local account
numbers for collecting cash, which then
credit a central account in the same way as
funds paid into this account directly. This
means that customers have a local account
number to pay into, while the corporation
benefits from a rationalised account
structure and accurate reconciliation.
Enhancing working capital. Working
capital benefits are often the primary drivers
of collections centralisation. While the
timing of payments and inventory can be
controlled and predicted, collections –
arguably the most critical element of the
working capital cycle – are far more difficult
to control. By increasing the predictability of
incoming flows, companies can manage
liquidity and reduce the level of working
capital that they need to maintain.
Why now?The barriers to centralising collections are
breaking down. In Europe, payment credit
transfers and direct debits are now
consistent, with no distinction between
System support:
Centralising collections needs top-level backing
�Helen Sanders is Editor of Treasury Management International and a freelance writer, editor and consultant. She was previously Director of Education at the Association of Corporate Treasurers.
WWW.BNPPARIBAS.COM 15
WORKING CAPITAL
Getty
ABS MARKET OPENS UP New programme should make securitisation more competitive, but will it restart a functioning, private ABS market?
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16 ISSUE THREE
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T he ECB’s Asset-Backed Securities
Purchase Programme (ABSPP) is the
key topic of the year for ABS products as it
may signal a turning point in the shaping up
and potential revival of the European
Securitisation market.
The technical bid provided by the ECB
with multi-billion euro purchase capacity
should drag ABS spreads tighter, starting
with eligible asset classes and extending
to non-eligible asset classes. Although the
programme only officially started on 19
November (the date when the Legal Act
was passed), its impact started to be felt
on both primary and secondary markets
much earlier.
The ECB’s stated intention through the
programme, alongside the third Covered
Bond Purchase Programme (CBPP3) and
Targeted Long Term Refinancing Operation
(TLTRO), is to “further enhance the
transmission of monetary policy, facilitate
credit provisions to the euro area economy,
generate spill-overs to other markets and, as
a result, ease the ECB’s monetary policy
stance, and contribute to a return of inflation
rates to levels closer to 2%” (ECB Governing
Council, 19 November, 2014).
Does the ECB ABSPP represent an efficient
tool to help achieve such a stated goal? A
significant tightening in ABS spreads will
incentivise originators to resort to
securitisation technology to secure efficient
funding for their loan portfolios as
securitisation becomes another competing
funding alternative, alongside covered bonds
and TLTRO. However, the sale of mezzanine
and junior ABS notes remains the key
condition to achieve any regulatory capital
relief, balance sheet reduction and asset
derecognition for issuers.
To what extent will the ECB’s ABSPP help
in making mezzanine and junior notes more
attractive to investors? We believe that the
ABSPP impact on the ABS market revival
would be far more effective if it was
accompanied by more accommodative
changes in the securitisation regulatory
regime (such as capital charge reduction on
mezzanine ABS pieces under Solvency II and
Basel III for insurers and bank investors,
more favourable LCR treatment).
ABSPP: What we know about the programmeAs the ABSPP is dominating headlines, with
the first purchases imminent at the time of
writing, we thought it would be
worthwhile to provide a summary of facts
and known details of the programme.
June conference: The ECB announced the
preparation of its ABS Purchase Programme
in its June Governing Council meeting,
alongside a series of accommodative
measures to curb deflationary trends in the
eurozone, such as rate cuts and the TLTRO
programme, providing attractive financing
on private, non-financial sector assets,
excluding residential mortgages. The June
announcement had a direct effect on
secondary ABS spreads, especially on senior
peripheral RMBS bonds (5-year generic
Spanish senior RMBS tightening from
120bp to 95bp in June alone).
September conference: In early
September, the ECB officially confirmed the
pending ABS Purchase Programme. The
ABSPP will be done in conjunction with
CBPP3. Blackrock Solutions was selected as
consultant to help design the programme.
Following a volatile summer, this
announcement marked the return of the
ABS spread compression trend across all
ABS sectors (eligible or not), with peripheral
bonds rallying the most (5-year generic
Spanish senior RMBS tightening from
mid-110bp to mid-80bp in September).
October conference: On 2 October, the
ECB released the details of the ABSPP and
CBPP3 programmes. The programme size
was not specified, but the ECB implied that
it is aiming at a €1 trillion balance sheet
increase, including ABSPP, CBPP3 and
The real test is whether the mezzanine and junior part of the capital structure is more attractive to external investors
Close call: ABS spreads will narrow
TLTRO. CBPP3 covered bond purchases
started in mid-October. As of 14 November,
the ECB had purchased €10.4bn of covered
bonds. In contrast with CBPP3, where the
ECB directly executes the purchases,
ABSPP will involve four asset managers
(Deutsche Asset & Wealth Management
International, State Street Global Advisors,
ING IM and Amundi Intermédiation)
assisting the ECB in pricing and
preselecting the bonds, with the ECB
making the final decision.
On 19 November, the ECB published the
Legal Act for purchases of ABS, officially
launching the programme. ABS securities
need to satisfy a list of conditions to be
eligible for ECB purchase. We list the main
eligibility conditions below.
ABSPP eligibility conditionsThe ABS bonds need to be:
X Eligible under the collateral framework
for Eurosystem credit operations
(ECB-repo eligible bond, see summary
of conditions below).
X Denominated in euro; have issuer
residence within the euro area; have at
least 95% of the underlying properties/
assets backing the ABS residing in the
euro area; and denominated in euro.
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WWW.BNPPARIBAS.COM 17
WORKING CAPITAL
Consumer, Lease, Credit Card and
SME ABS.
X Seniority: most senior classes only.
X Ratings: rated by at least two
rating agencies.
X Collateral: homogeneous pool of assets.
Loan level data requirements.
X Minimum rating: second-best rating
of at least A-.
Temporary framework:X Same conditions as Permanent
framework, except for minimum ratings.
X Minimum rating: second-best rating of
at least BBB-.
Additional requirements:X Servicer Continuity Provisions: the
legal documentation should include
provisions regarding servicer
replacement triggers for the
appointment of a back-up servicer
or of a back-up servicer facilitator
(with no more than 60 days to find
a suitable back-up servicer).
X Collateral requirements: there should
not be any addition of non-performing
loans in the collateral and no
structured, syndicated or leveraged
loans in the collateral.
It is important to monitor the bond universe closely as any rating change may adversely impact bond pricing
obligors classified as private
sector non-financial corporations
or natural persons.
X ABS bonds from Greece or Cyprus with
second-best rating below BBB-: meet
specific conditions on ratings (second-best
rating at the maximum achievable rating
in the jurisdiction), minimum credit
enhancement (25%), minimum rating of
all counterparties (first-best rating of at
least BBB-), full back-up servicing
provisions, conditions on reporting
and cash-flow modelling.
X The ECB cannot purchase more than 70%
per ISIN (except for Greek and Cyprus ABS
bonds with second-best rating below BBB-
with 30% maximum purchase limit).
X For bonds fully retained by the originator
at the time of purchase assessment, a
part of that same tranche needs to be
sold to an external investor (with no
link to the originator).
ECB repo eligibility conditions
ECB repo eligibility conditions operate
under two frameworks: the permanent
framework and the temporary
framework. The temporary framework
was first introduced in March 2013 and
was aimed at relieving constraints in ECB
collateral eligibility to help support
liquidity in the eurozone. This framework
allows for the eligibility of lower rated
bonds (second best rating of at least BBB-),
but has additional constraints attached to
it, such as servicer continuity provisions
and collateral conditions.
Permanent framework:X Asset classes: RMBS, CMBS, Auto, G
ett
y
European Central Bank president Mario Draghi hopes boosting credit provisions to the euro area economy will have a positive knock-on effect on other markets.
Sizing the ABSPP-eligible universeThe list of ECB repo eligible ABS posted on
the ECB website as of 20 November consists
of 901 bonds. After removing a few GBP
denominated bonds and a few non-applicable
shelves, we size the ABSPP-eligible
outstanding universe at approximately €600
billion (more than 850 bonds). We believe
that the great majority of this target
universe consists of ‘retained’ tranches,
i.e. kept with the originator and not sold to
outside investors.
Out of the c.€600 billion ABSPP-eligible
universe, 98% have a second-best rating of at
least A- (eligible under the ECB permanent
framework) and 2% have a second-best
rating in the BBB category (eligible under the
ECB temporary framework). These BBB bonds
consist almost exclusively of Spanish RMBS
and SME bonds. Their servicer continuity
provisions were deemed adequate by the ECB.
Non-eligible BBB rated bonds (with
inadequate servicer continuity provisions)
may become ABSPP-eligible once they are
upgraded and their second-best rating
becomes at least A- (since servicer continuity
provisions would not apply under the
permanent framework).
Alternatively, bonds with a second-best
rating of A- and inadequate servicer
continuity provisions risk losing their ABSPP
eligibility once they are downgraded and
their second-best rating drops below A-.
Although their legal documentation could
always be amended to allow for adequate
servicer continuity provisions (as has been
done in a few instances recently), we believe
it is important to closely monitor this bond
universe as any rating change may adversely
impact bond pricing. The recent changes in
the S&P sovereign ceiling methodology may
make such downgrades more likely
(especially in peripheral ABS sectors).
We report c.90 ABS bonds with current
second-best rating of A-. Some of these bonds
could lose their ECB eligibility depending on
FOCUS
18 ISSUE THREE
FOCUS
their servicer continuity language in the
event of downward rating migration.
ABS bonds with their ratings on the cusp
of both frameworks (second-best rating in
the A to BBB range) could be subject to
opportunistic trading strategies, based
on their servicer provisions language
and future rating migration.
How efficient a tool will the ABSPP
be in reviving the ABS market? Although we have seen the initial benefits of
the ABSPP even before the start of the first
purchases in the significant ABS spread
tightening (in both primary and secondary
markets), the full impact on the European
ABS market and on the revival of new issue
securitisation remains to be seen. As stated
earlier, we believe that the impact would be
far more effective if it was accompanied by
more accommodative changes in the
securitisation regulatory regime (especially a
capital charge reduction on mezzanine ABS
pieces under Solvency II and Basel III for
insurers and bank investors). We understand
these potential changes are currently under
tranches may make ABS an efficient
funding tool. New issue ABS volumes
could increase due to the increasing
competitiveness of ABS funding
versus other funding solutions for
loan originators (although we
believe that this effect is limited
without fully achieving all benefits
from the securitisation technology,
as discussed above).
On the negative side, the presence of the ECB
with multi-billion euro purchase capacity
could crowd an already limited investor
base and make the product less attractive to
traditional ABS investors, absent a pickup in
new issue supply.
ConclusionWe expect the ABSPP implementation to
have a positive effect on new issue and
secondary spreads, making securitisation a
more competitive funding tool for
originators. New issue volumes could
experience a pickup driven by increased
demand on senior tranches and fresh
origination activity helped by the sale of
retained tranches from originators.
However, the full effectiveness of the
programme will be judged on its ability to
make the mezzanine and junior part of the
capital structure more attractive to external
investors. The sale of mezzanine and junior
notes helps achieve additional securitisation
benefits, such as regulatory capital relief and
balance-sheet reduction. The sale of
guaranteed mezzanine tranches to the ECB
could help to some extent, but might not be
enough to restart a functioning private ABS
market that will facilitate credit provisions
to the eurozone economy. The revival of
such a functioning private ABS market will
require more accommodative changes to the
current securitisation regulatory regime. O
Opening up: The ECB programme must be attractive to external investors to work
Mahesh Bhimalingam
is Head of European
Credit Strategy for BNP
Paribas. He has over
14 years‘ experience
in capital markets,
including leveraged
finance, credit strategy
and trading.
consideration, but it may take time before
their full implementation.
In the absence of any regulatory regime
change, we still believe that the ECB’s ABSPP
could have some positive impact on European
securitisation in the following ways:
X Spread tightening on the senior
tranches may make mezzanine
tranches more attractive. Continued
tightening on senior tranches could
allow for a redistribution of spread
towards the mezzanine part of the
capital structure, making it more
attractive to outside investors. This
reallocation of spread premium to the
lower part of the capital structure
might help in the sale of mezzanine
and junior notes.
X ECB’s purchase of guaranteed
mezzanine tranches: although the
details are yet to be released, such
action could help with the placement of
mezzanine and junior pieces and
achieve regulatory capital relief and
balance sheet reduction.
X Spread tightening on the senior
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