ITFA Newsflash

ITFA is aware of recent concerns raised about the supply chain finance market and related-insurance cover. ITFA has provided its members with guidance on payables finance dating back to October 2018 highlighting the importance of the correct use of this critical trade product which has performed well during the Covid-19 pandemic with many programmes expanding both in size and scope of supplier capture. We continue to recommend that guidance. Additionally, we have provided extensive guidance on using insurance successfully to support trade transactions, backed by surveys validating the product, which stands.
 
We feel it is opportune to clarify why supply chain financing is a valuable tool to support the real economy and how insurance is a reliable partner to the financial institutions involved in this activity.
 
Supply chain finance (SCF) plays an important role in providing working capital to corporates enabling trade. This covers a number of different techniques including payables finance (also known as reverse factoring), defined in the Global Supply Chain Finance Forum’s “Standard Definitions for Techniques of Supply Chain Finance” produced with ITFA and other industry sponsoring associations is defined as follows:

Payables Finance is provided through a buyer-led programme within which sellers in the buyer’s supply chain are able to access finance by means of Receivables Purchase. The technique provides a seller of goods and services with the option of receiving the discounted value of receivables (represented by outstanding invoices) prior to their actual due date and typically at a financial cost aligned with the credit risk of the buyer. The payable continues to be due by the Buyer until its due date.

As it is a buyer-led trade finance product, which provides greater access to finance for suppliers hinging on the strength of the buyer, its traditional use is with strong multinational buyers as obligor. It is also traditionally a totally uncommitted product. It is not an appropriate tool to be used for obligors with deep liquidity issues or those without other sources of stable financing given this uncommitted nature. It is effective for aligning working capital cycles for the obligor, and then providing suppliers with options for early payment given their own working capital cycles.
 
Given the size of traditional and suitable obligors and the extent of their supplier base, the programs can be very large. For this reason, liquidity and stability of the financier is key, so largely these programs are mostly run by large global financial institutions, supported successfully by other large financial institutions whether by insurance or through participations. Non-banks have successfully arranged many programmes but these have mostly been funded by traditional banking institutions. Large global banks for example have the benefit of vast and stable liquidity as well as extensive relationships with the obligors. They benefit from strong procedures and resources to screen and on-board suppliers again driving stability.
 
The guidance here that ITFA issued in 2018 in response to the Abengoa and Carillion uses of payables finance which were deemed non-traditional and thus at odds with payables finance definitions, continues to be applicable today and should be considered when assessing such programs. The red flags highlighted here continue to be critical in addition to adhering to the intended product use described above:

1. Payment terms far beyond industry norms
2. Buyer assuming costs
3. Additional collateral
4. Relatively large size of the program
5. Buyer re-paying beyond maturity
6. The facility is committed

This guidance continues to be applicable and the ITFA data on the successful use of insurance as a tool to support global trade reinforces the points above. Claims paid data showed in 2020 that this type of mitigation proves absolutely reliable even in difficult times.
 
Payables finance will continue to be a sustainable form of financing trade supporting corporates across their supply chains, and insurance will continue to be a critical tool in supporting such transactions.  
 
Bank-Insurance relationship have been built up over years. Banks using insurance for their SCF activities know that insurers – just like the banks themselves – are subject to strict credit and compliance processes. Both industries are complementary as they have different ways to manage and provide for risk. Thanks to this know-how and relationship of mutual trust, working capital needs of corporate clients can be supported consistently through difficult cycles.