Clarissa Dann Welcome to Trade Finance TV in lockdown. I’m Clarissa Dann, and with me in my working from home studio is Michael Dietz (Deutsche Bank), John Bugeja (Trade Advisory Network), Enrico Camerinelli (Aité Group), and Parvaiz Dalal (CITI). They’re here to talk about how COVID-19 is affecting liquidity and how payables finance and supply chain finance solutions are helping out.
COVID-19 has really been knocking around supply chains and we hear all over the place how they’ve been dislocated, upturned and how manpower just isn’t there to fulfill some of the orders and the demands falling away, too. What are you seeing?
John Bugeja Physical supply chains have been evolving over the last few years in an interesting way. Anyway, prior to COVID-19, we’ve seen a bit of a reversal from the long-term trend towards globalization, partly due to protectionism or trade wars, partly due to the green agenda and sustainability. But also technology has played a part as well, so some of the low labor cost advantages enjoyed fx in Southeast Asia have become less of an issue where robotics have been employed in the manufacture of products. So there’s already an underlying shift. And then you have COVID-19.
Michael Dietz When we observe which of the shock scenarios is actually making more sense, is it 9/11? Or the 2007-2008 when the world was equally in shock? I would say it’s more like 9/11, because of course you cannot compare the situation, but nevertheless, people hope and people are convinced that we somehow will get back to a normality, or let’s put it in that way; to a life which allows us to coexist even in COVID-19 times. And that is actually the key to what is happening now, and the thinking of the corporate trust plays a big, big role. And corporates do want to know what can be done in order to safeguard their entire business. It’s about making sure that you are ready whenever day zero starts and you have the ability to interact in the market.
Enrico Camerinelli The situation today is quite different from what we saw in the post-Lehman crisis, not only because that was a financial crisis and this one is economic, but mostly because the way that companies and banks operate today is going to affect their brand reputation. It’s almost unethical now to lay off people in this current situation. And therefore, also, while you say the usual techniques of optimizing working capital, i.e. cash in or collect ASAP and pay-as-late-as-possible, and even to say keep your inventories at a minimum, they are being disrupted because all of these activities have to be done. So taking into consideration the counterparty; being the client when it comes to receivables, being the supplier, when it comes to payables and also the inventory, given that everybody’s expecting a quick ramp up of the business as soon as the pandemic releases, you cannot afford not having your goods in stores. And so the way that working capital drivers are being sort of optimized is quite different from what is the usual practice. So corporate treasurers of large or small companies are telling us that they expect their bank partner to really give them the right advice of what’s happening and give them guidance on how they see things moving forward.
Michael Dietz This holds true for our entire business right now. Whatever we’re discussing, we’re discussing, how can we help in a way that suppliers will be secured, that supply chains will be safeguarded, and that the readiness to go back into business is given by all means.
John Bugeja We tend to talk to the tier 3 suppliers mainly. So you have the big automotive manufacturers, then you have the big tier 1s who are themselves major global corporates. And then you have the tier 2’s who are actually SMEs or maybe medium sized companies. And everyone at the end of the chain, the manufacturers and the tier 1’s; they will want to keep stock down to zero. So they have a Just-In-Time model.
Our clients, the SMEs can’t force the same behavior onto their suppliers in Southeast Asia, because they’re even smaller than our clients. So what that means is the parties in the supply chain who have the least financial power are the parties that end up carrying all the stock. Now, if you overlay COVID-19 onto that scenario, the manufacturers have stopped manufacturing, so they’re not calling off the stock.
In many cases, the tier 1’s are sitting on stock supplied by the tier 2’s, but haven’t paid for it yet. Remote invoice won’t allow it to be invoiced, because they are holding it on consignment, they only regard the points of sale, even though they’re sitting on the stock, it’s in their warehouse. When the individual items cross that threshold from the warehouse onto the production line, that’s the point of sale. And then they authorize the issue of an invoice, often by self-invoicing. So, you know, if you look at it from the point of view of a tier 2smallish company, weak finances, poor balance sheets, and suddenly they’re sitting on masses of stock, typically not under their control, it’s the wrong side of the world and they’ve got no cash and no sales.
Clarissa Dann I did see that the Bank of International Settlements reckons that around 50% of firms are not going to be able to cover their interest payments. They just haven’t got enough cash. How are you seeing the liquidity situation at the moment in these COVID-19 times?
Parvaiz Dalal There is always a risk when the environment is uncertain, but if you look at the nature of the trade, which is shot-gun and self-liquidating, it is still the most preferred asset from an investor perspective. Moreover, trade finance securities are always linked to the commercial flow which can be tracked and the payments are made once a trade is completed. So for now, it is mainly around adjusting the terms so that the suppliers can fulfill the contract.
Enrico Camerinelli I have to say, first of all, that the money is there. We see trillion or multibillion euro or dollar stimulus packages, so the money is there. But it’s important to ensure, and this is more on the regulators and the bank side, making sure the money goes to those really who are in most demand, typically small and medium enterprises.
In terms of liquidity management, visibility is a real issue, especially n regards to the smaller the size of the company and therefore the less investment they have in IT supporting applications, giving them less visibility of what their cash needs are, or if they have sources of cash internally before going out and seeking for more borrowing. And this is why I believe the whole open banking framework and APIs application programing interfaces could be the sort of solutions that banks could use, to provide what I call a ‘light touch’ or a thin layer of Treasury application that the small and medium enterprises can use, to really see what the cash positions are and understanding where they really are and the need for more liquidity.
Michael Dietz Quoting BIS, I have my doubts. Money is cheap, money is available and sourcing of liquidity is still possible, but not as possible as it was half a year ago. It has become a resource of bank relationships, a resource of good credit relationships, and it has become again a matter of trust. For instance, we at Deutsche Bank, we know that this will be a difficult time. On the other hand, that’s also the time when you want to be there, you want to be there for your customers and you want to make sure that the right customers and the friends of the respective firm are supported and both survive the crisis.
John Bugeja What Michael has described, I think, is a very accurate portrayal of the scenario of the major multinational corporate world. But more than 50% of GDP fx, of the UK, is driven by SMEs.
SMEs have always had a problem accessing liquidity at a reasonable price, so interest rates are incredibly low right now and that should translate into a low cost of funds, but for SMEs, that hasn’t been the case. So many SMEs are paying 12-15% per annum for their finance when it’s available. And that’s often not through the banks, that’s often through the FinTechs. And it’s not so much about the next round of interest payments. Their problem is going to be paying the overheads, paying the regular bills that they have to pay in order to keep in business when their turnover has collapsed.
So there’s going to have to be greater availability of funding for them at reasonable prices for a good while. It’s not just a question of a few months. This is going to be for a good while because they won’t recover that quickly. I think certainly in the UK, we’ve seen positive action from the government to encourage the banks and to provide guarantees support to the banks. If it’s difficult for the banks to to mobilize those funds, I was talking to a bank earlier on in the crisis where the instructions were to only lend the money to companies that were viable, but by and large, nobody is viable, so the government loosened that restriction subsequently, so they’ll just lend the money.
Michael Dietz Of course, the limitation correlates with the size of the respective corporate because you have to make sure that the entire value chain is warranted. And this is much easier to be made visible once you are an MNC instead of being an SME or a small corporate. Nevertheless, the government in Germany has started to support, first of all these programs, which have been roughly 90% of the respective liability size. So 10% was the burden of banks. And now the latest change has been made in order to ensure that the government has the ability to even shrink that down to zero percent and then takes the full burden. We hope that this, in particular in this current situation will help to support as a means, and I’m absolutely with you that this is necessary in order to ensure that this works.
Clarissa Dann Well, the liquidity situation is all the worrying, but supply chain finance and payables finance platforms are coming to the rescue, aren’t they? Or is there a problem because of the general lack of trade going on?
Parvaiz Dalal We have seen increasing the new request for offering supply chain financing in the recent past from multiple sectors. Now, I would like to give two examples. We supported one of the large companies in India to import PPE equipment by executing the import for them in a close coordination with the foreign exchange credit and operations team within the bank. We helped another government in Asia to import equipment for the first time and help execute this transaction by explaining the counterparty risk and mitigations put in place and successfully helped to procure the equipment in record time. We are using our global network to help support traditional letters of credit and once payment guarantees open up our own supply financing to fulfill the society need in this difficult time.
Enrico Camerinelli Regarding liquidity management, this is a call to attention for supply chain finance platform providers. The onboarding with small enterprises could be easier, but not because these enterprises really need us. Of course they need liquidity, but it could be that jumping on the supply chain finance platforms would have the needed result for especially mid-sized and small companies that have a lack of free cash forecasting and cash position application, and then eventually using it as a way to access funding providers. The risk could be if the supply chain finance platform providers are not careful, because that would have a very high impact on onboarding of small and medium enterprises, but not an equivalent with a flow of financing transactions on that same platform.
John Bugeja In the early stages, the programs generally will be increasingly used by the SMEs for invoices that have already been approved by the buyers, obviously goods have already been shipped and accepted. So their drawing down on those facilities as fully as they can because they need the cash, but that will come to a bit of a shuddering stop when they stop shipping and invoices do not get approved and that finance goes away. As the shipments restart, the availability of finance on those programs will be a little too late in the cycle to really help the SMEs. They’ll need the finance before they ship, especially if they’re manufacturing or producing or sourcing. So something else is going to be required.
Michael Dietz Well look, I mean, there’s a base assumption, which we make and that is that supply chains will not break down, there’s no interest from a global perspective. And I totally share John’s assessment on globalization. Nevertheless, there will be a high interest for many parties to retain whatever is in place. I mean, just as a side note, the German government spends roughly 80% of the amount which was spent for the German reunification, to ensure that such a stretch will take place and that we will have the ability to retain the supply chains for the time being.
Clarissa Dann We’ve been hearing an awful lot about digitalization. This pandemic has made this a not-nice-to-have, but have-to-have. What do you think?
Michael Dietz Digitalization in the area of what the customer does not see will be elevated tremendously, because you can see now that the work location and the ability to interact is actually much more remote from where you are than everybody anticipated. Trade still remains the mother of all paper-based businesses. We need to find ways of how to get rid of it, but this won’t work on a one on one basis, it would be a concerted action amongst all banks because all would benefit from it. And last but not at least, the customer would have security, fraud free, in order to know what’s going on.
Enrico Camerinelli My expectation is that these trade finance platforms, supply chain finance platforms, so anything that will digitalize trade transactions will have to be given for free. So the revenue model is more on, what is the value of the applications that will be offered on top of these platforms that will have the objective of creating as much transaction volumes as possible, and making money out of the added value services. But with APIs open banking, this is where banks will start competing, not in terms of the technology they are offering, but in terms of the services they provide.
John Bugeja In the past, digitalization was seen as primarily an efficiency play to take some cost out of the process, to reduce delays, to reduce errors and so on. But it was always very difficult in the banks to build a business case, to deliver cost savings and cost efficiencies, which cannot be proven because everything is new, because it’s innovation. Suddenly it’s urgent. And suddenly banks are saying, is this going to support our recovery from COVID-19? Is it going to be a business continuity issue? If it is, it goes to the top, so all of that is good.
But the challenges aren’t so much technology. There are solutions out there. There are consortia out there. The problem is scale and the fact there are so many parties involved in every supply chain and they’re from all over the world and very different industries in a single supply chain. And they have different legal systems. And it’s the legal systems that sometimes get in the way, you can have a perfect technology solution, but it doesn’t stand up in law unless you have a contract involving a group of people, a discreet closed group that all signs up to a particular interpretation of an electronic record fx. That inhibits adoption and scale massively. So I think one of the priorities now is actually for the governments across the world to say, ‘we need to take some relatively simple, but very urgent steps to make it possible in law to recognize things digitally, which historically have only been possible in paper.’
Parvaiz Dalal Thanks to all the good work and investment done by our business, supply chain has created a full digital capability, starting from onboarding of supplier, which has seen increased demand during this period. And we are able to handle smoothly and successfully, operating remotely to the actual financing and repayments from our client. We are able to reach out to a much wider area, supporting e-commerce from the supply chain of the equation, providing a much wider coverage.
Do you think the cycle times wary significantly, thereby supporting the working capital with the short term churn? One of the biggest themes during the pandemic was continuity of our operations and non-disruption of the financing regime to all the suppliers and the buyers, digitally across the globe, and we have clearly demonstrated a continuity in our operations during this difficult time.
Clarissa Dann I’d like to thank all my experts for their insights today and, of course, all of you for watching. To see more news and views, go to TRADEFINANCETV.NET. We look forward to seeing you again soon.