A Single Port of Call for Financing Receivables Portfolios
by Sebastian Hölker, Head of Structuring and Implementation of Supply Chain Finance Products, Global Transaction Banking, Corporate & Investment Banking, UniCredit
For a long time, corporates have had difficulties financing their entire receivables portfolios, at least when they didn’t fit into large-scale securitisation programmes. Collaboration between banks and existing factor-insurer partnerships promises to finally put an end to this problem, says Sebastian Hölker, Head of Structuring and Implementation of Supply Chain Finance Products at UniCredit.
Many corporates – for many years – have found that neither banks nor factoring providers are prepared to fully take on their receivables portfolios. Both tended to ‘cherry-pick’ according to their respective preferences – often leaving the customer with certain debtors excluded from the supply chain finance activities.
But why, one might ask, is it important to corporates that their complete receivables portfolios are financed, given the current abundance of liquidity in the market?
In fact, corporates continue to generate strong demand for receivables finance. Risk and liquidity management, of course, remain an incentive, but there are other benefits to selling receivables. For example, a sale without recourse reduces a firm’s days sales outstanding, optimises its working capital and can improve debt/equity ratios. With these values seen by many as key indicators of a company’s performance, treasurers keep seeing receivables finance as an excellent way of maintaining financial health.
The portfolio problem
Yet some receivables portfolios remain unattractive for factorers, and others for banks. For instance, receivables against just one or two large debtors or portfolios with strong concentrations of similar debtors can be problematic for factorers whose credit insurers manage risk by diversification. Those constellations are more likely to be of interest to a firm’s bank – as banks have to assess debtors on an individual basis. Indeed, banks are usually happy to finance large amounts relating to individual debtors, provided these debtors are creditworthy.
On the other hand, selling to a factorer is usually a more suitable solution if a firm’s receivables portfolio features a range of small debtors. Factorers work together with insurance companies to specialise in diverse portfolios, which allow them to take a scoring approach, using statistical analyses and mathematical models to determine risk across a spread of different debtors – without needing to assess each of their individual balance sheets.
The difficulty is that in many cases a firm’s receivables portfolio does not fit neatly into either of these moulds. Many portfolios have too great an exposure to specific geographies, industries, or even individual companies, for factorers to take on. These same portfolios often feature a range of different debtors – making them equally unsuitable for banks, which would have to assess each debtor individually.
Consequently, corporates often have nowhere to go to factor their entire portfolios. Finding a solution, however, could simply be a matter of putting the right people together – which is exactly what is happening at UniCredit.
Collaboration the solution
UniCredit is currently working with several insurance companies to produce a single solution – one involving collaboration, with the aim of taking on all kinds of receivables portfolios together. This kind of collaboration has the potential to be highly effective, since the weaknesses of each are offset by the strengths of the other: the bank can account for the large debtors and concentrated risks in a portfolio, while the insurance company takes on the smaller debtors.
Of course, at first glance this seems an administrative challenge. Yet recent advances in digitalisation will allow banks to share data on a secure basis with their corporate and insurance partners – enabling banks to act as the fronting entity for the partnership while uploading entire receivables portfolios onto its system.
With UniCredit, the solution leverages on the state-of-the art receivables finance technology that UniCredit has recently established. This facilitates the data transfer from and to the corporate treasurer and provides the latter with all kinds of reports and alerts to give him maximum transparency about what is going on with his receivables, and how he can make best use of this asset type.
Clearing the path
Presenting clients with a united front for these operations is not without its complications, however. For a start, banks and insurance companies are subject to very different sets of regulations – ones not developed with harmonisation in mind.