Trade Finance Financing Receivables - Structures and Issues - Presentation by Geoff Wynne, Partner and Sam Fowler-Holmes, Partner - Sullivan & ...

Trade Finance

Financing Receivables –
Structures and Issues

Presentation by Geoff Wynne, Partner and
Sam Fowler-Holmes, Partner

Thursday 25 March 2021

What this presentation will cover
       Overview of receivables finance
       Growing use of Platforms
       Structuring with SPVs
       Selling down receivable transactions
       Selling to non-bank investors
       Current issues in documenting
       Issues from the Greensill fallout
       What happens next?

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What is a receivable?
        Who’s asking?
         ›   Right to receive payment – asset of the seller
         ›   Obligation to make payment – liability of the buyer
        Chose in action
         ›   ‘pure’ intangibles
                Open account trades
                Letters of credit (sight, deferred)
         ›   Documentary intangibles (i.e. a bill of exchange or promissory note)
        Existing vs future receivables
        Each sale and purchase, from raw material to finished product, can create a
         receivable which could be the subject of financing and can be financed in a range of
         different ways
        Other types of receivables

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Some law – legal and equitable assignments
       Legal / statutory / s136 assignment
        ›   In writing
        ›   Signed by the assignor
        ›   Must be absolute and not by way of charge
        ›   Whole of the debt
        ›   Notified to the debtor
       Equitable assignment?
        ›   Clear intention to transfer the receivable
       Does the distinction matter?
        ›   Practical impact being eroded in most cases
       Notice – does it matter?
        ›   Priority
        ›   Discharge of the debt
        ›   Further equities
        ›   Amendments to contract

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How do you finance a receivable? (1)
       Loans (or other financing) relating to receivables vs receivables purchase
       Industry guidance
        ›   Global Supply Chain Finance Forum (GSCFF)
               Standard Definitions for Techniques of Supply Chain Finance (2016)
               Receivables Discounting Technique (June 2019)
               Payables Finance Technique (November 2020)
        ›   BAFT – Payables Finance Principles Criteria (September 2020)
       Receivables Discounting
        ›   Sale of one or more receivables by a seller of goods or services to a financier at a discount
        ›   Often made available to larger corporates
       Factoring
        ›   Receivables are sold by seller to financier (the ‘factor’) at a discount
        ›   Factor typically takes on a greater role including colleting receivables, debtor management
            and potentially default protection
        ›   More focus on SMEs

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How do you finance a receivable? (2)
       Forfaiting
        ›   Sale of receivables that are typically represented by some form of independent payment
            instrument (bills of exchange, promissory notes and letters of credit)
        ›   Many jurisdictions have different rules relating to certain of these types of instruments
       Payables Finance
        ›   Buyer-led structure - financier’s customer is the buyer
        ›   Sellers in the buyer’s supply chain can access receivables finance via receivable discounting
        ›   Key characteristic is an unconditional and irrevocable undertaking to pay the receivable in
            question
       Loan Financing
        ›   Financing (debt) provided in connection with receivables or assets that are expected to
            generate receivables rather than via receivables purchase (as with methods listed above)
        ›   Debtor / creditor relationship rather then seller / buyer – can be secured or unsecured

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Receivables discounting – basic structure
                                 1. Supplies goods/services and invoice
     Debtor                                                                            Supplier
     (Buyer)                                    Supply Contract                         (Seller)

                                           4. Payment of face value of
                                              receivable on maturity
                                                       date

           5. On-payment of
              face value of
             receivable on
             maturity date
                                                        3. Payment of discounted
                                                      purchase price in exchange for
                                                         assignment of receivable

                                          Receivables Purchase Agreement
     Financier
                         2. Details of invoice and request for financier to purchase

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Receivables discounting – commercial
motivations
       Seller
          ›   Quicker access to cash and working capital benefits
          ›   Alternative access to finance and potentially at cheaper pricing
          ›   Risk (buyer, geography, industry) mitigation
          ›   Potential operational benefits (financer as collection agent)
          ›   Ability to offer better payment terms
          ›   Balance sheet benefits
       Buyer
          ›   Potentially better payment terms

       Financier
          ›   Relationship product
          ›   Diversify portfolio

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Typical structuring points
       Committed or uncommitted
       Sale of all or part of receivable?
       Level of recourse
        ›   Without
        ›   Limited
        ›   Full
       Disclosed or undisclosed?
       Collection arrangements
       Insurance

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Key risks to consider
        Performance risk of Seller
        Default or insolvency of the buyer
        Political and country risks
        Fraud
         ›   Non-existent goods
         ›   Inflated invoices
        Double funding
        Security over receivable
        Assignability and perfection steps
         ›   Restrictions on assignment or other conditions
         ›   Perfection of assignment
         ›   Recognition of ownership under relevant laws in cross-border transactions
        Challenges to sale
        Due diligence and transaction monitoring is key

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Payables finance – basic structure
      Debtor                                                                                    Supplier
      (Buyer)                                                                                    (Seller)
                                       1. Supplies goods/services and invoice
                                                        Supply Contract

                                                                                     4. Request for
                                                                                       financer to
             6. Notice of                                                               purchase
            assignment of                                                              receivable
              receivable                                                                 (manual
                                                                                     discount only)
                                                      Service Provider/
       7. Payment of face value of                                                5. Payment of discounted
                                                          Financier
          receivable on maturity                                                 purchase price in exchange
                   date                                                         for assignment of receivable

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Payables finance – commercial motivations
        Buyer
           ›   Potentially improved payment terms with seller
           ›   Supporting sellers and securing supply chain
           ›   Operational efficiencies
           ›   Working capital benefits
        Seller
           ›   Access to cheaper source of financing
           ›   Balance sheet management
           ›   Working capital and cashflow benefits
           ›   Risk mitigation
        Financier
           ›   Typically good quality asset with short term exposure
           ›   Relationship product
           ›   Diversify portfolio

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Typical structuring points
        Two agreements in the structure:
         ›   Payment Services Agreement / Buyer Agreement
         ›   Receivables Purchase Agreement
        Committed or uncommitted
        Timing of undertaking to pay arising
        Role of financier as paying agent
        Without recourse – what does this mean?
        Use of platform

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Key risks to consider
        Default or insolvency of the buyer
        Fraud
        Security over receivable
        Assignability and perfection steps
         ›   Restrictions on assignment or other conditions
         ›   Perfection of assignment
         ›   Recognition of ownership under relevant laws in cross-border transactions
        Challenges to sale
        Due diligence and transaction monitoring is key

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True sale
        Usually a key driver for the seller to remove receivable from its balance sheet
        Distinction between legal true sale and accounting true sale
        No ‘one-size fits all’ approach to legal true sale analysis or to address re-
         characterisation risk
        Some guidance laid down in Re George Inglefield as applied by the Court of Appeal in
         Welsh Development Agency v. Export Finance Co. Ltd.
        Holistic approach needed – description of the arrangements not conclusive
        In the absence of a sham transaction, English courts generally reluctant to interfere
         in the contractual arrangements of sophisticated parties

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Electronic platforms
        Ever increasing number of platform providers
         ›   Bank ‘owned’
         ›   Third party providers
        Do they solve all problems?
         ›   Operational efficiencies
         ›   Recording of transactions
         ›   But no set of standard terms in the market place or interoperability of platforms
        Important to understand how the platform operates and who is involved
         ›   Platform provider only
         ›   Platform provider with additional role (e.g. account holder)
         ›   Platform provider and active participant
        What liability does the platform provider have?
        What performance standards are being agreed to?
        How does a participant acquire rights against another participant?

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Use of SPVs – the basics
        An SPV is a legal entity created for a specific, limited purpose
         ›   Transaction specific
         ›   Specific form of financing or transaction
        There are a number of different legal forms depending on the relevant jurisdiction
         ›   Limited liability company
         ›   Limited liability partnership
         ›   Others
        Legal, commercial, tax and accounting issues underpin everything
         ›   Ring-fencing of assets
         ›   Insolvency remote vehicle
         ›   Better financing terms
         ›   Off balance sheet treatment
         ›   Varied Investor terms

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Use of SPVs in supply chain finance
        Typical structure
         ›   Receivables can be pooled and sold to the SPV at a discount
         ›   Purchase can be
                by way of a specified pool of receivables
                on a revolving basis
         ›   Options for funding
                Note/bond issuance etc. (capital markets)
                Bank/alternative funder debt
         ›   Watch out for specific considerations
                Funding mismatch
                Servicing issues

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How does it work (at its simplest)?

                                                Seller/
      Debtor
                                               Originator
                              Sales Contract

                                      SPV

                                                            Financier/
                                                            Investors

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Supply chain finance in 2020
    Supply chain finance was already a practice under fire
         ›   Continuing fallout from the collapse of Carillion and Abengoa
         ›   Securities and Exchange Commission (SEC) report from end of 2019 on disclosure
         ›   Rating agencies warnings about characterisation
         ›   Report of Australian Small Business and Family Enterprise Ombudsman April 2020
         ›   Media reporting of abuses of practice and exploitation of suppliers
    The impact of Covid-19
         ›   Significant rise in requests for supply chain financing as other forms of liquidity unavailable
             and cash flows dried up
         ›   Range of different supply chain finance products being used
         ›   SEC notice in June – again on disclosure
    Global Supply Chain Finance Forum report in August 2020
         ›   Focused on benefits of supply chain finance

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Supply chain finance going forward
        What does all this mean for the supply chain finance industry?
                Need to focus on why supply chain finance exists and the interests and objectives of the
                 parties
                Show awareness of the risk of abusing the practices
         ›   Already disclosure obligations were on the horizon?
        How will transparency be achieved?
        Trade debt vs bank debt argument re-engaged?

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Trade debt v finance debt – the arguments
    Not just balance sheet question – legal vs accounting treatment
    Auditors and ratings agencies need to appreciate effect
    For example, why should holder of “debt” (invoice) determine what sort of debt it is?
    What problems
         ›   Requirement to do “trade debt” transactions only
         ›   What about position in rescheduling, insolvency etc?
    Some solutions
         ›   Make sure variation to payment period is in the original invoice/payment obligation
         ›   Look at useful life of asset in receivable financing

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The position of trade debt in Restructuring,
insolvency etc.
        Where do you rank if loan/receivable not paid?
        Just unsecured or better?
         ›   The argument is trade gets paid
        Can you get better ranking for trade debt in insolvency of buyer (of goods)?
        Should be an incentive to do?

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Why supply chain finance?
        There is an advantage to all of “stretching” payment dates for buyer
        Supplier can be paid earlier > makes sense
        Remember the original “true trade” debate
         ›    What is true trade debt – determined by reference to how it arose
         ›    Debt incurred for purchase of assets in course of trading would be trade debt
        Why is the nature of true trade debt debated?
        The mood of Moody’s and rating agencies
        The case of Carillion as an example (of what?)
         ›    Focus on stopping long term trade debt
         ›    The transparency debate
        Who else has concerns?
         ›    Bad press!
         ›    Misuse of terminology

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Current Issues in Documenting Receivables
financings
        Documenting between the principal parties in light of current issues
         ›   Who bears what risks?
         ›   Bank purchaser sitting between Supplier and Buyer
         ›   Issues like Eligibility Criteria and Concentration Risk
         ›   New issues of transparency
        What happens when there is a sell down of the receivable?
         ›   Use of the BAFT document
         ›   Puts risk on Participant to do credit checks
         ›   May work for a bank purchaser subject to the above
        What about the non-bank purchaser?

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Documenting for the non bank Purchaser
        Selling down to non bank purchasers
         ›   Already a discussion on what documentation would be more suitable
         ›   Who does the credit analysis?
         ›   Who takes documentation risk?
         ›   Purchaser protections BUT Supplier need to have sale of risk
        Participation is a good basis
         ›   Amend BAFT or have a variation?
        Consider the Greensill fallout

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What happens now and in the future?
        Did Greensill sell down supply chain assets?
        What did the documentation say?
         ›   Take a closer look in the future
         ›   Define what you are buying
        How to respond to transparency?
         ›   Do you need more or is it already there?
         ›   Was this just a due diligence issue perhaps “gone wrong”?

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Actions to be taken?
    Defend the products in supply chain financing
         ›   Remember it works for suppliers and buyers
         ›   Works for arrangers
         ›   Works for financers and investors
    Is it all in how to document?
    Resist the need to regulate
    Resist the need to change the accounting treatment
         ›   BUT accept the need to be transparent about what is trade debt and what is financial debt
    SCF Products are good but maybe the users are not always that good!

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Any Questions?

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Suggestions for future topics and webinar dates

Please feel free to send any suggestions for future topics to London Events
(londonevents@sullivanlaw.com)

Future webinar dates for 2021
        Thursday 22 April
        Thursday 27 May
        Thursday 24 June

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Geoffrey Wynne
Partner

Geoffrey Wynne is head of Sullivan & Worcester’s London office and also head of its Trade & Export Finance Group. He has extensive experience in banking and
finance, specifically trade and structured trade and commodity finance. He also advises on corporate and international finance, asset and project finance,
syndicated lending, equipment leasing and workouts and financing restructuring.

Geoff is one of the leading trade finance lawyers and has advised extensively many of the major trade finance banks, multilateral financers and companies
around the world on trade and commodity transactions in virtually every emerging market including CIS, Far East, India, Africa and Latin America. He has
worked on many structured trade transactions covering such diverse commodities as oil, nickel, steel, tobacco, cocoa and coffee. He has worked on warehouse
financings in many jurisdictions and advised on how to structure involving warehouse operators and collateral managers. He has also advised on ownership
structures and repos for commodities and receivables financings.

Geoff sits on the editorial boards of a number of publications and is a regular contributor and speaker at conferences. He is also the editor of and contributor to
The Practitioner’s Guide to Trade and Commodity Finance published by Sweet & Maxwell and A Guide to Receivables Finance, a special report from TFR
published by Ark.

Geoff has recently been recognized as the only UK lawyer included in the Trade Finance section of the UK Legal 500's all new UK 'Hall of Fame.'
Trade & Forfaiting Review (TFR) honoured Geoff with the TFR Fellowship Award in its 2017 TFR Excellence Awards.

Sullivan & Worcester UK LLP         T +44 (0)20 7448 1001
Tower 42                            F +44 (0)20 7900 3472
25 Old Broad Street                 gwynne@sullivanlaw.com
London EC2N 1HQ
                                                                                                                                     44418

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Sam Fowler-Holmes
Partner
Sam Fowler-Holmes is a Partner in Sullivan’s Trade and Commodity Finance team, advising a wide spectrum of traditional and alternative financial institutions
and corporate clients of all sizes.
Sam’s experience includes advising clients on a range of traditional and innovative trade finance products in relation to a broad range of commodities, both in
developed and emerging markets across the globe. He regularly acts for clients in relation to structured and unstructured trade financings and has extensive
experience in supply chain finance matters, including acting for both electronic platform providers and platform participants.
He speaks regularly at the Sullivan trade and export finance seminars and has presented at events organised by the ITFA Emerging Leaders Committee. He has
been a member of the ITFA Emerging Leaders Committee since January 2020.

Sullivan & Worcester UK LLP       T +44 (0)20 7448 1006
Tower 42                          F +44 (0)20 7900 3472
25 Old Broad Street               sfowlerholmes@sullivanlaw.com                                                                    44418

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Awards & Recognition
The Legal 500 UK, 2020
Sullivan is ranked in Tier 1 for Trade Finance by The Legal 500 UK, 2020
Partners Geoffrey Wynne, Simon Cook and Mark Norris are listed as Leading Lawyers for Trade Finance
by The Legal 500 UK, 2020
Sullivan is also ranked for Commercial Litigation by The Legal 500 UK, 2020
Trade Finance Magazine “Best Law Firm of the Year” 2019
Trade Finance Magazine named Sullivan “Best Law Firm of the Year” at its Awards for Excellence, 2019
Global Trade Review “Best Trade Finance Law Firm” 2019
Global Trade Review (GTR) named Sullivan “Best Trade Finance Law Firm” in the GTR Leaders in Trade Awards 2019

Trade Finance Global
Sullivan was awarded “Best Trade Finance Law Firm” 2019 by Trade Finance Global
Chambers UK, 2019
Chambers UK, 2019 ranks Sullivan in its Commodities: Trade Finance (UK-wide) listing Partners Geoffrey Wynne
and Simon Cook are Ranked Lawyers in Tier 1 and Tier 2 respectively by Chambers UK, 2019
The Legal 500’s all new UK “Hall of Fame”
In 2018 Geoffrey Wynne was included in the Trade Finance section of the Legal 500’s all new UK “Hall of Fame”
TFR Fellowship Award 2017
Trade & Forfaiting Review (TFR) honoured Geoffrey Wynne with the TFR Fellowship Award in its 2017 TFR Excellence Awards
                                                                                                                          44418

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