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Supply chain finance emerges ‘more mature and resilient’ after Greensill

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date: June 28, 2021

Following the collapse of Greensill earlier this year, the supply chain finance market has dusted itself down and is set to return bigger, stronger, and fairer. New regulations and practices are now being put into place and trust is being rebuilt, just going to show the resilience of the supply chain.

Following the collapse of Greensill earlier this year, the supply chain finance market has dusted itself down and is set to return bigger, stronger, and fairer.

When supply chain finance firm Greensill filed for insolvency in March, it would have taken those with the strongest and steeliest nerves not to be concerned about the impact on supplier finance more generally.

With the company’s failings becoming headlines on the evening news – not helped by concerns about the firm’s close connections with senior ex-members of the UK government – it threw a public spotlight on what had been a niche and routine area of banking.

Yet, speakers at an SCF Community webinar held on 23 June were confident the supply chain finance market – specifically referring to payables finance business – would survive Greensill’s downfall. In fact, not only survive but grow stronger and more resilient.

There was always going to be a risk of contagion given the size of Greensill’s presence in the market, explained Michiel Steeman, Executive Director at the SCF Community. Some commentators may have been tempted to draw a comparison of the collapse of such a big funding partner to the failure of Lehman Brothers back in 2008 and its repercussions on the global economy.

No Contagion

Yet once the dust settled, Steeman said: “Users were not concerned, corporates were not concerned, and funding lines that were in place through other funding organisations simply remained in place. There really was no contagion. There was enough of a buffer in the market that the SCF market was just as alive as it was before,” he said.

Sean Edwards, chairman, at the International Trade and Forfaiting Association (ITFA) added: “(Greensill’s) traditional payables finance business with large buyers and largely backed by banks was rapidly refinanced. It has left a little bit of a vacuum into which the platforms have stepped, and we can be pretty sure that that traditional business is going to carry on.”

Bob Glotfelty, VP of growth at tech firm Taulia, said that post-Greensill, corporates will be even more eager to ensure they have “stronger funding partners” such as banks to back their programmes, combined with the best technology from tech firms.

“The impact will be the desire of corporates to have the best of both worlds. Bank-tech partnerships will be the future of SCF,” he said.

There will inevitably be some reputational damage – particularly due the difficulties of differentiating between Greensill’s regular SCF business and its more potentially contentious non-SCF business lines, Steeman acknowledged. Yet the survival of the wider SCF market is a sign of its “maturity,” he said.

His sentiments were echoed by others, with Chris Southworth, secretary-general at the ICC noting: “For a fairly big player to go under and not really affect the market is a good sign of maturity”.

“Overall, we see growth. It is an exciting space,” he said.

Despite the speakers’ optimism, there will be lessons to be learned from Greensill’s collapse.

More regulation on the way

Edwards warned that there will be more regulation on the horizon, with regulators likely to demand greater transparency, requiring corporates to declare the scope of their SCF programmes on balance sheets. These requirements are far preferable to a potential alternative decision by regulators to reclassify SCF as debt on the balance sheet, a move that would have had a more damaging impact.

The looming demand for greater transparency will help the market’s reputation and maturity, said Edwards. “For those big programmes, it won’t make a difference. The best users of these programmes have already been disclosing it on balance sheets for some time. Some outliers might fall away,” he said.

He said there would likely be recommendations on limiting the length to which credit terms can be extended under such programmes. This would be in line with guidelines from industry organisations such as BAFT [The Bankers’ Association for Finance and Trade] and ITFA that already require programmes not be used to “artificially extend credit terms”.

Steeman added: “The element of transparency that will come in will help grow SCF and make it a standard financing tool for corporates. Only for those that want to hide something will transparency be a problem.”

There are many other avenues for SCF market growth in a post-Greensill world, speakers predicted.

Edwards sees potential for growth in Eastern Europe in smaller markets with smaller buyers where the need for more affordable funding sources is acute, citing ITFA’s collaboration with the EBRD [European Bank for Reconstruction and Development] to encourage SCF programmes in this region.

Proven resilience

In Italy, the market has already seen strong growth over the last year exceeding analysts’ expectations, said Simone Del Guerra, global co-head of working capital solutions and CEO at Unicredit Factoring. “Covid boosted strongly SCF requests,” he said, with demand driven by a need to improve the stability of supply chains.

Glotfelty said SCF’s appeal during the last pandemic-struck year illustrates the market’s longevity. The product has been increasingly harnessed to provide corporates with affordable financing to keep their supply chains running during a time beset with factory shutdowns, national lockdowns, travel restrictions and sudden shifts in consumer demand.

“Covid has been a huge financial disruption and the first major economic test for SCF since it has become what it is today. From 2009 to 2020 – that was the longest bull market in history and within that time SCF grew quite dramatically. Adoption surged especially in the early few months of Covid.

“This really proved the resilience of the model,” he said.

Glotfelty added that SCF tools can help companies meet their ESG [environmental, social and governance] goals which are now an intrinsic part of day-to-day business.

“[SCF] is a force for good,” he said. “It can provide inexpensive financing for small businesses and can be used to incentivise ESG goals.”

Similarly, Del Guerra praised SCF for helping to “optimise working capital while making supply chains stable and sustainable”.

Yet, to limit further reputational damage to the market in the aftermath of Greensill, Edwards advised corporate treasurers contemplating using SCF to consider the importance of their supply chain and suppliers to their specific business.

“Think about the integrity of the supply chain and treating your suppliers fairly. With greater disclosure – one is going to see that the term extension is far shorter now. We will end up at a fairer middle point now, and you should think about as a corporate treasurer whether that makes sense for your suppliers,” he explained.

Fairness, integrity, and sustainability of supply chains seem to be the buzzwords among SCF industry experts, and they hope this message can be conveyed to a broader audience so that the failings of Greensill can become a distant memory.

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An on-demand version of this webinar is available at https://app.livestorm.co/adaugeo-media/the-future-of-supply-chain-finance-life-after-greensill?type=detailed

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