{ THE MAGAZINE FOR EUROPEAN TREASURERS } - BNP … · { THE MAGAZINE FOR EUROPEAN TREASURERS } SPRING VIEWS Special report: ... APRIL 2015 ISSUE THREE. FOCUS ... Equally, debt-based

F O C U S{ T H E M A G A Z I N E F O R E U R O P E A N T R E A S U R E R S }

SPRING VIEWSSpecial report: The changing

face of working capital

ONLY COLLECT

How to centralisecollections

NO PAPER

JUST DATA

The benefits of the BPO

WILL ABSPP

GET BUY IN?

Crunch time for ECB plan

WORK THAT

CAPITAL

New ways with assets

KEY CHANGE

Why Cofidis switched focus

APRIL 2015ISSUE THREE

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2 ISSUE THREE

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This document is for information purpose only and is directed at professional clients. It is not intended as an offer for the purchase or sale of any financial instrument, investment product or service. This material is not intended to provide, and should not be relied on for, legal, tax, accounting, regulatory or financial advice.

Recipient should seek independent legal, financial and other professional advice before investing in any product, subscribing to any service or entering into any transaction described herein. Neither BNP Paribas SA nor any of its affiliates will be responsible for the consequences of the recipient relying upon any information contained herein or for any potential error or omission. This document may not be reproduced or disclosed (in whole or in part) to any other person nor be quoted or referred to in any document without the prior written permission of BNP Paribas SA.

BNP Paribas SA is authorised by the Autorité de Contrôle Prudentiel et de Résolution and regulated by the Autorité des Marchés Financiers in France. BNP Paribas SA is incorporated in France with Limited Liability with capital 2.490.325.618,00 EUR. Registered Office: 16 Boulevard des Italiens, 75009 Paris, France. RCS Paris 662 042 449.www.bnpparibas.com. ©BNP Paribas. All rights reserved.

Focus is produced for BNP Paribas by Cedar Communications Ltd, 85 Strand, London WC2R 0DW United Kingdom. T: +44 (0)20 7550 8000, F: +44 (0)20 7550 8250W: cedarcom.co.uk ©2014 Cedar Communications Ltd

For BNP Paribas

Editor in chief Thierry Bujon de l’EstangEditors Cathy Vuong, Anne SellesContributing writers Pierre de Corta,Frédéric Tollu, Helen Sanders, Mahesh Bhimalingam

For Cedar

Consultant editor Mark JonesCreative director Stuart PurcellAccount manager Dan GeoffreyAccount director Hannah SaundersProduction controller Teri SavilleProduction director Vanessa SalterDigital director Robin BarnesCEO Clare Broadbent

C O N T E N T S

Cover

: Gett

y

F O C U S

04COLLABORATION IS KEY

Towards a more holistic working capital strategy

12THE ROAD TO RECOVERY

Why Cofidis made debt collection a priority

06DON’T JUST BANK ON IT

The many ways to finance working capital

14

TIME TO CASH IN

The compelling benefits of centralising collections

1OINNOVATION AT WORK

BP’s lessons from the first live BPO in Europe

16 THE ECB’S POLICY PUNT

Will the ABSPP kickstart European securitisation?

WWW.BNPPARIBAS.COM 3

WORKING CAPITAL

W E L C O M EEurope seems to be gradually emerging from a prolonged period of turmoil, spanning two

financial crises and a severe economic downturn. But while they see encouraging signs of

stabilisation, European treasurers are facing unique challenges in managing their working

capital requirements.

One set of challenges stems from the ever-expanding regulations imposed on banks in

order to try to prevent new crises. These regulations are already having material

consequences for companies as banks adapt their models to the new environment;

consequences which are often still not fully understood by business. Liquidity ratios brought

in by Basel III and their impact on the value of deposits, increased capital requirements

which render some previously profitable businesses suddenly unattractive, the exiting of

some banks from regions or industries… the list of the changes that will impact on corporates

is long and growing.

From a macroeconomic standpoint, the prevailing deflationary environment – driven

by the reduction in oil prices and the negative bond yields in the aftermath of quantitative

easing by the ECB – creates another set of challenges, notably on the liquidity investment

front. Then there is the volatility in the currency markets…

So it is no surprise that European treasurers are exploring new ways to resolve complex

working capital needs. To address those needs, a collaborative approach which considers

every function of the business in the round is key to success.

As the banking system is fast evolving, true cooperation between companies and banks

is required to develop the innovative solutions – such as Bank Payment Obligation – needed

to optimise working capital.

As we highlight the working capital challenges that European corporate treasurers are

facing in this third issue of Focus, we hope you will find valuable information to enrich your

global approach to treasury and serve your organisation in the new fiscal environment.

Jacques Levet

Head of Transaction Banking EMEA

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COLLABORATE TO COMPETEWorking capital can be the difference between success and failure. So how do companies minimise requirement and maximise liquidity?


WORKING CAPITAL

C CC, DSO, DIO, DPO – companies of all

shapes and sizes are focusing

forensically on key performance indicators

as the realisation is dawning – often

painfully – that reducing the need for

working capital can be key to survival.

But most organisations still rely on an

old-school, tactical approach to try to reduce

demand, rather than draw up a coherent

plan for working capital efficiency.

What are the reasons for this, and how

should companies move on from the

“KPI-is-king” approach?

Forget fragmentation Traditionally, different company departments

are measured on individual metrics that

contribute to the working capital cycle –

finance and treasury monitor DPO and DSO;

procurement teams are measured on supplier

payment terms and cost of goods received;

and sales teams are measured on payment

terms and customer payment performance.

Here, each department is measured and

incentivised according to different KPIs, and

while decisions may positively influence their

own departmental KPIs, it may be to the

detriment of the company’s overall working

capital objective. (For example, if sales is

measured on gross margins and revenues

alone, there may be a negative impact on

working capital.)

But with liquidity at a premium since the

global financial crisis, compounded by a low

interest rate environment and increasing

regulatory constraints, cash-rich companies

need to minimise working capital

Treasury is the natural focal point for a more holistic working capital strategy

requirements in order to invest cash over a

longer time horizon. Equally, debt-based

corporations need to diversify funding

sources and leverage financial assets and

transactions as collateral.

And companies of all sizes are building

business in new territories where cash may

be ‘trapped’ for tax or regulatory reasons, and

where risks may be difficult to assess.

So, organisations everywhere need a

working capital strategy that is holistic and

collaborative. But how is this achieved?

Go strategicThe answer is: by every means necessary.

Treasurers and CFOs are already using a

variety of techniques to reduce reliance on

external financing for working capital. Part of

a succesful approach is to extend supplier

payment terms, achieve earlier and more

predictable payment, and get proactive to

reduce overdue collections. And companies

are adopting new systems to support these

activities, such as streamlining payment and

collection processing (see article on page 14.) But, while these initiatives can improve

flows and individual metrics, they may not

reduce the amount of working capital needed

to fulfil daily financial obligations – and they

won’t help create a more resilient, flexible

supply chain that boosts competitiveness.

Slash through silosInstead, companies need to take an integrated

approach towards working capital. By doing

so, all parties involved will benefit from the

skills and expertise of other teams.

Ultimately, this promotes group-wide

objectives, rather than mere departmental

ones. For example, treasury and finance

teams’ analytical skills and practical

knowledge of payments, collections and

liquidity are keys to managing costs and

profitability. Procurement maintains key

supplier relationships and understands

supplier dynamics, as well as offering

expertise in negotiating contracts and

monitoring supplier performance and risks.

Production teams are aware of the

operational challenges in delivering customer

orders and the mechanisms required to adapt

the production cycle to adverse events. Sales

teams understand the competitive pressures.

By adopting a more collaborative approach

between treasury, sales, production and Gall

erys

tock

procurement, companies can balance

commercial, operational and liquidity risks

upfront – and influence supplier and

customer relationships positively.

For example, treasury can introduce

procurement to supply chain financing

solutions that strengthen supplier

relationships, extend payment terms and

help price negotiation. Sales teams might

benefit from factoring and other

receivables financing techniques that

enhance DSO, reduce customer credit risk

and free up credit limits.

But as well as needing to get individual

departments to see the benefit of

collaborating for the greater good, there can

also be geographic and cultural barriers to

collaboration. So, top-level sponsorship is

needed to align objectives and decision-

making across different business functions

– and management has to instil a

group-wide focus on working capital,

rather than solely on specific KPIs.

Treasury is the natural focal point for a

more holistic working capital strategy, given

that its skills in liquidity, risk management,

and payments and collections management

touch on all the other areas.

Working with the right banking partner

can be instrumental by offering expertise and

insights into best practices, visibility over

cash and risk globally, innovative financing

and investment solutions, and technology to

support automation and integration across

the working capital cycle.

And, with stronger supplier relationships,

fewer late payments, more attractive

commercial terms for customers and

better alignment across the financial

supply chain, the benefits flow to every

part of the organisation. O

�Pierre de Corta is the Head of Factoring & Supply Chain Financing at BNP Paribas, the Working Capital Sales team for Large Corporates. Pierre has more than 20 years’ experience in working capital financing.

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OPEN UP, CASH IN

Not so long ago ‘alternative’ methods of working capital financing were considered emergency-only, but now borrowers and lenders are turning on to the benefits


WORKING CAPITALG

ett

y

One enduring legacy of the 2008

financial crisis for corporates is the

need to make working capital optimisation

a primary objective. This has led to an

increasing focus on ‘alternative’ financing

methods to leverage financial assets and

transactions more effectively.

Those methods grew in popularity during

the immediate aftermath of the crisis as

bank liquidity became more constrained.

Indeed, some companies owe their survival

to their ability to leverage their financial

assets as a source of financing.

And with ongoing liquidity constraints –

particularly as banks adopt Basel III

requirements – companies of all sizes are

trying to reduce their reliance on bank

facilities to finance working capital.

As a result, the value of ‘alternative’

techniques is transcending emergency

financing and becoming a key part of a

company’s financing portfolio, enabling

treasurers to unlock ‘trapped’ cash, reduce

cash conversion cycles and improve

financial ratios (figure 1) without

extending bank credit lines.

But working capital financing is not a

one-size-fits-all, one-stop solution. Rather, it

encompasses a range of solutions, with

distinct benefits for every kind of company

according to its working capital profile.

Identifying the alternativesWorking capital financing leverages one of

the three groups of assets in the financial

supply chain: receivables, payables and

inventory. Of these, receivables offers the

most options, including factoring,

discounting, total pool purchase and

securitisation, but there are solutions for all

three asset types.

In this article.... There are many different ways to finance working capital outside traditional bank facilities, from factoring to inventory management solutions that leverage work-in-progress; which methods treasury should consider will vary according to company working capital profile.

In favour of factoringThe best-known receivables financing

technique is factoring, most often used by

small to medium sized companies. In

traditional factoring, the company sells

one or more receivables to a bank or

financing company (the factor) and

receives immediate payment. The amount

received is based on a percentage of the

market value of the receivables and will be

higher or lower according to the credit

quality of the customer.

In more sophisticated factoring, the

credit risk is transferred to the factor

(non-recourse), but in others the factor has

recourse to the borrower in case of customer

non-payment. Terms differ according to the

debt profile of the lender’s customers. Parties

can also build a factoring solution into the

arrangement to manage risk.

Unlike some forms of receivables

financing, traditional factoring is disclosed to

the company’s clients (the debtors), who

typically pay the factor directly. For some

companies – particularly larger businesses

– disclosure to customers is a disadvantage,

but companies with resource constraints are

increasingly adopting factoring as it enables

them to outsource collection.

Similar to traditional factoring, invoice discounting offers working capital

ACCOUNT RECEIVABLES

MONETISE TRADABLE INSTRUMENTS

FIGURE 1 ADVANTAGES OF ALTERNATIVE FINANCING TECHNIQUES

IMPROVE WORKING CAPITAL METRICS

LIGHTEN BALANCE SHEET

RETAIN THE RIGHT ACCOUNTING TREATMENT

BALANCE SHEET MANAGEMENTTREASURY MANAGEMENT

P DSO

ACCOUNT PAYABLES N DPO

INVENTORIES P DIO

FREEING UP CASH TRAPPED INTO WORKING CAPITAL

REDUCING CASH CONVERSION CYCLE

OFF-BALANCE SHEET CASH

OFF-BALANCE SHEET ACCOUNT PAYABLES

OFF-BALANCE SHEET CASH

IMPROVING FINANCIAL RATIOS

BANK DEBT RELIEF AND IMPROVING GEARING

BENEFITSO TIME VALUE OF CASH OPTIMISED TOWARDS SUSTAINABLE IMPROVEMENTS RATHER THAN ONE-OFF CASH RELEASE

O ENHANCED LIQUIDITY THROUGH ALTERNATIVE SOURCE OF FUNDING

O GLOBAL REDUCTION OF FINANCIAL COSTS RESULTING FROM IMPROVED BALANCE SHEET STRUCTURE

advantages by accelerating the payment of

customer invoices at a discount. This solution

is provided by banks and some independent

factors. Like factoring, the level of discount to

a receivable depends on the credit quality of

the customer. Although invoice discounting

can be on a recourse basis, most companies

prefer non-recourse to leverage favourable

off-balance sheet treatment and risk transfer.

A key benefit is the ability to choose

whether to disclose the sale of the receivable

to the customer. If undisclosed, the company

is responsible for repaying the bank or factor

the funds collected. Invoice discounting

tends to be used for larger transactions

than traditional factoring.

A variation of invoice discounting is total pool purchase (TPP), where an entire

portfolio of receivables is purchased, as

opposed to individual invoices. Here the

credit risk assessment is based on the entire

pool, as opposed to individual customers,

giving greater flexibility for companies that

have debtors of differing credit quality by

individual receivable. Since credit risk is

assessed on the global portfolio, some

companies enjoy the flexibility to add

different quality debtors to the pool. As in

discounting, TPP also improves the balance

sheet and removes debtor risk if structured

on a non-recourse basis. As it leverages

i

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bank financing, it can be an alternative

to securitisation for companies not seeking

outside investors.

Securitisation is a mature technique for

converting a pool of illiquid financial assets

into a liquid, tradable financial instrument.

Assets range from short term (trade

receivables) to medium and long term (credit

card debt, auto loans/leases, student loans,

mortgages and so on). They are sold into a

special purpose vehicle (SPV) that then

issues securities in the capital markets.

Using an SPV isolates the assets from the

company, therefore the repayment profile

and risk of the assets form the basis of the

credit rating for the security rather than the

credit risk of the company. The securities are

tranched and are either retained or sold to

the capital markets investors with different

risk appetite to achieve different financial

objectives of the originator.

Securitisation of trade receivables can be

a useful form of financing for corporations

and financial institutions with sizable

receivables portfolios (typically greater

than €50 million) originating in one or

several countries. This includes B2C

receivables as well as B2B, to which

factoring, discounting and TPP are limited.

Similar to discounting and TPP, the

company usually remains the servicer of

the receivables and the sale of receivables is

generally not visible to customers.

Securitisation can be a very attractive

option to diversify funding risks, raise large

amounts of money in the markets, reduce

funding cost and/or achieve specific

balance-sheet objectives.

As securitisation is based on the quality of

the underlying assets rather than the credit

profile of the company, it is particularly

attractive to companies that are not rated, or

whose credit rating would attract higher

financing rates. Securitisation also allows

companies to leverage their B2C receivables,

whereas factoring, discounting and TPP are

limited to B2B. An advanced financing

Some companies owe their survival to their ability to leverage their financial assets as a source of financing

technique, securitisation requires the provision

of reliable historical and portfolio data and the

structuring process normally lasts four to six

months and involves other parties such as

arrangers, legal and tax counsels, etc.

Supplier side financing While factoring uses receivables to finance

working capital, reverse factoring (or

‘supplier financing’) (SF) uses payables.

Suppliers send invoices to the buyer (who

is the borrower) in the normal way. The

buyer approves the invoice and sends it to

the financier (typically a bank), who is then

DEAL SIZE

TENOR

RECEIVABLE TYPE

FUNDING SOURCE

ASSESSMENT

RISK MANAGEMENT

SERVICING

TYPICAL CLIENT

PROFILE

FIGURE 2 RECEIVABLES FINANCINGTRADITIONAL

FACTORING

INVENTORY

DISCOUNTINGTOTAL POOL

PURCHASESECURITISATION

EUR 1 -3 million > EUR 5 million EUR 20 to 250 million > EUR 50 million

Up to 180 days 30 days to 2 years up to 180 days up to 180 days

B2B Receivables B2B Receivables B2B Receivables B2B or B2C Receivables

Bank balance sheet Bank balance sheet Bank balance sheet Capital markets

- Individual screening and

credit analysis conducted

on each debtor

- Possible to apply different

funding conditions to

different debtors (such as

recourse or non-recourse)

- Payments made to

specific accounts

Credit risk per debtor is

analysed where number of

debtors is small

Analysis conducted on

portfolio to review:

- Concentration risk

- Aging of portfolio

- Historical losses

- Provisions and late

payment

- Portfolio analysis conducted

on quality of debtors

- No individual screening

conducted on each debtor,

subject to concentration limit

on one single debtor

Optional recourse

or non-recourse

Optional but typically

non-recourse

Optional but typically

non-recourse

Optional

- Receivables typically paid

to factor with disclosure

- Factoring can act as

collection and servicing

Sale of receivables is

generally undisclosed

to buyer

- Sale of receivables is

generally undisclosed

to buyer

- Company remains

responsible for servicing

Client typically remains

servicer

Small to medium companies Medium to large companies

with significant level

of trade receivables

interested in improving

balance sheet

Medium to large

companies with portfolio

of debtors/obligors lacking

concentration in similar

types of receivables

Corporation or financial

institutions with a sizeable

granular portfolio

responsible for paying suppliers. Suppliers

can opt to be paid on the invoice due date or

to discount the amount to receive early

payment, often within five days of invoice

approval. The buyer pays the bank on an

agreed future date.

By offering suppliers more attractive forms

of financing, SF programmes benefit buyer

and seller, increasing the resilience of the

supply chain by preventing supplier failure

through lack of access to liquidity and

improving supplier relationships.

Larger suppliers with a stronger credit

profile than the buyer are often attracted to

SF programmes even if they can access

comparable or better financing rates due to

the working capital and risk benefits of early

payment, while avoiding drawing down on

their own financing sources.

Supplier financing programmes are

often above €5 million in value and can

extend for up to two years. Large

programmes may be syndicated across

multiple lending banks.


WORKING CAPITAL

company. This offers the maximum

off-balance-sheet inventory benefit.

Pre-Receivables structure: an inverted

just-in-time solution in which the bank or its

trading vehicle buys the finished inventory

from the client company and sells it to the

company’s customers on a just-in-time basis.

Making the right callJust as companies often have more than

one financing bank, many find that more

than one alternative financing technique

is appropriate to their business – the

most successful companies often use a

combination of solutions.

Various factors will influence treasurers’

decisions, including the metrics on which

treasury is measured, such as return on

capital employed, weighted average cost

of capital and peer benchmarking. Bank

covenants will also influence the choice of

financing solution.

Other considerations will be specific to

the assets themselves and the regions and

Leveraging the WIPThe most straightforward way to leverage

‘inventory’ is through an asset-based lending

facility, but another viable option is an

inventory management solution, where a

company sells its work-in-progress (WIP)

inventory to a third party that owns that

inventory until it is required in production.

Only a few banks offer these solutions, but

they can be invaluable in unlocking cash held

in inventory for earlier use. The assets have

also now been moved off the balance sheet.

Inventory management solutions include:

Flash Title: the bank or a bank-owned

trading vehicle buys inventory from the

supplier and instantaneously sells it to the

company on extended payment terms.

Sale on Delivery: the bank or bank-owned

trading vehicle buys inventory and holds

title while in transit, selling either at the

inventory’s destination or port.

Just-in-Time: the bank or bank-owned

trading vehicle buys, owns and holds

inventory, selling it as directed by the client Gett

y

currencies involved will also have an impact

with regard to meeting specific regulatory

requirements, cross-border liquidity

constraints and currency convertibility.

Working with a banking partner with

the skills, experience and range of solutions

to understand the company’s global financial

strategy, working capital needs and financial

assets is essential to an effective working

capital strategy.

As new accounting rules and regulations

take effect in the wake of Basel III, these

forms of financing will become more and

more attractive to both borrowers and

lenders. They will then no longer be

considered ‘alternative’ forms of financing,

but mainstream or even default ways of

financing working capital. O

Key change: New techniques avoid extending bank credit lines

�Frédéric Tollu, Head of Global Trade Solutions Europe, joined the BNP Paribas Group in 1990 and has been instrumental in developing trade business worldwide.

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THE POWER OF THE PROCESSIn 2014 BP carried out the first live BPO, exchanging only data and no paper. What advantages does this new payment system offer?


WORKING CAPITALG

ett

y

�Michael Van

Steenwinkel is a chemical engineer and petroleum economist. As Global Credit Manager at BP Petrochemicals, he has worked on BPO from a corporate perspective since 2011.

W orld trade has seen a startling increase

in open account transaction over recent

years: today more than 80% of total world

trade by volume is settled by clean payment.

This means speed and flexibility are huge

challenges for every company in every

sector – and banks have to keep pace by

offering clients fully automated processing

combined with payment assurance and

financing options.

BPO is a new method of trade financing

that enables banks to offer their corporate

customers flexible risk mitigation and

financing services across the supply chain.

So, last April, in collaboration with BNP

Paribas, BP performed the first live BPO

transaction in Europe in an operation that

was awarded Trade Financing Deal of the

Year 2014 by Trade & Forfaiting Review. BP’s

Michael Van Steenwinkel discusses the

benefits of the new approach.

Which trade tools were you using before?Given the counterparties we are dealing with

and the countries involved, the vast majority

of our secured payment transactions are

processed through documentary letters of

credit, stand-by letters of credit, bank

guarantees or documentary collections. It

is a must in our sector. We need to monitor

credit risk – not only corporate credit risk,

but country risk, too.

What triggered your decision to use BPO? Generally speaking, the more flexibility we

have in our international trade and bank

operations, the better for the organisation at

all levels. Documentary operations take

time; time for issuance, time for

amendments and time for payment. No

specific event made us think about BPO,

but we consider speed and flexibility to

be the main advantages of the solution.

How does BPO help you? What are its main benefits?Our business model requires strong and

accurate risk mitigation. To ensure the

company’s objectives are met, we need to

be paid on time in a quick and flexible way.

The ease and speed of making amendments

is important. To give you an example,

when a documentary letter of credit gets

issued, it can easily take up to two or three

days before an amendment is made. With

the BPO, making amendments – which

happens quite frequently – can be done

in a few hours.

Another advantage is that the credit

lines of the importers are used for a shorter

time than with the documentary letter of

credit or with a stand-by letter of credit.

What milestones do you have to reach before performing a live transaction?We must bear in mind that the BPO is a

new product. With new products there’s

always development issues at different

levels. A first level is education: a lot of

people don’t know the product yet and

stepping into the unknown is sometimes a

tough thing to do. A second aspect is around

readiness of all parties involved; not only

corporates but banks, too, need to be ready

and able to step into the new adventure.

Did BPO mean a different set-up and approach for your team?Once people were informed, trained and

aware of the new process, they adapted.

The BPO helped them to focus on

value-adding things. Only data are

exchanged; paper copies remain outside

the banking system, so documents are

available quicker and the customer has

faster access to the goods.

How did your counterparts react to the new process?All stakeholders benefit from the flexibility

and speed compared to traditional

documentary operations. It also means lower

costs for our clients, since their banking lines

have a quicker turnaround. We now have a

recurring stream of BPOs with one customer

– experiences are positive on both sides.

To whom would you recommend the BPO?In my view, the BPO is valuable for many

sectors and many types of companies. From

the moment you want to mitigate the credit

risk of the corporate without having to

worry too much about the country risk (for

which you would typically use a confirmed

letter of credit or stand-by letter of credit),

the BPO solution is a very usable product.

What is your experience of using banking-related digital tools? What issues need to be addressed?So far, my experience has been limited but

positive. It is hard to predict what the

future will bring. The BPO is a new

product, so a lot of aspects need to be

worked out over the next few years and

incorporated into URBPO [Uniform Rules

for Bank Payment Obligation, which will

establish uniformity of practice in the

market adoption of the BPO]. I also see a

need to expand the offer towards a

‘confirmed’ BPO or towards the BPO

offering financing to its counterparts.

The fact that it is an electronic product

definitely creates opportunities for

dematerialisation. In a parallel way, the use

of e-documents (like electronic bills of

lading) would be a good extension of the

concept of digital tools in the banking

world. I do think this will become part of

the BPO at some point. O

Wheels of industry: BPO can greatly speed up trade

BPO in brief Bank Payment Obligation (BPO) is an irrevocable undertaking by one bank to pay another at sight or at maturity in which only commercial data are exchanged, thereby bypassing the need for paper records.

i

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C ofidis designs, sells and manages

financial products and services, with

broad experience in consumer financing and

payment solutions. Its central treasury is

located in Lille. It is in charge of improving

the use of credit lines, management of excess

liquidity and the funding needs of the group,

with European subsidiaries managing

day-to-day local payments and collections.

The set-up is designed to optimise the

group’s working capital.

How does Cofidis treasury work in Spain?The treasury team in Spain manages daily

payment and collection flows, while the

central treasury team manages credit

lines, financing and derivatives hedging.

Locally, we have a weekly and monthly

treasury planning where we take into

account all the payment and collection

flows that we are expecting in a given

period. We share this cashflow planning

with our central treasury, who attends to

our funding needs.

In practical terms, payments and

collections are managed in two completely

separate flows. On the collections side, the

larger part of our collections are fully

known from the first day we sign a new

loan with a client, so we have a clear

COLLECTIONS BEAR FRUIT

How did payment solutions provider Cofidis Spain react to the 2008 crisis?

Finance manager Antoni Arjona says the company had a complete change

of focus – and debt recovery was key


WORKING CAPITAL

collection calendar with agreed terms and

dates with each of our 800,000 clients in

Spain. Our collections are launched on the

first day of the month via direct debit. We

sweep the funds collected to a local cash

pool on a regular basis and inform central

treasury, who can then include them in the

group’s liquidity position. It is very

important for us to avoid any disruption to

the collection process, so we concentrate

our efforts on automating and optimising

the operation as much as possible.

On the payments side, there are also two

separate flows that are managed

independently. On the one hand, there are

the normal business flows of the company:

Cofidis Spain knows amounts and due dates

of monthly payments to suppliers, taxes,

employees, etc. These payments are ordered

from a dedicated payments account. But we

also have the flows of payments to fund our

clients’ consumer finance needs, which are

managed separately.

The payments account gets funded by our

collection’s account via our local cash

pooling. As soon as our estimations start

showing liquidity needs, we agree the

provision of funds with our central treasury.

Through this funding and the control of the

maturity of the funding disposals, we

manage the liquidity needs or excesses. If

unexpected need for additional funding

arises, our central treasury sends us the

required liquidity upon demand.

How do you manage collections? How did the migration to SEPA DD affect you?For Cofidis Spain, direct debit is the main

means of payment in the collection process.

Our set-up has significantly changed with

SEPA DD and we have had to change or

adapt many aspects of our organisation.

These included legal (contracts and

mandates were adapted to SEPA

regulation), IT (systems for generating

remittance files, reconciling account entries

and dealing with all types of rejects,

returns and refunds needed to be adapted

to SEPA), and commercial (educating

commercial teams and clients on what

SEPA meant), to name just a few.

Our systems are designed to be ready to

reconcile all the movements in our collection

accounts automatically. We initiate the

collection process by submitting our direct

debit remittances to the bank. Once the

collection is sent, we keep close track on the

account statements. Every account entry is

read and identified by our systems on a daily

basis. When collections are completed

successfully, systems update the outstanding

debt balances of our clients.

Whenever there is disruption in the

collection process, our systems trigger the

actions needed to correct the failure. With

each rejection, return or refund file, our

systems identify the original direct debit,

read the reason code for each particular ‘R’

transaction, and trigger the action needed.

Our systems were automated before SEPA

and we now have them in SEPA, although

some aspects are still complicating the

smoothness of our collection process.

Smoothness here is absolutely key for us and

small discrepancies can impact on that,

requiring manual intervention.

What’s your take on the new initiatives emerging with SEPA, such as e-mandates?These initiatives are positive, although our

view is that the mandate needs to be

flexible; it must adapt to what the client

needs and what the business of the issuer

of the SEPA DD is. The mandate in effect is

the consent by the debtor to have his or

her account debited by the creditor. This

agreement allows many formats and

many ways of getting registered. In

Cofidis, mandates were part of the debt

contract, but following SEPA regulation

they are now a proper and independent

document, signed by the client together

with the debt contract.

Did your business suffer during the crisis? What has changed since?Yes, our business suffered with the crisis,

like many others. Although business

decreased during 2008-2010, since 2012 we

are seeing months of improved numbers.

What has really changed in Cofidis is

the way we manage the business itself.

We have moved from focusing mainly on

We have moved from focusing on managing the financing to focusing on managing the debt recovery process

Antoni Arjona is Financial Director of Cofidis in Spain. He joined the company in 2012 with initial responsibility for treasury and insurance services, becoming Financial Director in October 2013. G

ett

y

the management of the financing to

focusing on the management of the debt

recovery process. We like to say we

accompany our clients, as we are with

them through all the process. We want to

be close to our client, we want our client

to feel that we are close to them and that

we understand their needs.

We can adapt the debt collection cycle to

the needs of our clients, offering them

flexible payment terms, and that is what we

do. We have clients that are able to pay back

their debt but may suffer some difficulty

that impedes the process, so we want our

clients to be aware of the issues and feel that

we are helping them to repay those debts.

We are very proud of the result this is

bringing to our business, as it certainly helps

the collection cycle’s efficiency.

Cofidis has some 800,000 clients in Spain

today and is a leader in the consumer

finance business. The speed in approving the

financing package to our clients and the

channels through which the debt can be

requested and set up are key competitive

advantages of the group.

The efficiency in the debt collection process

is crucial for us: every aspect of our collection

cycle needs to run like clockwork. O

The SDD

SEPA has brought harmonised payment instruments across the Eurozone. One of the most important features is the cross-border SEPA direct debit (SDD), now used by many companies. This makes payments more convenient for customers and more predictable for their suppliers, without the need to manage separate direct debit schemes in each country.

W hile centralising payments is

well-established as a way to reduce

costs, streamline processes and connectivity

and improve working capital metrics,

centralising collections, including ‘collections

on behalf of’ (COBO), has proved far more

challenging. Although obstacles remain,

centralising collections is becoming far more

achievable, and the value proposition more

compelling.

Obstacles to centralisationDespite the organisational and technology

implications, centralising payments is

relatively straightforward. After all, a

company is in control of timing and method

used to pay its suppliers, so barriers are

typically internal, which can be overcome

through strong management support. In

contrast, the timing and payment method

used by customers is beyond the company’s

control. This makes it difficult to develop

economies of scale, particularly given the

diversity of payment instruments and

formats. Secondly, commercial sensitivities

about disconnecting credit and collection

teams from local sales operations often arise.

A compelling value propositionDespite the perceived challenges, the benefits

of a centralised collections model and COBO

can be compelling:

Monitoring credit. By establishing

consistent credit controls, companies can

reduce and achieve greater visibility and

control over credit risk and leverage

sophisticated credit metrics and analytics.

For multinational businesses where entities

work with the same customers in different

parts of the world, it is far easier to manage

credit risk at a group level.

Reducing bad debts. Fragmented

collection processes and technology typically

result in inconsistencies in the way that

overdue collections are managed. By

investing in centralised technology and

processes, collection actions can be

undertaken more promptly, with far greater

control and visibility.

Improving customer relationships.

Although sales teams may be concerned that

remote collections teams lack awareness of

customer sensitivities and could damage

these relationships, the opposite is often true.

By reconciling collections and releasing

customer credit limits promptly, errors in

chasing up correctly paid invoices are avoided

Collections centralisation is here – and has some

big benefits for corporates

COLLECT, CONNECT, COMPETE

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14 ISSUE THREE

FOCUS

Gett

y

Payment infrastructures in many emerging markets are leading to greater opportunities for collections centralisation

domestic and cross-border payments.

Collection accounts can also be located in the

Eurozone country of a company’s choice. One

of the most important new instruments is

the cross-border SEPA direct debit (SDD).

Although there are still some issues to

overcome, such as mandate management,

SDD is convenient for customers and ensures

more predictable collections for suppliers,

without the need to manage separate direct

debit schemes in each country. The B2B SDD

scheme allows this benefit to be extended

across business as well as retail customers.

In addition to the opportunities developing

in Europe, the potential for multi-currency

collection factories is also increasing. XML ISO

20022 is becoming a universally accepted

common standard, streamlining the

exchange of information between systems

and counterparties. The use of cards is

growing internationally, including for supplier

payments, with benefits on both sides of the

transaction. Payment infrastructures in

many emerging markets are becoming more

sophisticated, standardised and automated,

leading to greater opportunities for collection

centralisation.

Driving innovation for competitive advantageAs collections centralisation is a relatively

new concept, not all banks have the expertise

or solutions to support a centralised

collections framework. Without substantial

local and regional solutions and expertise,

challenges may also lie in understanding and

reconciling diverse regulatory environments.

The benefits of doing so can be considerable,

however, with improved control and visibility

over working capital, lower costs, and

significant competitive advantage. O

and sales teams can do more business,

leading to improved revenues with the

customers with the best payment

performance. In some companies, sales teams

remain the key interface with customers for

overdue collections or dispute resolution, but

improved processes and auditability mean

that these actions take place more

systemically with greater accountability.

Rationalising technology. By

implementing a single technology hub for

credit, collections and bank connectivity,

companies achieve improved control and

efficiency and can justify the use of more

sophisticated technology, such as intelligent

credit scoring and monitoring, flexible,

automated processes, comprehensive

analytics and reporting, and automated

reconciliation.

Simplifying bank relationships. Channelling collections through one or only

a few bank accounts is a crucial way of

reducing bank account, transaction and

connectivity costs, and the time taken to

maintain bank relationships. Centralising

collections makes it easier to automate bank

account reconciliation with more consistent,

timely information. This is further enhanced

through the use of virtual accounts (shadow

account numbers per entity/ customer that

link to a physical bank account) to enable

accurate, automated account posting. A

related solution involves using local account

numbers for collecting cash, which then

credit a central account in the same way as

funds paid into this account directly. This

means that customers have a local account

number to pay into, while the corporation

benefits from a rationalised account

structure and accurate reconciliation.

Enhancing working capital. Working

capital benefits are often the primary drivers

of collections centralisation. While the

timing of payments and inventory can be

controlled and predicted, collections –

arguably the most critical element of the

working capital cycle – are far more difficult

to control. By increasing the predictability of

incoming flows, companies can manage

liquidity and reduce the level of working

capital that they need to maintain.

Why now?The barriers to centralising collections are

breaking down. In Europe, payment credit

transfers and direct debits are now

consistent, with no distinction between

System support:

Centralising collections needs top-level backing

�Helen Sanders is Editor of Treasury Management International and a freelance writer, editor and consultant. She was previously Director of Education at the Association of Corporate Treasurers.


WORKING CAPITAL

Getty

ABS MARKET OPENS UP New programme should make securitisation more competitive, but will it restart a functioning, private ABS market?

FOCUS

16 ISSUE THREE

FOCUS

T he ECB’s Asset-Backed Securities

Purchase Programme (ABSPP) is the

key topic of the year for ABS products as it

may signal a turning point in the shaping up

and potential revival of the European

Securitisation market.

The technical bid provided by the ECB

with multi-billion euro purchase capacity

should drag ABS spreads tighter, starting

with eligible asset classes and extending

to non-eligible asset classes. Although the

programme only officially started on 19

November (the date when the Legal Act

was passed), its impact started to be felt

on both primary and secondary markets

much earlier.

The ECB’s stated intention through the

programme, alongside the third Covered

Bond Purchase Programme (CBPP3) and

Targeted Long Term Refinancing Operation

(TLTRO), is to “further enhance the

transmission of monetary policy, facilitate

credit provisions to the euro area economy,

generate spill-overs to other markets and, as

a result, ease the ECB’s monetary policy

stance, and contribute to a return of inflation

rates to levels closer to 2%” (ECB Governing

Council, 19 November, 2014).

Does the ECB ABSPP represent an efficient

tool to help achieve such a stated goal? A

significant tightening in ABS spreads will

incentivise originators to resort to

securitisation technology to secure efficient

funding for their loan portfolios as

securitisation becomes another competing

funding alternative, alongside covered bonds

and TLTRO. However, the sale of mezzanine

and junior ABS notes remains the key

condition to achieve any regulatory capital

relief, balance sheet reduction and asset

derecognition for issuers.

To what extent will the ECB’s ABSPP help

in making mezzanine and junior notes more

attractive to investors? We believe that the

ABSPP impact on the ABS market revival

would be far more effective if it was

accompanied by more accommodative

changes in the securitisation regulatory

regime (such as capital charge reduction on

mezzanine ABS pieces under Solvency II and

Basel III for insurers and bank investors,

more favourable LCR treatment).

ABSPP: What we know about the programmeAs the ABSPP is dominating headlines, with

the first purchases imminent at the time of

writing, we thought it would be

worthwhile to provide a summary of facts

and known details of the programme.

June conference: The ECB announced the

preparation of its ABS Purchase Programme

in its June Governing Council meeting,

alongside a series of accommodative

measures to curb deflationary trends in the

eurozone, such as rate cuts and the TLTRO

programme, providing attractive financing

on private, non-financial sector assets,

excluding residential mortgages. The June

announcement had a direct effect on

secondary ABS spreads, especially on senior

peripheral RMBS bonds (5-year generic

Spanish senior RMBS tightening from

120bp to 95bp in June alone).

September conference: In early

September, the ECB officially confirmed the

pending ABS Purchase Programme. The

ABSPP will be done in conjunction with

CBPP3. Blackrock Solutions was selected as

consultant to help design the programme.

Following a volatile summer, this

announcement marked the return of the

ABS spread compression trend across all

ABS sectors (eligible or not), with peripheral

bonds rallying the most (5-year generic

Spanish senior RMBS tightening from

mid-110bp to mid-80bp in September).

October conference: On 2 October, the

ECB released the details of the ABSPP and

CBPP3 programmes. The programme size

was not specified, but the ECB implied that

it is aiming at a €1 trillion balance sheet

increase, including ABSPP, CBPP3 and

The real test is whether the mezzanine and junior part of the capital structure is more attractive to external investors

Close call: ABS spreads will narrow

TLTRO. CBPP3 covered bond purchases

started in mid-October. As of 14 November,

the ECB had purchased €10.4bn of covered

bonds. In contrast with CBPP3, where the

ECB directly executes the purchases,

ABSPP will involve four asset managers

(Deutsche Asset & Wealth Management

International, State Street Global Advisors,

ING IM and Amundi Intermédiation)

assisting the ECB in pricing and

preselecting the bonds, with the ECB

making the final decision.

On 19 November, the ECB published the

Legal Act for purchases of ABS, officially

launching the programme. ABS securities

need to satisfy a list of conditions to be

eligible for ECB purchase. We list the main

eligibility conditions below.

ABSPP eligibility conditionsThe ABS bonds need to be:

X Eligible under the collateral framework

for Eurosystem credit operations

(ECB-repo eligible bond, see summary

of conditions below).

X Denominated in euro; have issuer

residence within the euro area; have at

least 95% of the underlying properties/

assets backing the ABS residing in the

euro area; and denominated in euro.

X�Have at least 90% of the underlying

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WORKING CAPITAL

Consumer, Lease, Credit Card and

SME ABS.

X Seniority: most senior classes only.

X Ratings: rated by at least two

rating agencies.

X Collateral: homogeneous pool of assets.

Loan level data requirements.

X Minimum rating: second-best rating

of at least A-.

Temporary framework:X Same conditions as Permanent

framework, except for minimum ratings.

X Minimum rating: second-best rating of

at least BBB-.

Additional requirements:X Servicer Continuity Provisions: the

legal documentation should include

provisions regarding servicer

replacement triggers for the

appointment of a back-up servicer

or of a back-up servicer facilitator

(with no more than 60 days to find

a suitable back-up servicer).

X Collateral requirements: there should

not be any addition of non-performing

loans in the collateral and no

structured, syndicated or leveraged

loans in the collateral.

It is important to monitor the bond universe closely as any rating change may adversely impact bond pricing

obligors classified as private

sector non-financial corporations

or natural persons.

X ABS bonds from Greece or Cyprus with

second-best rating below BBB-: meet

specific conditions on ratings (second-best

rating at the maximum achievable rating

in the jurisdiction), minimum credit

enhancement (25%), minimum rating of

all counterparties (first-best rating of at

least BBB-), full back-up servicing

provisions, conditions on reporting

and cash-flow modelling.

X The ECB cannot purchase more than 70%

per ISIN (except for Greek and Cyprus ABS

bonds with second-best rating below BBB-

with 30% maximum purchase limit).

X For bonds fully retained by the originator

at the time of purchase assessment, a

part of that same tranche needs to be

sold to an external investor (with no

link to the originator).

ECB repo eligibility conditions

ECB repo eligibility conditions operate

under two frameworks: the permanent

framework and the temporary

framework. The temporary framework

was first introduced in March 2013 and

was aimed at relieving constraints in ECB

collateral eligibility to help support

liquidity in the eurozone. This framework

allows for the eligibility of lower rated

bonds (second best rating of at least BBB-),

but has additional constraints attached to

it, such as servicer continuity provisions

and collateral conditions.

Permanent framework:X Asset classes: RMBS, CMBS, Auto, G

ett

y

European Central Bank president Mario Draghi hopes boosting credit provisions to the euro area economy will have a positive knock-on effect on other markets.

Sizing the ABSPP-eligible universeThe list of ECB repo eligible ABS posted on

the ECB website as of 20 November consists

of 901 bonds. After removing a few GBP

denominated bonds and a few non-applicable

shelves, we size the ABSPP-eligible

outstanding universe at approximately €600

billion (more than 850 bonds). We believe

that the great majority of this target

universe consists of ‘retained’ tranches,

i.e. kept with the originator and not sold to

outside investors.

Out of the c.€600 billion ABSPP-eligible

universe, 98% have a second-best rating of at

least A- (eligible under the ECB permanent

framework) and 2% have a second-best

rating in the BBB category (eligible under the

ECB temporary framework). These BBB bonds

consist almost exclusively of Spanish RMBS

and SME bonds. Their servicer continuity

provisions were deemed adequate by the ECB.

Non-eligible BBB rated bonds (with

inadequate servicer continuity provisions)

may become ABSPP-eligible once they are

upgraded and their second-best rating

becomes at least A- (since servicer continuity

provisions would not apply under the

permanent framework).

Alternatively, bonds with a second-best

rating of A- and inadequate servicer

continuity provisions risk losing their ABSPP

eligibility once they are downgraded and

their second-best rating drops below A-.

Although their legal documentation could

always be amended to allow for adequate

servicer continuity provisions (as has been

done in a few instances recently), we believe

it is important to closely monitor this bond

universe as any rating change may adversely

impact bond pricing. The recent changes in

the S&P sovereign ceiling methodology may

make such downgrades more likely

(especially in peripheral ABS sectors).

We report c.90 ABS bonds with current

second-best rating of A-. Some of these bonds

could lose their ECB eligibility depending on

FOCUS

18 ISSUE THREE

FOCUS

their servicer continuity language in the

event of downward rating migration.

ABS bonds with their ratings on the cusp

of both frameworks (second-best rating in

the A to BBB range) could be subject to

opportunistic trading strategies, based

on their servicer provisions language

and future rating migration.

How efficient a tool will the ABSPP

be in reviving the ABS market? Although we have seen the initial benefits of

the ABSPP even before the start of the first

purchases in the significant ABS spread

tightening (in both primary and secondary

markets), the full impact on the European

ABS market and on the revival of new issue

securitisation remains to be seen. As stated

earlier, we believe that the impact would be

far more effective if it was accompanied by

more accommodative changes in the

securitisation regulatory regime (especially a

capital charge reduction on mezzanine ABS

pieces under Solvency II and Basel III for

insurers and bank investors). We understand

these potential changes are currently under

tranches may make ABS an efficient

funding tool. New issue ABS volumes

could increase due to the increasing

competitiveness of ABS funding

versus other funding solutions for

loan originators (although we

believe that this effect is limited

without fully achieving all benefits

from the securitisation technology,

as discussed above).

On the negative side, the presence of the ECB

with multi-billion euro purchase capacity

could crowd an already limited investor

base and make the product less attractive to

traditional ABS investors, absent a pickup in

new issue supply.

ConclusionWe expect the ABSPP implementation to

have a positive effect on new issue and

secondary spreads, making securitisation a

more competitive funding tool for

originators. New issue volumes could

experience a pickup driven by increased

demand on senior tranches and fresh

origination activity helped by the sale of

retained tranches from originators.

However, the full effectiveness of the

programme will be judged on its ability to

make the mezzanine and junior part of the

capital structure more attractive to external

investors. The sale of mezzanine and junior

notes helps achieve additional securitisation

benefits, such as regulatory capital relief and

balance-sheet reduction. The sale of

guaranteed mezzanine tranches to the ECB

could help to some extent, but might not be

enough to restart a functioning private ABS

market that will facilitate credit provisions

to the eurozone economy. The revival of

such a functioning private ABS market will

require more accommodative changes to the

current securitisation regulatory regime. O

Opening up: The ECB programme must be attractive to external investors to work

Mahesh Bhimalingam

is Head of European

Credit Strategy for BNP

Paribas. He has over

14 years‘ experience

in capital markets,

including leveraged

finance, credit strategy

and trading.

consideration, but it may take time before

their full implementation.

In the absence of any regulatory regime

change, we still believe that the ECB’s ABSPP

could have some positive impact on European

securitisation in the following ways:

X Spread tightening on the senior

tranches may make mezzanine

tranches more attractive. Continued

tightening on senior tranches could

allow for a redistribution of spread

towards the mezzanine part of the

capital structure, making it more

attractive to outside investors. This

reallocation of spread premium to the

lower part of the capital structure

might help in the sale of mezzanine

and junior notes.

X ECB’s purchase of guaranteed

mezzanine tranches: although the

details are yet to be released, such

action could help with the placement of

mezzanine and junior pieces and

achieve regulatory capital relief and

balance sheet reduction.

X Spread tightening on the senior


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