Aon Risk Solutions Aon Credit International Credit Perspectives October 2016 Receivables finance Highlighting solutions to the challenges clients face In this Issue 1 Introduction 3 A bank s perspective 4 An insurer s perspective There has been a significant increase in demand for credit risk insurance backed finance facilities for clients during the last 2 years. This has involved a number of different finance lines including; receivables, supply chain, stock, leasing and football transfers, to name but a few. In response to this convergence between the credit risk insurance market and financiers (which includes traditional lenders, Fintechs and other funds), Aon Credit International (ACI) launched our Financial Institutions specialism in the UK in 2015 and rolled this out across EMEA in 2016. During this time we have developed close working relationships with financiers and have developed a deep understanding of funder s drivers for credit risk insurance. These include: Risk management Supporting internal credit decisions by providing risk mitigation and credit enhancement on investment and non-investment grade risks. Credit concentrations Providing alternatives to funded/unfunded syndication via insurance capacity in order to improve risk distribution and ensure appropriate hold levels. Capital optimisation Using insurance and guarantee products as eligible unfunded credit protection to improve capital relief and maximise return on risk weighted assets, with also an opportunity for arbitrage. Risk. Reinsurance. Human Resources.
We are leading transactions and introducing clients to our financial institutions network more and more. One area where this is particularly true is where credit risk insurance is used as a facilitator to raise additional liquidity. This is structured on the client selling their receivables to a financial institution, with the insurance being arranged and serviced by the client. From a client s perspective they continue to deal with their new and existing buyers maintaining these relationships from a commercial, risk and performance perspective. The financial institution is noted as a loss payee of joint insured under the insurance policy. The diagram below outlines this structure. Benefits of this approach Working capital efficiency Fund up to 100% of invoice values (less dilutions and discount) for agreed clients May be considered off balance sheet subject to auditor confirmation Improved cash conversion ratios Reduced net debt burden Potential to reduce borrowing costs Structural flexibility Whole or a selected pool of receivables Syndicated market but differing lender requirements may limit capacity Ease of administration Debtor receipts usually paid direct to a collection account Undisclosed to your clients Covenants usually only operational Who benefits? If you fall into any of the following categories, Receivables Finance could work for you: Public rated companies, due to additional financial scrutiny from rating agencies Listed companies subject to higher scrutiny in relation to financial metrics including cash conversion Companies with cash conversion cycles which are wider than their peer group Companies requiring funding for growth If you have Capital Expenditure which is driven by growth If an imbalance of negotiating power exists with your buyers We have developed this structure further for a number of financial institutions clients and have a number of financier insured receivables purchase programmes which are beneficial to our financial institutions clients and their corporate clients. Credit Perspectives - Receivables finance 2
A Bank s perspective Wayne Mills Head of Supply Chain and Asset Finance (Global Corporates and Financial Institutions) Lloyds Bank What are the current trends in the supply chain finance market? We are witnessing a coming together of finance lines within the trade segment and have aligned our approach including receivables, supply chain and asset finance areas of expertise. The approach now is moving away from products and towards understanding the working capital and asset finance needs of clients. More and more multinational organisations are considering one or a number of these financing solutions as part of their working capital strategy. To meet the needs of clients it is important to consider and understand both the financial and physical supply chains as part of the working capital strategy. The time it takes to pay creditors and be paid by debtors is heavily influenced by the physical supply chain. What are the needs and drivers within the multinational segment? Multinational organisations have very specific needs and banks need to tailor their working capital solutions accordingly. We have seen particular demand for off balance sheet receivables solutions from clients, to reduce net debt levels and improve liquidity at half year and financial year ends. We are able to structure these facilities for clients and investment grade buyers on an uninsured basis. In order to further our offering in this area, we have developed credit risk insurance backed facilities for non bank and sub investment grade buyers, on a global basis. We have worked successfully with the credit risk insurance market to develop policy wordings which provide certainty of cover, reduce conditionality and give high levels of coverage. This has led to clients being able to demonstrate that risk has been transferred, allowing their auditor to confirm de recognition of the sold receivables under the relevant accounting standards (e.g. IFRS 9/US GAAP). What are the key elements and behaviours when dealing with multinationals? We need to have a strong understanding of clients and their operations, with focus on core strengths and capabilities. We also need to recognise a growing number of providers of finance solutions and an abundance of liquidity in the market. Clients appreciate transparency and honesty where solutions are concerned. Treasurers do not expect funders to service all their needs comprehensively in every jurisdiction, but do expect funders to be straightforward with them. How do you see the market developing and moving forward? In terms of the current landscape and future developments, we are very much alive to the presence of the so-called Fintechs. From a personal point of view, I am absolutely convinced that rather than being a threat or a disrupter in relation to banks such as Lloyds Bank, Fintech can be an enabler and a facilitator. Working together with Fintech can benefit our strategy in terms of supporting clients and delivering the right working capital solutions to help them optimise their financial supply chain. Our clients have a choice of a huge number of suppliers who are very keen to work with them, and this is why we need to be relevant with our solutions and we need to be capital efficient in order to provide liquidity at the right price. The simplicity of the Lloyds approach makes it particularly appealing, as the shift of focus from a product silo to listening to the needs of our clients, means we can continue to build longterm, enduring relationships. Credit Perspectives - Receivables finance 3
An Insurer s perspective Neil Ross Product Head of Trade Credit AIG How is the credit risk insurance and finance sector converging? There has always been a commercial nexus between trade credit insurance and financing. Until now credit risk insurance would typically be provided directly to the corporate with a financing party becoming a joint insured or loss payee as security for their facility. Credit insurance remained a risk transfer tool for corporates rather than support for funders. Depending on the conditionality of the credit risk insurance policy, the financing party would bear residual credit and operational risks. With the recent changes to the regulatory landscape and a desire for financing parties to maximise their return on capital, financing parties are now focusing on achieving a policy which is fully Basel III compliant without exception under the Capital Requirements Regulation (CRR). To achieve this, credit risk insurance and financing parties are working closer to create solutions, which remove policy conditionality whilst maintaining attractive financing terms for the corporate customer. What is AIG s strategy to meet the needs of this changing market place? AIG has created a range of new products, which are regularly evaluated to meet the current objectives of our customers. For instance, AIG Trade Finance has positioned itself with market leading technology, structuring bespoke insurance policy wordings to achieve not only the best regulatory capital outcome for the financier, but maximising the funding advance for the corporate. Our aim has been to overcome many of the inefficiencies of traditional trade finance and to provide greater certainty for both funder and seller. funders, brokers or AIG. The key driver for insurance is ultimately to facilitate funding more efficiently for the benefit of the corporate, whilst being profitable for the funder. The motivation to achieve this may be 1. Relieving buyer and jurisdiction overconcentration, particularly where the seller is an unrated or sub-investment grade 2. Credit limit relief, where the funder wishes to expand a current program 3. Pure risk transfer, where the funder has limited knowledge and appetite for the risk 4. Risk transfer, where a new funder has appetite for a trade sector but needs to satisfy internal criteria by having a rated counterparty 5. Lowering the administrative burden by partnering with a specialist insurer 6. Achieving IFRS accounting treatment In all these situations the funder is then able to seek regulatory capital relief. Are there any developments within AIG s solution portfolio to meet the future needs of the finance sector? AIG believes that whilst funders can address the regulatory changes, their attention is turning to other risks, such as multi portfolio aggregation, dilution, obligor know your customer (KYC) and fraud risks. AIG has recently developed a new technology platform (The Funding Point) which now makes it possible to highlight and manage these risks more effectively and is currently evaluating its appetite to provide a form of risk transfer where these risks can t be naturally mitigated. How are you working with funders and what are their key drivers for insuring? AIG Trade Finance enters into dialogue with key Bank and Non-Bank funders to provide structuring advice and credit support for transactions originated by Credit Perspectives - Receivables finance 4
Contacts Robert Michael Head of Business Development +44 (0)20 7086 0330 robert.michael@aon.co.uk Steve Taylor Executive Director, Special Products +44 (0)20 7086 1631 stephen.taylor2@aon.co.uk About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: http://aon.mediaroom.com. Published by Aon UK Limited. Registered office The Aon Centre, 122 Leadenhall Street, London, EC3V 4AN. Copyright Aon UK Limited 2015 all rights reserved. Aon UK Limited is authorised and regulated by the Financial Conduct Authority. FP Ref FPACI281016 The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. www.aon.com Risk. Reinsurance. Human Resources.