Monday, August 10, 2015

LEGAL, SUPPLY CHAIN FINANCE STRUCTURES

Legal View on Supply Chain Finance Structures

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It’s always good to get the legal input on supply chain finance, and I had the recent opportunity to sit in on Mayer Brown’s webinar Leveraging Supply Chain Finance to Optimize Value. Unfortunately I was in Whistler B.C., home to some of the most famous mountain biking trails (and yea, skiing too). So I had one foot in the webinar as I was preparing to head out and steal a day.
While there are lots of common elements and features across supply chain finance structures, no two programs will be alike.   Mayer Brown examined the differences between three structures.
  • Invoice based SCF programs
  • Negotiable Instrument Based SCF programs
  • Non Recourse Receivable Purchase (Factoring)
differences in scf structures
Chart courtesy of Mayer Brown
Basically the key differences occur around the following areas:
  • Article 9 versus Article 3 (In the U.S., the Uniform Commercial Code (UCC) governs private transactions including receivables – in different countries different regulations apply.  By allowing lenders to take a security interest on collateral owned by a debtor’s asset, the law provides lenders with a legal relief in case of default by the borrower.
  • UCC filing or not – do you put a lien on that receivable?
  • Buyer notified of funding and pays bank or not
  • Accounting treatment
Mayer Brown went into some special situations. For example, if a buyer is a special purpose entity, especially operating offshore (Singapore, Ireland), it is common for banks to require a parent guaranty from a creditworthy group further up the corporate tree.
They had some interesting points around the accounting treatment of these programs, specifically how to avoid short term payable finance structures. There is limited GAAP guidance on the subject, and I have written about some of these issues here here and here .
Essentially, Mayer-Brown mentioned four things to avoid:
– Supplier participation is mandatory = BAD
– Buyer involvement in negotiations between Supplier and Bank = BAD
– Excessive Buyer control = BAD
– Make-whole arrangements between Buyer/Supplier = BAD
They have another webinar Trade and Supply Chain Finance Update, taking place in New York on September 16, 2015.

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