The removal of a major supply-chain finance product provider could create a working capital squeeze for some Australian organisations.
Is your organisation facing a working capital squeeze following the demise of Greensill Capital?
There has been a lot of media coverage recently about Greensill Capital and its supply-chain finance products. While there is some complexity regarding the structure behind these types of products, which we won’t go into in this article, the biggest consideration for Australian organisations is how they handle the inevitable issues that will arise if Greensill Capital cannot continue to operate.
So, what’s the big issue?
Supply-chain finance products are ‘reverse factoring’. This approach involves a supplier’s invoice being financed by a bank or financial institution at a discounted rate. In practice, it would look like this:
- An organisation uses reverse factoring to pay its suppliers in as little as 5 to 21 days (much earlier than usual), in exchange for a discount on the value of the invoice
- The organisation repays its reverse factoring provider/facility in 60 to 90 days, creating additional working capital availability
- The organisation also receives a discount on their supply costs (e.g. labour, inventory, raw materials), less the cost of the reverse factoring product.
Greensill Capital’s former clients may no longer have the working capital to pay their suppliers early, and will lose the discount on the invoices, resulting in a loss of margin. Alternatively, if organisations try to retain the discounts, they will face a cash flow squeeze and need to source additional working capital.
As reported in the media, the highest profile organisation impacted appears to be to the old Arrium steelwork assets at Whyalla, now owned by British businessman Sanjeev Gupta through the GFG Alliance. The media has reported he may have had facilities of up to $6.5 billion with Greensill Capital, which will now turn into a significant working capital shortfall.
Could your organisation be exposed?
If your business uses any Greensill Capital reverse factoring products, urgent action may be required to arrange new working capital finance.
Even if your organisation has not been using Greensill Capital’s reverse factoring products, it is possible one or more of your clients/customers have. As their supplier, this puts your organisation at risk.
It can be difficult to know if your organisation has exposure to a reverse factoring product, because there may be little or no visibility that your client/customer was using Greensill Capital.
Despite this, there are some key factors that can indicate whether your client/customer has been using a reverse factoring product.
Consider whether you have any clients/customers (typically large) that historically paid invoices at 30 to 120 days, with little prospect of negotiating this to a shorter period, but who, at some point in the past few years, started offering invoice payment terms from as little as 5 to 21 days with a discount only to the face value of the invoice. If so, it is possible these clients/customers are using a reverse factoring product.
What’s the impact of exposure?
If you have clients/customers who have lost access to their reverse factoring product, it is highly likely your organisation will start facing the following issues:
- Payment terms could immediately revert to historical levels of 30 to 120 days, causing a working capital squeeze
- The credit risk of these large counterparties may now be questionable. You should ask, “why would my organisation wait up to 120 days after supplying goods for payment?”
- The need to obtain appropriate retention of title arrangements when goods are supplied, to protect your position in the event of a client/customer’s insolvency (but only when supported by effective Personal Property Securities Register (PPSR) registrations)
- Little protection if services are supplied (i.e. labour hire), as your organisation cannot benefit from the retention of title arrangements and may be significantly exposed.
BDO can help
If you think your organisation could be at risk, please contact a BDO Finance Solutions expert to discuss your working capital needs, or a member of BDO’s Business Restructuring team for advice on protections against counterparty risk, retention of title and PPSR security, or in a worst case scenario, restructuring or some form of formal administration.