WW - Supply Chain Financing Program

Table of contents 

I - Description

Supply Chain Financing Program is also called Reverse Factoring Program

1 - What is a Supply Chain Finance Program ?

2 - Who is offering this kind of Program ?

The Banks of our customers

3 - What does it cost ?

• Discount interest for the period from the date of discount payment to maturity date of the invoice. Discount rate = EURIBOR/LIBOR.

• Spread (bank fee based on the buyer’s credit standing) at 1 to 2%

4 - How does it work?

4.1. Benefits for the supplier

• Additional source of funding (« True Sale »)

• Funding with no impact on Solvay’s credit envelope (Off-balance sheet funding)

• Attractive financing rates. No additional costs, only discounting fee

• Without recourse financing to suppliers

• Cash Flow optimization through earlier receipt of receivables / improvement of liquidity planning

• Positive effect on important figures (equity ratio, debt ratio, DSO, WC…)

• Receivable portfolio: risk reduction, potential cost savings by replacement of credit insurance

• Reporting tools included in the system

• Flexibility to request discounting at any time during the life of the transaction.

4.2 Benefits for the other parties

• Customer / Buyer : Payment Terms extension

• Customer’s Bank : Additional business / fees, based on non-risky companies

4.3 Accounting impact

Presentation

II - Solvay’s position (corporate guidelines) with regard to SCFP

Such programs are set up if customer has a better credit standing than Solvay.

1 - Condition for GBU to initiate a new program :

• Reverse factoring is only permitted when the customer A/R are not eligible to the Group Factoring programs

• Solvay must be able to collect the money on the current dedicated bank account managed by Solvay Financial entity in the country (when applicable)

• The impact of a specific A/R factoring program or reverse factoring initiated by GBU should be recorded in the GBU working capital

• In case a business constraint leads to setting-up a reverse factoring program for a given customer which was part of a Group Program, then GBU cash target will be adjusted to ensure neutrality at group level

• If there is a permanent extension of payment terms, there should be another benefit for Solvay in counterpart. (e.g future increase of volumes, pricing..).

2 - Main disadvantages :

• SCF programs durably increase payment terms (while the conditions of discount with a bank are not durably set)

• Entering a SCF program jeopardizes the potential of the BNPP program (internal financing), by using our best quality receivables

• Assignment of receivables to Solvay SA should be cancelled, as receivables   can’t be sold twice

3 - Key conditions for Group Egibility :

Implementation of new SCFP should remain exceptional and respect a specific process:

• Threshold = 10 M€ (annual sales)

• Case should be submitted to Corporate Treasury (Validation of cost), GAR (IFRS), Legal Corporate and BU Finance and legal for validation :

• • Current payment terms
  • Requested payment terms
  • Financial and contractual Proposal of the partner bank recommended by the  customer
  • Impact on WC
  • Business prospect with the customer. Will this extension of payment terms increase  the size of the business that we have today?
  • Business at stake, if any.

• If accepted, contract negotiation between Solvay (including legal departement, IFRS) and the customer’s Bank

• Implementation and execution of the SCF program : to be defined by Credit Management, Treasury or BU Finance

III - Programm Implementation

1 - Who are the actors of the SCFP implementation?

• The customer
• The customer’s bank
• Corporate Treasury
• Credit management team
• GAR (IFRS)
• Legal (BU + Corporate)
• BU Financial Director
• BU Market Director or Sales manager

2 - What are the roles and responsibilities of the different actors?

2.1 - Credit Management :

is the coordinator of the SCFP feasibility :

• Sends the approval request template to Corporate Treasury with figures & impacts

• Involves all BU within the perimeter of SCFP

• Makes sure that the key conditions of SCFP implementation are met

• Coordinates the actions till the best option is chosen

• Defines a follow-up agenda

• Fills in the necessary documents for banks and BU (for ex : onboarding)

The Credit Manager responsible for the SCFP implementation is the one in charge of the BU that has the largest turnover with the customer.

2.2 - Corporate Treasury

Coordinates the ‘technical’ aspects :

• Liaises with IFRS, reviews and confirms with IFRS the off-balance sheet treatment of this factoring

• Liaises with Legal, reviews the contract with Legal

• Recommends best option

• Secures this external financial source for the BU

• Negotiate with banks

• Reviews the pricing with BU and CM

• Reviews the contract with Tax

2.3 - Business unit

• Sales Manager : generally receives the original request from customer

• Sales Manager + Finance Director : make the decision

• General Manager or Finance Director : validates the set up
  

3 - What are the different steps of the implementation ?

Implementation is a long process involving different stakeholders & different steps of validation.

• The request to implement a SCFP usually comes from the customer. But it can also be a solution suggested by CM to reduce credit exposure on a customer

• CM checks if the key conditions are met (turnover and BNPP cession)

• CM identifies the BU coordinator who will be in charge of the coordination (the one having the biggest turnover with the customer)

• CM organizes a first call with the Bank and Corporate Treasury to collect SCFP conditions offered by the supplier’s bank (automatic or manual, rates, perimeter coverage, payment terms)

• CM defines the concerned perimeter (BU, country, invoicing zone)

• CM collects all the necessary info (Sales + SCFP conditions) :

• • • PRS number of customer

    • PRS customer

    • Customer country

    • List of involved GBUs and legal entities

    • Payment terms granted by each GBU

    • Annual Sales per GBU

    • Any specific information on ongoing contracts

to measure the cash and financial cost (AR, DSO, Financial cost) :

Financial Impact (examples)

• CM organizes a global call including different BUs (sales manager, BU or Market Director and Financial Director, BU legal ?)  and Corporate Treasury to get their validation

• CM communicates the financial impact to BU to get their approval on suggested options & defines the next steps.

Financial impact communication example

• Chosen option (meeting BU needs with best market conditions: payment terms, pricing, execution) is submited to Corporate Treasury  for validation through SCFP template : 

SCFP Template

• Once Corporate Treasury approves the principle of common choice, necessary internal reviews will be necessary up to implementation :

• • • Legal and Tax review of the contract/program

    • Treasury to review the pricing with BU and CM

    • IFRS to review and confirm the off-balance sheet treatment of this factoring

    • BU and CM to be kept in the loop as well to follow up the contract implementation and the bank on boarding until finalization

          Such steps can take more than 6 months time before implementation.

• CM informs OTC Service Center Manager, Collection Manager and AR Manager about new coming SCFP.

• When contract and bank on boarding are available, CM coordinator (or legal  BU representative) makes sure that contract is signed by duly authorized BU representative

Enterprise Management Bodies

• Communication of go-live to OTC Service Center Manager, Collection Manager and AR Manager.

• Corporate Treasury organizes bank training for AR.

• Contract and on boarding documents stored by Treasury and BU Legal but also centralized in CM google file

Contracts & Onboarding

• CM coordinator needs to update on a quarterly basis all changes or necessary information in the CM shared google file :

Reverse Factoring Follow up

• As part of this SCFP structuration, create a CM shared google file and gather copies of current contract

Contracts & Onboarding  

• Shared google file access given to Treasury, BU Finance Director, OTC Service Center Manager, Collection Manager and AR Manager and CM Team

Reverse Factoring

IV - SCFP Execution

• Receivables are in Solvay SA (PI1) => not visible anymore in the local systems (WP1, PF1)
  
• Receivables are assigned to PI1 (since 10/11/17) and easily recognizable via the F7 document type
• Standard Collection process in case of manual discounting
• Cash Collector coordinator has to check if invoices are correctly processed in the bank web-portal
• Early payments: should be approved by the GBU and executed by the cash collector coordinator or the credit manager : for Manual option, Cash Collector Coordinator communicates to CM the list of invoices available for discount :

Quaterly Selection per BU

• CM coordinator communicates amount to BU Finance.

RF Discount example

• Cash Collector coordinator receives automatic remittance advices when invoices are paid and make sure with AR of correct booking

• CM filled up amount factored each quater after closure :

Reverse Factoring Follow up

• CM regularly checks the rate evolution and if program is still relevant