Greater regulation is coming to supply chain finance, but the market will still need those prepared to speak out to prevent financial scandals, writes Rebecca Spong The downfall of Greensill Capital last March dragged the niche financial product of supply chain finance on to front pages around the world – mixed up with stories of political intrigue and the owner Lex Greensill’s questionable connections to senior members of the UK government. This week, more than a year and a half later, Liberty Steel, a division of Indian-British steel giant GFG Alliance, finally announced that it had reached a debt restructuring deal with creditors of Greensill. With the Greensill affair rumbling on in the background, the US Financial Accounting Standards Board (FASB), issued new rules coming into force next month which call for greater transparency on how supplier finance programmes are being used. It will make it easier for those looking at company accounts to see the impact of programmes on working capital and cash flow. The move is widely supported by the SCF market and is said to be reinforcing what should already be best practice for many practitioners. “It is a consolidation and formalisation of what was already happening,” says Thomas Dunn, chairman of Orbian, who has worked closely with the FASB, speaking ahead of a panel discussion to be held at the Working Capital Forum in Amsterdam at the end of the month. Dunn remains resolute about the benefits of supplier finance - adamant that the problems of last year lay with Lex Greensill rather than the financial product. “Without a shadow of a doubt, it is a powerful collegial tool that allows capital and liquidity to be delivered into supply chains at the lowest cost in the supply chains – based on the credit of the buyer, " he says. “It is unequivocally a force for good.” That’s Not SCF When Greensill Capital first appeared, it positioned itself as fast-moving financial technology (fintech) company that was going to shake up the world of SCF and “democratise” a product for the masses. But what the company was involved in was not real SCF, says Dunn. “When we talk about SCF – the extent to which Greensill Capital was a player was tiny,” Dunn says, referring to some of the legitimate programmes with large banks and A-grade corporates it was involved in. “It accounted for five percent of Greensill’s business and less than five basis points of global activity in that field. What he was doing was rebranding dodgy lending….as supply chain finance,” he explains. In some cases, Greensill was reported to have been lending against future receivables where a potential invoice has yet to even be issued. This is a far riskier proposition than traditional supply chain finance. Regular SCF shouldn’t be demonised in reaction to Greensill’s actions, argues Dunn. “Just because someone gets electrocuted – doesn’t make electricity a bad product. Just because Enron committed a massive fraud on the back of electricity generation, doesn’t make electricity generation a bad business.” Even before the collapse of Greensill, there were already some in the SCF market who harboured suspicions about the company’s activities. A few decided to become industry whistle-blowers working with investigative journalists such as Duncan Mavin, the author of The Pyramid of Lies – Lex Greensill and the Billion-Dollar Scandal. The book was published this year and charts the rise and fall of Lex. “A lot of sources in the industry wanted to talk about Greensill and expose what was happening because they were worried that things Greensill was doing would undermine the entire sector,” explains Mavin, speaking ahead of his appearance at Working Capital Forum Europe this month. Mavin himself was initially confused as to why SCF – a financing tool he had seen in various forms for a long time – was “being touted as a new thing”. “I guess it was traditional boring business but super-charged with stuff that wasn’t SCF,” he says. Enter the regulators The new FASB rules will require companies to provide information on key terms of the supplier finance programme including descriptions of payment terms and assets pledged as security or other forms of guarantees. So could this level of detail reduce appetite for supplier finance programmes among some companies? Yes, says Mavin, if they are reluctant to be transparent about their working capital position. “What appealed to those companies was the ability to borrow money without having to tell people they borrowed money,” he adds. However, he suggests rising interest rates and looming recession are having a far bigger impact on investor appetite for SCF than regulatory changes. Previously, the low-interest rate environment had created a “hunt for yield”, with investors trying to find somewhere they could squeeze more money from. It was this low-interest environment that had helped encourage the explosion of shadow banks and fintechs, such as Greensill, onto the market, with investors keen to support them in their desperate search for a good return. Greensill’s main funding source was via investors investing in its packaged-up invoices – some of which were covered by insurance. “[With higher interest rates] there are plenty of other places to park your money – you don’t have to go to supply chain finance funds,” he explains, predicting investor appetite for supposedly ‘safe’ SCF assets will likely start to decline. However, Dunn sees opportunities for traditional bank-financed supplier programmes to support today’s cash-strapped suppliers and pressurised supply chains. “Interest rates are up; capital is extremely expensive, and liquidity is hard to source now. This is where SCF is of paramount importance,” he says. The need to speak up Despite new regulation, future financial scandals in any sector including SCF are almost inevitable. There will always be certain market conditions that enable those with winning and persuasive personalities to circumvent rules, reflects Mavin. Yet there should equally be those individuals and regulatory bodies that are ready to call out bad behaviour, he adds. “To uncover the problem wasn’t very hard. I didn’t have secret insight to figure out what was going on. It was obvious. It should have been stopped but it wasn’t. I believe when you see a problem you should speak up.” “There are lots of people that should have spoken up”. Thomas Dunn and Duncan Mavin are both appearing in the panel discussion 'The End of the Wild West?" at Working Capital Forum Europe in Amsterdam on. 1st December.
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