Confirming or Supplier Financing programs known as Supply Chain Finance (SCF) have proven to be a good tool for managing payments from companies as well as providing financing for their SME suppliers. Since its origin, the product has undergone many variations, improvements, and advances in the market, all of which have served to demonstrate how important it has become to its users as it continues to add value to them in particular and the market in general.
Talking about syndication agreements in the world of financing in general is nothing new, especially when we refer to structures applied to long-term operations. However, talking about syndication in response to short term financing needs based on the existence and management of commercial loans, is not so common. Although it does exist, it is only generally used in certain situations, specific customer circumstances or times of liquidity stress.
Having said that, discussions which focus on true syndicated Confirming operations are very unusual. It is not a solution that the market has implemented nor has a product been developed to offer it as a service to paying customers, even though there are circumstances where it would make real sense and be extremely useful.
We have deliberately referred to “true” syndicated Confirming operations to distinguish them from other types of solutions. Disintermediation, portfolio sales or any other means or schemes to distribute risks enable a Confirming operating entity to eliminate or reduce part of its exposure in the operation. It might do so through so called “back to back” or “dorsal” contracts with other entities. However, these solutions are not “true” syndication contracts because they do not engage several parties in a single agreement.
Risk sharing in a Confirming operation has sense and value but in this article we aim to concentrate specifically on what a true syndication structure for Confirming would look like from a conceptual point of view and to do this we need to set out the fundamentals which should necessarily include the following characteristics:
– Several entities or financial operators simultaneously sign a Confirming contract with the client / paying company: transparent structure
– All the entities participating in the syndication have the same rights and obligations, according to the terms of the agreement reached: joint structure
– All entities access the same data managed in the operation: shared information
– An entity or operator acts as the syndication Agent responsible for managing the Confirming program not only for the client and suppliers but for the rest of the participating entities as well: centralized or grouped management
Now that we have the basic structure, let’s move on to consider the purpose of setting up a Confirming operation. Why would it be interesting for the parties involved, particularly for the customer / payer and for participating entities?
Nowadays, most of the large companies and corporations which have been operating payments to suppliers through Confirming, structure it by opening several programs at the same time with many other entities, in such a way that they use a transactional and volume distribution principle among their banks, thus achieving an operational and risk balance.
This structure may work but it is not optimal, it is time consuming, cumbersome and costly because it requires the simultaneous management of several programs, the search for formulas and criteria for the distribution of payments and the sending of batch payments to several banks as well as the synchronized control of the use and availability of different risk lines, the grouping and unified management of the information sent by the banks on each program and, last but by no means least, the dedication of an internal professional to the management of all these financial and operational processes.
If one can do away with needless operations and work, simplify the management and vision of the progress of payments under a single program, and avoid restricting the principle of distribution and balance between entities, wouldn’t large companies be better served and work more efficiently by having all the Confirming programs centralized in one?
If we go further and consider issues related to risk capacities or limits needed to address a certain volume of payments and suppliers, we can see that a shared risk solution would be more flexible and stable.
It is clear that for many large companies a Syndicated Confirming solution would be a very interesting option especially if the entity which proposed and led the process could ensure that the structure it was offering did not involve any additional costs and also allowed the companies to continue dealing with their usual banks.
Having seen that there are benefits for large companies, we should also consider whether it would be interesting for a financial institution to promote syndication structures in Confirming. Here the answer is also clear: it depends on the profile of the entity and the role to be played as promoter / agent of the syndication or role of participant. Notwithstanding, there are opportunities and cost benefits that make this proposal interesting for more than just a few operators, regardless of their positioning and business type.
We can agree that in any event we are talking about innovative solutions which differentiate and add value to customers. Therefore, in a market as competitive and niche-seeking as the financial one, the idea of considering the development or building of this type of solution to incorporate it in our product portfolio should not be dismissed.
Nevertheless, building a true syndication solution for Confirming appears to be more than just a minor challenge. There are many variables, alternatives and decisions to be considered to configure a comprehensive tool that includes the basic characteristics mentioned above: a structure which guarantees transparency and equality, with shared information and centralized management.
As George Bernard Shaw once said, “Some men see things as they are and ask why. Others dream things that never were and ask why not.” Building a true Syndicated Confirming solution requires a high level of operational knowledge about the product and a high technical capability to overcome the many challenges and solve hidden issues that may arise along the way but this project is as interesting as they come and the rewards are many. If those dreams are to be turned into reality through the successful development and implementation of the tool, choosing the right specialists is not just a good option, it is essential.