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Global Trade Advisor — Spring 2010
Welcome to another edition of Global Trade Advisor, a quarterly email report on international trade trends and strategies from RBS. This publication highlights trade services solutions that promote greater transaction efficiency and improved working capital management. We also report on how these solutions are helping specific companies manage their global financial supply chain with greater ease and control.

Customer financing program enhances sales
The latest innovative play in supply chain finance is motivated by a desire to support sales. The new strategy is exemplified by a customer financing program that RBS developed for a major U.S.-based multinational manufacturer and distributor.

SWIFT’s Trade Services Utility expected
to broaden supply chain financing

Corporations conducting international trade on open account terms can expect the services that banks offer in support of these transactions to expand when a relatively new SWIFT initiative — the Trade Services Utility — gains more registered bank users across the globe.

Customer financing program enhances sales

The latest innovative play in supply chain finance is motivated by a desire to support sales. The new strategy is exemplified by a customer financing program that RBS developed for a major U.S.-based multinational manufacturer and distributor.

Last year, the multinational firm was facing two serious challenges to sales. First, in a market where 30- and 60-day open account terms were the norm, with companies occasionally offering 90-day terms to some international buyers, the multinational's competitors began offering terms of up to 180 days.

"What makes this supply chain finance program different is that the company's motivation is purely to enhance sales in an increasingly competitive market."

Second, in the midst of the global liquidity crisis, customers wanting to buy the company's products were having trouble getting local financing at a reasonable cost. "Their banks were either canceling or contracting their credit lines, or drastically increasing the price of financing," says Rob Long, Director, RBS Global Trade Finance.

To help protect and grow the company's market share, RBS developed a program designed to provide competitive financing to the firm's key customers around the world.

Addressing cost, balance sheet concerns

Under normal circumstances, meeting competitors' 180-day terms would hit the company hard in two ways. Carrying receivables an extra 90, 120 or 150 days would impose a significant financial burden. Furthermore, the added weight of those receivables for a longer period would negatively impact the firm's balance sheet.

RBS responded with a customer financing program that meets the financing needs of the company's customers — and thus promotes sales — without impacting the firm's days sales outstanding (DSO) or weighing down its balance sheet with inflated receivables.

The program enables the multinational to offer terms of up to 180 days but still be paid within its standard terms of 30 or 60 days. RBS takes ownership of the receivables at that time and finances the buyer's purchase for the difference between the original and extended tenors (typically 120 or 150 days).

Not only do the buyers receive the financing they need to purchase the company's products, but they receive it at "a very favorable rate compared to what they could get in the local market," Long says.

The company isn't required to carry the receivables on its balance sheet beyond the standard 30 or 60 days. After RBS purchases the receivables, they are carried as a contingent liability in the footnotes of the firm's financial statements. "This form of financing does not qualify for a true sale opinion under existing accounting standards, but it does move the receivables off the balance sheet and into the notes," Long explains.

Role of corporate guarantee

At the heart of the program is the company's payment guarantee. Understanding that no bank would be able to undertake the credit risk of each of the company's customers worldwide — especially smaller, thinly capitalized customers that may not meet minimum bank lending standards — the company has provided to RBS a corporate guarantee of its buyers' obligations.

The multinational only selects for this financing program key distributors that meet its credit standards, as well as RBS' minimum threshold for participants of $2 million in annual revenues.

Buyers in the program sign a financing agreement with RBS. The bank and the company have developed a mutually agreeable arrangement for follow-up on late payments, including when the exercise of any drawing under the guarantee may occur. Late interest is billed to the buyers but is ultimately the company's responsibility.

RBS and its multinational client don't have to disclose the company's payment guarantee to buyers. "It introduces more discipline into the payment process when the buyer must pay a bank on time as opposed to one of its suppliers," Long says.

Results and future goals

The company initiated the program last year with five U.S. customers and has since expanded it to include another 10 global customers, including buyers in Latin America, Western Europe and Asia. The program currently operates in U.S. dollars and euro.

"The company has been pleased with the good will the program has engendered with its customers," Long says. "Over the next several years, they expect substantial increases in sales to these individual buyers."

The company would like to have $65 million in outstanding accounts receivable being financed by its buyers through RBS by mid 2010, and wants to increase that to $100 million by early 2011, he says.

"We regard this as a win-win proposition," Long says. "The company carries the receivables at their standard tenors with no impact to the firm's cash flow or cost structure, while the buyers benefit from increased availability of financing at very attractive rates for their product purchases from the company."

Standby Operations Reorganizes for Better Customer Service

Effective March 1, RBS N.V. customers can look forward to dedicated support from the Standby L/C Operations team in Medford, MA.

Each customer will be assigned to one of three teams, which will be led by a designated "monitor" to ensure service level agreements are upheld. Each trade specialist will handle the entire process for a standby L/C transaction.

Additionally, each new request for the issuance or amendment to a Standby L/C will be acknowledged via a reply e-mail.

As our staff become more familiar with your business, we expect that they will be able to anticipate your needs better.

Asia Navigator

Read the latest research from RBS on regional macro trends; quarterly GDP, FX and policy rate forecasts; and country updates.
Read the research.

SWIFT’s Trade Services Utility expected
to broaden supply chain financing

Corporations conducting international trade on open account terms can expect the services that banks offer in support of these transactions to expand when a relatively new SWIFT initiative — the Trade Services Utility (TSU) — gains more registered bank users across the globe.

Operating behind the scenes as a bank-to-bank application, the TSU holds promise for reducing the number of proprietary banking systems corporations use to transact trade on open account. Additionally, the TSU should help banks offer more supply chain financing services to their corporate clients.

"The TSU's ability to capture detailed information on each transaction also should help companies manage their customs compliance programs."

Furthermore, a new debt instrument introduced as part of the TSU's second release in 2009 — the Bank Payment Obligation — aims to protect open account transactions similar to the way letters of credit mitigate risk in traditional trade.

Open-account data standards

Brussels-based SWIFT is best known as the global provider of secure, standardized financial messaging services. Through the TSU, SWIFT has introduced standards for bank-to-bank exchange of open-account transaction data.

SWIFT developed the TSU in response to the corporate world's shift from traditional trade instruments, namely letters of credit and documentary collections, to a greater reliance on open account terms. According to SWIFT estimates, more than 80% of global trade is now conducted on open account.

First introduced by SWIFT in 2007, the TSU is a data matching and workflow engine. "Banks registering with the TSU can share buyer and seller data sets in a standard format," says Deborah Seliski, global head, traditional trade channels and supply chain services at RBS, and chairperson of SWIFT's North America TSU Regional User Group. "The TSU lets banks share data from purchase orders, invoices, bills of lading, insurance certificates and other documents.

"There is no exchange of paper, so this is very different from how banks have traditionally operated," Seliski notes.

How companies may benefit

Because the TSU creates transparency in open account transactions, banks will be able to provide more services around those transactions, including financing, Seliski says. "Once there is transparency, banks can offer credit risk mitigation tools, pre- and post-shipment financing, as well as inventory receivables financing," she says. "With the data flowing in a standardized format, banks will also be able to offer data mapping to a client's back-office system."

Some larger banks, such as RBS, have already built proprietary systems for supply chain finance and data mapping services. But corporate clients of these banks can still benefit from the TSU.

"Let's say you are a supplier in Asia with many U.S. customers that all use different banks," Seliski explains. "If you're selling on open account, you could be forced into using multiple proprietary banking systems. But if your bank is a registered TSU user, you can just work with that bank while your buyers work with their banks, with the TSU acting as a connection point."

The TSU's ability to capture detailed information on each transaction also should help companies manage their customs compliance programs, Seliski adds.

Bank Payment Obligation

Last fall, SWIFT announced that more than 100 banks had registered as TSU users, but in general banks have been slow to embrace the service, Seliski says. Its second release last year is garnering more interest, however, due to its introduction of the Bank Payment Obligation (BPO).

The BPO represents an irrevocable undertaking given on the part of one bank (the obligor bank) to pay another bank (the seller's bank) provided a number of predetermined conditions have been fully satisfied by the electronic matching of data within the TSU.

The instrument will provide companies trading on open account with a risk mitigation tool that serves much the same purpose as a letter of credit. "For those companies that want to continue to do business on an open account basis, the BPO can provide an extra level of protection that they don't have today," Seliski says.

Banks and regulators around the world are still in the process of approving the BPO for use, she says.

RBS and the TSU

RBS has participated in TSU's development from the beginning, Seliski says. "Even though we have built our own proprietary platform and already offer clients supply chain finance services, we appreciate how the TSU will facilitate the exchange of information between our customers and their counterparties, who won't have to use multiple banking systems," she says.

To learn more about the SWIFT TSU or the BPO, contact your RBS Global Trade Finance advisor or visit the SWIFT Web site.

 

The Royal Bank of Scotland plc is in certain jurisdictions an authorized agent of ABN AMRO Bank N.V. and ABN AMRO Bank N.V. is in certain jurisdictions an authorized agent of The Royal Bank of Scotland plc.