MNCs search for help in EM liquidity squeeze

By:
Kimberley Long
Published on:

Funding constraints of the kind familiar to small and medium-sized enterprises (SMEs) are now starting to impact multinational corporations (MNCs) with emerging-market (EM) exposure, pushing them to look to their banks for new options to obtain financing.

The local currency liquidity constraints being experienced by many MNCs have resulted in growing demand from them for distributor financing and other products, including invoice financing.

These have traditionally been the preserve of SMEs, often unrated and privately owned. Now bigger companies are having to resort to them, especially in EMs

Sameer Sehgal-160x186
Sameer Sehgal, Citi

Sameer Sehgal, trade head EMEA at Citi, says: "Of the Fortune 500 companies, I would estimate 25% to 30% have actively engaged in a product like this in the last six to nine months.

"Two years ago, you could have counted the numbers on your fingers. The trend will likely continue. Like supply chain finance four or five years ago, distributor finance is picking up momentum very quickly, and the next few years look very bright."

Invoice discounting allows a company to obtain funds ahead of an invoice being paid. The treasurer can access a percentage of an invoice before it is settled, with some providers offering up to 90% of the invoice value, depending on due diligence into the credit of the payer.

Once the customer settles the invoice, the remaining percentage is released by the provider, minus the agreed fee.

Sehgal says although invoice discounting is not new, current market conditions have spurred a notable increase in the number of enquiries.

"Invoice discounting as a product has been around for years as a plain vanilla offering," he says. "Its use is more pronounced now as companies realize sources of liquidity are drying up and they need to propel their value chain through other sources."

Although the world’s largest corporates have had access to high levels of bank liquidity in recent years, Sehgal says there are areas emerging where a number of factors are combining to curtail easy access to credit.

These problems are rising up the supply chain, with the impacts on the ability for SMEs to access financing now being felt by larger corporates at the top.

"FX fluctuations are hurting corporate value chains quite adversely," says Sehgal. "No company is isolated, since even if the corporate is able to ring-fence itself, its SME dealers and suppliers are not immune and actually are quite seriously hampered.

"Depreciating EM currencies cause a mismatch in payments [in foreign currency] and receivables [in local currency], thereby in turn creating liquidity and solvency issues for the SME."

This is impacting how able these companies are to make their payments.

"Companies in some geographies are really concerned about their ability to pay on time, and what the cumulative impact of late or missed payments could be," says Sehgal. "In some markets, this is further accentuated by a severe paucity of US dollars, thereby causing further systemic delays."

In addition to the falling value of local currencies, the availability and willingness of many banks to provide financing to companies operating in EMs is declining.

"Smaller-sized corporates are finding it difficult to obtain direct financing from banks," says Sehgal. "Balance sheets are being pruned, geographic presence is being rationalized to core markets and, overall, banks are just lending less."

Banks have rising concerns on the social and political climate in some countries, which is disproportionately impacting emerging regions.

"The current geopolitical climate is also taking its toll on how many banks want to lend to EMs, especially as they go through challenging macro-economic issues," says Sehgal. "They are less willing to take that risk."

Regulation

Caution on the bank side is also down to regulations starting to bite.

"The impact of Basel III on the banks means that capital becomes scarcer and lending is more selective," says Sehgal. "This means even good corporates are having difficulties in certain regions.

"The countries suffering the most are the ones that have been hit by falling commodity prices. Markets like Nigeria and the Middle East are seeing their liquidity levels in the banking sector drop."

The outcome is corporate treasurers are now seeking to make up for the slowdown of their payment flows.

Making use of their own future cash flows for working capital, through products such as invoice discounting, does not disrupt how a company conducts its conventional funding business. It can be used alongside other debt products, such as revolving credit facilities.