how to channel liquidity to sme from investors post
TRANSCRIPT
How to channel liquidity to SMEfrom investors post COVID19at no cost for a State
SMEADDITIONALLIQUIDITY
INVESTORSOVEREIGNDEPOSITS
STATEREINFORCEDACCOUNTS
By Olivier Gazon - March 2020
Channelling liquidity from investors to SME post COVID19 1
ContentsExecutive summary 2
1 The issue 4
1.1. Enterprises: Upcoming liquidity shortage. . . . . . . . . . . . . . . . . . 4
1.2. Banks: Deeply fragilized sector . . . . . . . . . . . . . . . . . . . . . . . 5
1.3. Investors: Looking for safer placements . . . . . . . . . . . . . . . . . . 6
1.4. States: Hard hit budget and balance sheets . . . . . . . . . . . . . . . . 7
1.5. Problem statement summary . . . . . . . . . . . . . . . . . . . . . . . . 7
2 Public authorities’ interventions and their shortcomings 8
2.1. Economic support to enterprises . . . . . . . . . . . . . . . . . . . . . . 8
2.2. Bank bail outs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.3. Liquidity funding solutions along banks . . . . . . . . . . . . . . . . . .10
2.4. Monetary policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
3 The solution 11
3.1. The goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
3.2. Needs of the key stakeholders . . . . . . . . . . . . . . . . . . . . . . . .113.2.1. SMEs’needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.2.2. Investors’needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.2.3. Credit reinsurers / ‘excess loss’ underwriters . . . . . . . . . . . . . . . . . . . 12
3.2.4. Banks’needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.2.5. States’needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.3. SBFinance breakthrough innovation . . . . . . . . . . . . . . . . . . . .133.3.1. Genuine Enterprise Note (GEN) . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.3.2. Vendor alignment scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.3.3. Potential Enterprise Note (PEN) . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.3.4. Debtor exposure concentration adding value to the PEN Underwriter . . . . 19
3.4. The process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .213.4.1. Involved parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.4.2. Liquidity injection through GEN-SME+ scheme . . . . . . . . . . . . . . . . . 22
3.5. Profitably boosting the economy through SMEs . . . . . . . . . . . . .243.5.1. SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.5.2. Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.5.3. Economic eco-system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.5.4. Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.5.5. State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.5.6. Excess loss Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4 Why GEN-SME+ is THE most effective ‘economic boost’ tool 26
5 About Sustainable Base Finance 27
Contact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Appendix 1: The securitization process in a nutshell 28
Appendix 2: PENs Vs Trade Finance credit insurance 29
Appendix 3: SBFinance Platform overview 30
Channelling liquidity from investors to SME post COVID19 2
The issueThe pandemic creates unprecedented economic contraction with SMEs in the front line.Banks, by respecting conservativeness principles, provide limited liquidity in SMEs in need.How to channel investors’ liquidity directly in SMEs, rapidly, with limited risk?
The opportunityThe SBFinance scheme enables a Government to boost SMEs liquidity through investors’ liquidity. It is simpler, faster and cheaper than securitization.
Executive summary
The COVID19 economic challenge
Channelling liquidity from investors to SME post COVID19 3
How it worksSME receivables are proratized in units of receivable : Genuine Enterprise Notes (‘GENs’).At Public Authority daily GENs auctions, Investors place their tailor made orders in a few seconds.Each GEN is subscribed by the investor with the best offer. The SME collects the proceed of the GEN sale, less a margin (for the State).
Investors are paid 100% of nominal value of the GENs At GEN redemption date (redemption dates are computed to be subsequent to receivable payment date with a 95% probability).
Any unpaid amount by the Debtor at GEN redemption date is compensated as follows:
• 50% by the SME vendor (i.e. collateral account with 10% of outstanding in cash) ;• 50% by the State (i.e. Potential Enterprise Notes –‘PENs’: purchase with 50%
discount of GENs’ unpaid part, against a revenue on each sold GEN)
Subsequent receivable collection is paid in priority to the State.
Strenghtened economy through SMEsThe Government profitably boosts SME liquidity thereby increasing economy robustness.Indirectly, reinforced SME balance sheets positively impact banks’profitability.
GEN-SME+Redemption Payment
GEN- SME+(Genuine Enterprise Note)
Prorate unit of SME trade receivable
Redemption date
Purchase commitment at redemption date
SMEs
Trade receivables
Liquidity with no Þnancial debt
Debtors
Receivable payments
State
Public Authorities
Receivables to GEN-SME+
GEN-SME+auction
Cash collateral(10% of outstanding)
Best Price
Inventors(professional)
GEN-SME+
GEN-SME+Redemption Payment
PENs(Potential Enterprise Note)
Purchase commitment at redemption date
on 100% of not fully paid GENs by Debtor
with 50% discount on unpaid GEN nominal
1
6
8
3
4
7
9 10
5
Eligiility test2
State (PEN Underwriter)
PENsPENs
Channelling liquidity from investors to SME post COVID19 4
The COVID19 pandemic, unprecedented confinement measures almost worldwide… result in a sharp economic slowdown in most sectors of the economy.Before COVD19, everyone was hoping for a soft economic cycle landing. While economic recessions have often shifted from region to region leaving space for exports, the magnitude this worldwide economic contraction is likely unprecedented since world war II. Government have initiated massive commitment to support the economy to mitigate the downturn. Despite fast enormous Governments initiatives, the economy will remain substantially hurt.
1.1. Enterprises: Upcoming liquidity shortageJust about all economic sectors are affected with the following impact on their enterprises:
1. Negative EBITDA: Despite government measures to ease the pain, reduced sales generates negative operating margins.
2. Lack of liquidity: Delayed client payments negatively affect working capital3. No new credits: While certain credit reimbursements may be deferred, access to
new credit facility is almost impossible for smaller economic actors.
The risk is therefore to enter in a negative circle:
• Lack of liquidity generates payment defaults.• Payment defaults trigger bankruptcies.• Bankruptcies percolate on other enterprises.
Given their structural limited solvency and more limited access to funding, SMEs, the highest relative employers per turnover, shall be most at risk.
1. The issueCOVID 19 Ecomomic Impact
Channelling liquidity from investors to SME post COVID19 5
1.2. Banks: Deeply fragilized sectorThe COVID19 pandemic affects local banks from 2 sides:
• Weakened enterprises profitability, liquidity and solvency • More precarious bank counterparties
As a result, banks’ liquidity and solvency stress is going to rise:• Liquidity stress: Delayed and absence of repayments will spread at unknown pace.• Solvency stress: The sudden economic slowdown will lead to wide scale credit write offs
As a result, more bank bankruptcies shall occur in several countries in a short time frame.
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Channelling liquidity from investors to SME post COVID19 6
1.3. Investors: Looking for safer placementsBefore the COVID19 pandemic, conservative professional investors were already concerned:
1. End of economic cycle: The economic cycle was seen as reaching its peak. USA import tariffsI tensions, Brexit uncertainties had already impacted exports in economies such as GermanyII as in Q1 2019
2. Italian bank bankruptcies: The Italian economy and its banking sector are diagnosed by investment professionals as very fragile with bank bankruptciesIII taking place
3. Limited State guarantee: The 100k€ Deposit Guarantee SchemeIV limit and the Cyprus bail in are seen as the likely scenarioV in case of systemic financial crisis
I) Tariffs and Retaliatory actions by Erika York at Tax Foundation (Feb. 14, 2020)II) German trade decline raises fears over global economy in The Guardian (May 2019)III) E.C.B. takes the reign of Italian Bank to prevent wider crisis by J.Ewing in The New York Times (January 2019)IV) EU Deposit Guarantee Scheme Directive 2014/49V) Why Bank Bail-ins Will Be the New Bailout by Richard Best (June 25, 2019)
The magnitude of COVID19 economic impacts reinforces Investors’ perception that their deposits are at risk at banks.This further motivates investors to diversify placements and seek safe deposits while currently having limited alternative. Investors are open to new solutions.VI
VI) This economic crisis can’t be addressed by conventional thinking alone by John Rekenthaler (March 27, 2020)
Channelling liquidity from investors to SME post COVID19 7
1.4. States: Hard hit budget and balance sheetsSome States such as FranceI have taken spectacular economic measures in record time to preserve as much as possible the economic eco-system. Most States have followed.The COVID19 pandemic therefore deeply affect States’ financial accounts, worldwide:
1. Increased State costs: Pandemic health direct costs, increased unemployment, affect State charges
2. Lower State revenues: Reduced enterprise sales and profits substantially affect States tax revenues and will only be partially compensated
3. Increased sovereign debt: Government credit facilities further increase sovereign debt on top of the increase in budget deficit (increase in cost and lower revenue)
While States taken measures are effective, States’ financial accounts shall be seriously affected.
I) Corona virus COVID-19: Les mesures de soutien aux entreprises, Ministère des Frances de la République Française
1.5. Problem statement summaryThe COVID19 pandemic generates a sharp worldwide economic downturn. Worldwide.The crisis hits SMEs first further to their structural limited solvency.The magnitude of the crisis fragilized the entire banking sector with a growing systemic risk.Given now limited financial capacity of States to bailout the bank sector and the bail-in precedent in the Cyprus bank crisis in 2014, Investors are desperately seeking diversification of deposits outside banks.States, financially hard hit, are expected to facilitate the economic recovery with effective solutions that more than compensate the short-term financial burden.
Channelling liquidity from investors to SME post COVID19 8
Governments and Central Banks (‘Public authorities’) applied different solutions to support the economy during and outside economic crisis:
• Economic support to enterprises• Bank bail outs• Liquidity funding solutions along banks• Monetary policies
We discuss how the COVID19 pandemic economic situation challenges them.
2.1. Economic support to enterprises
Historical measuresHistorical governments measures to support enterprises in economic slowdowns can be categorized in 3 categories:
1. State grants (subsidies, tax waivers,…)2. Credit facilities3. State obligations payment deferrals (VAT, social security...)
I) Germany to unveil major stimulus as virus death toll rises throughout Europe, Silvia Amaro, CNBC (March 23, 2020)II) 10 things you probably did not know about Canadian SMEs, Source: Innovation, Science and Economic Development Canada.
Challenge of the COVID19 crisis Each government has applied one or the other measure in different form or scale:
• France was the first western state to take massive measures on the 3 levels.• Germany mostly acted on credit facilitiesI.
While effectively mitigating short term liquidity shortage, State support to enterprises entails important limitations:
• Short-term effectiveness: Measures mitigate a short-term emergency situations• Sovereign debt increase: All measures have a direct impact on the sovereign
debt.• Incomplete effectiveness: Measures event if sometimes very broad as in France,
cannot address all problems As a result, most fragile actors will suffer most and in particular, SMEs who are statistically the largest private job providers per euro of turnover.II
2. Public authorities’ interventions and their shortcomings
Channelling liquidity from investors to SME post COVID19 9
2.2. Bank bail outs
Recent bail outsIn recent crisis, States have actively supported banking sector continuity of bankrupt banks.
2008 bail out
The 2008 crisis started with the bankruptcy of a systemic bank, Lehman Brothers. Thereafter, most States have massively intervened to recapitalize their banking champions.As a result, bank runs have been limited and the systemic effect has been managed.State bail out has increased sovereign debt and, in some cases, affected the State’s credit rating negatively (e.g. Belgium).
2013 Cyprus bail-in
The Cyprus bank crisis whose size was not manageable by Cyprus State only, triggered a ‘haircut’ on larger depositors. That triggered the Deposit Guarantee Scheme EU Directive limiting the guarantee to 100k€ per depositor per bank.
Recent position of EU on bank bailouts
EU commission is reviewing rules on bank bailouts further to recent State recapitalization intervention.I
I) EU weighs tougher bank failure rules after fury over bailouts by A.Weber on Bloomberg(March 4, 2020)
Challenge of the COVID19 pandemic situationBanking sector
As described above, compared to 2008, • the crisis is initiated in the service and industry, outside the financial sector• more banks in several countries may go bankrupt in parallel• the local situation of each bank is also weakened despite Government enterprise
support
This combination may create a larger systemic effect and a need for larger scale restructuring.
States
States’ sovereign debt have substantially increased Vs before the 2008 crisis:• Bail out effort in 2008, • Budget deficit from the 2008-2012 economic downturn
States alone look unlikely to be able to support alone a bank bailout in case of a systemic crisis of the anticipated magnitude.
Public Authorities disaster planning for COVID19 pandemic systemic financial crisis therefore means organizing liquidity between economic actors, also along banks.
Channelling liquidity from investors to SME post COVID19 10
2.3. Liquidity funding solutions along banksPublic authorities implement receivables securitization as funding leverage i.e. combining private funding to sovereign funding or guarantee (see outline of receivable securitization in Appendix 1).European institutions promote receivables securitization for some time:The European Investment Fund participates to banks’ receivable securitization willing to reduce their exposure to SMEs receivables.I
Limited effectiveness of securitizationDespite the fact that receivables securitizations have been sponsored by EU initiatives, they have had relative limited success:
• Implementation time and effort: Implementation involves complex design and numerous parties and important regulatory constraints.
• Limited liquidity for investors: Despite listing of securities, liquidity of securities is very low limiting appetite and therefore affecting the yield.
• Unattractive compound financial cost: The cost advantage of investor funding rate is overturned by:
ȍ implementation costs (third parties and project management costs) ȍ ongoing operating costs.
I) See The SME initiative at European Investment FundII) Europe sets up emergency lifeline worth billions, BBC news (March 19, 2020)III) Who is benefiting from Quantitative Easing by Tevjan Pettinger (2012)IV) Net exports from the eurozone rose less than €3 billion ($3.2 billion) between September 2014 and September 2015 – a negligible amount in an €11 trillion economy What’s wrong with EU quantitative easing strategy? By Martin Felstein (2016)
2.4. Monetary policiesCentral banks have played a major role in past recoveries using all the means they can under their mandate.
• Interest rates i.e. lowering interest rates even in negative territory• Money supply
ȍ Recent ECB quantitative easingII
ȍ Bank lending policy
Recent historical measures to boost the economy have increased liquidity mostly for investorsIII and reduced the States interest burden.In Europe, the impact on enterprises has been limited.IV Banks, under pressure to improve their solvency ratios, have had a conservative approach to lending, in particular to SMEs.
Channelling liquidity from investors to SME post COVID19 11
3.1. The goalTo be highly effective in the current COVID19 pandemic economic contraction, the solution should
☑ inject funding to enterprise most in needs: primarily SMEs; ☑ attract existing private sector funding: Investors; ☑ remain robust in case of bank systemic crisis; ☑ boost the State’s economy; ☑ be easily scalable; ☑ be fast, simple and affordable to implement.
With the economic slowdown and fragilized bank sector, liquidity is king. For all parties:
Parties Funding focus Additional comment
SMEs ReceivablesSale of receivables, well understood by SMEs, when effective, meets the short-term need in liquidity
Investors DepositsThrough quantitative easing and the crisis uncertainty, investors have gathered available liquidity.
Boost economic recovery through channeling investors funding directly in SMEs
3.2. Needs of the key stakeholders
3.2.1. SMEs’needsFor SMEs, obtaining working capital liquidity currently:
• Takes time and effort outside day to day core business, with uncertainty of ap-proval.
• In the form of straight loans, is limited by gearing i.e. structural low SMEs capital-ization.
• In the form of non-recourse factoring, is affected by bank and insurance limits by debtor.
Therefore, to effectively boost SMEs, the liquidity injection scheme needs to be:
☑ Fast Upon initiated process by the SME, liquidity should be almost certain
☑ Sustainable Independent from third party’s own funding limitations
☑ Scalable: There should be no limitation based on third parties’ other exposure
3. The solution
Channelling liquidity from investors to SME post COVID19 12
3.2.2. Investors’needsWith a frail banking instability, investors want to diversify their liquidity. They will channel their liquidity in new solutions if and only if they offer a better alternative, i.e; In the current economic uncertainty, a new solution must therefore be:
☑ SaferSovereign risk is perceived as better to bank deposits
☑ LiquidLiquidity on investment has to be as equivalent to liquidity on bank deposits
☑ Simple: Easy to use
3.2.3. Credit reinsurers / ‘excess loss’ underwritersThe COVID19 sharp economic downturn will trigger reinsurers / excess loss underwriters lossesI: A good solution should maintain reinsurance capacity while reducing pressure on reinsurers:
☑ ↘OccurrenceThe solution should reduce the number of loss occurrences.
☑ ↘LiquidThe solution should reduce the loss intervention per occurrence.
☑ ↗Simple: The solution should increase reinsurance coverage at unchanged capital.
I) World Bank -Trade credit insurance, 2010II) The recently implemented European System of National and Regional Accounts integrating double entry accounting creates balance sheets i.e. balancing assets with sovereign debt
3.2.4. Banks’needsWith the upcoming COVID19 economic effect on the banking sector, a good solution should relieve financial pressure on banks:
☑ LiquidityThe solution should facilitate debtor’s credit repayments
☑ ProfitabilityThe solution should reduce the risk of credit failure
☑ Solvency Ideally, liquidity injection should help maintain solvency ratios
3.2.5. States’needsEmergency measures under COVID19 pandemic have affected States financial accounts To be sustainable, the liquidity injection scheme in SMEs should, for States, be:
☑ FastImplementation must be fast to mitigate recession risk
☑ Budget deficit free
A budget cost free solution that boost the economy is strategic.
☑ Financially scalable
State balance sheet improvement under ESA 2010II rules is a plus
Channelling liquidity from investors to SME post COVID19 13
3.3. SBFinance breakthrough innovationThe SBFinance scheme resolves hurdles of trade receivables direct purchase and of securitization (‘trade receivables finance’), through 3 innovative components:
Innovative components Added value
☑ Genuine Enterprise Notes (GENs)
Integrates the benefits of receivables securitization, yet faster, more simply and cheaper
☑Vendor alignment scheme
Curtailed trade receivable dilution risk
☑Potential Enterprise Notes (PENs)
Enables scalable credit enhancement through strengthening the credit unerwriter’s financial statements
3.3.1. Genuine Enterprise Note (GEN)Genuine Enterprise Notes (‘GENs’) resolve investors hurdles with trade receivable finance.
3.3.1.1. Trade receivable finance challenge for InvestorsWhile trade receivables appear as an attractive short-term asset class, professional investors currently only show mild interest in trade receivables existing schemes:
Direct purchase of trade receivables drawbacks:
Tedious administrationExecuting the purchase and monitoring of invoices one by one is not practically doable for large investment amounts.
Illiquidity Rapidly reselling purchased receivables is almost impossible.
Lack of information Assessing the credit risk, expected payment date is either impractical or not doable.
Trade receivables securitization drawbacks:
Limited liquidityAs previously outlined, Trade receivables securitization secondary markets bear limited liquidity.
Investment durationThe securitization medium term maturity make securitization a non alternative to bank deposits.
Complexity Unreadable prospectus take time to understand the effective product.
Channelling liquidity from investors to SME post COVID19 14
3.3.1.2. GENs: Resolving investors’hurdle with trade receivables finance Genuine Enterprise Notes (‘GEN’) opens the door to trade receivables being an attractive short term liquid asset for Investors.
A GEN is a prorate unit of receivables, with a redemption date and a credit score.
Receivable proratization
Accepted receivables for sale are proratized in units of receivables i.e. Genuine Enterprise Notes – GEN1.00 EUR GEN ⬄ 1.00 EUR nominal on a receivable
Units of receivables characterization
Units of receivables are provided descriptive features to facilitate their understanding:
• Debtor Group: The ultimate debtor of the receiv-able
• Risk score: The indicative risk score of the Debtor Group at the date of sale provided by a credit score entity (e.g. Dun & Bradstreet)
• Redemption date: The indicative date of payment with a 95% of probability taking into account Debtor-Vendor history and economic trend.
Direct selection by investors
Investors can discretionally select the GEN matching their desired needs in terms of amount, debtor, redemption date, score category.
3.3.1.3. GENs’ unprecedented advantages
Faster, cheaper and more liquid than trade receivables purchase and securitizationGENs resolve long and expensive securitization preparation and the lack of transparency of CPs as GENs are simple prorate assets:
☑ No risk transformation
A unit of receivable de facto:• is related to a single asset• is a prorate right of such asset• exists in a receivable before being sold individually
☑ Outside regulatory scope
Receivables (and therefore units of receivables are outside) the MIFID scope of financial instruments, money market instrument or transferable securities.
☑ Full transparencyInvestors make their direct selection on units of receivables
GENs resolve impracticalities of trade receivables purchase:
☑ TransparencyComprehensive information with credit score and expected redemption date.
☑ Flexibility Investment based on investors’ amount independently from receivables’size
☑ SwiftnessInvestors place tailor made purchase and sale orders in a few seconds
Channelling liquidity from investors to SME post COVID19 15
3.3.2. Vendor alignment schemeThe SBFinance Vendor alignment scheme trims down trade receivable dilutionI risk including product liability administration costs and fraud risk.
3.3.2.1. Dilution issues with trade receivable finance Trade receivable dilution is a major hurdle in trade receivable finance management.Best practice trade receivable finance programs mitigate dilution risk on sale of trade receivables through the following payments scheme to the Vendor:
On sale of receivable: discount value of 80%-90% of sold trade receivables.
Upon Debtor payment: The remaining 10%-20%.
The process is very tedious and not very effective:
Monitoring costs Understanding the reason for non-payment in due time
Payment adjustment costs Computing and adjusting excess payment to the Vendor
Fraud losses Losses incurred by the risk underwriter in case of fraud
I) Non-payment debtor payment other due to credit risk. It includes credit notes, rebates & incentives, fraud, and product liability issues,…II) Automated reconciliation features on incoming invoices e.g. beneficiary account, unusual elements Vs debtor history (amount, address, …).
3.3.2.2. SBFinance Vendor alignment schemeBeside automated highlight of abnormal elements on an invoiceII, the SBFinance Vendor alignment scheme is designed to curtail dilution risk in a simple way:
Vendor alignment element Innovative feature
New debtor acceptance: Vendor-Debtor history pre-requisite: Minimum successful debtor-vendor activity track record
% of GEN sold per receivables
Comprehensive business view: Sold volume of GENs per receivable can anticipate the net compound proceeds on an invoice after rebates/credit notes.
Debtor non-payment atGENs redemption date:
At redemption: Vendor pays 50% of Debtors unpaid GEN partThereafter: Vendor recovery in 2nd rank after the GEN holder
Vendor cash collateral Pre-financed cash reserve:
☑ Used on Debtor non-payment at redemption date (see 3.)
☑ Amounting at all times to: ȍ 10% of the total outstanding unpaid
receivables
ȍ 50% of the largest debtor outstanding balance
Receivables quality Early terminations:Upon a Vendor’s 3rd debtors not paying at GEN redemption date, early termination is engaged.
Channelling liquidity from investors to SME post COVID19 16
3.3.2.3. Advantages of the SBFinance Vendor alignment scheme
Trade receivables dilution risk becomes immaterialSBFinance Vendor alignment scheme is highly effective:
☑ Fully aligned vendor
With up to 50% participation to debtor non payment, the Vendor’s margin is seriously affected, motivating cautiousness and preventing fraud.
☑ Immediate execution
Any partial debtor non-payment is resolved immediately with direct debit on the Vendor collateral account.
☑ Scalability Simple treatment with limited administration facilitates scalability.
3.3.3. Potential Enterprise Note (PEN)PENs are new type of trade receivables credit enhancement designed to optimize:
• liquidity of GENs for investors and • the relative exposure for the credit underwriter.
3.3.3.1. Trade receivable finance credit enhancement challengeCredit insurance, the most common form of credit enhancement, is often a pre-requisite in non-recourse sale of receivables.
Drawbacks For insurers/credit enhancersCredit insurance has the following drawbacks for the Insurer:
Concentration riskInsurers need to limit exposure concentration by Debtor either directly and/or are dependent from reinsurers’ exposure.
F/S impact burden Insurance commitment at 90% of the nominal create a burden on insurers solvency ratio.
Admin costs Current best practice scheme to tackle dilution risk and fraud is time consuming.
Drawbacks For Vendors and InvestorsCredit insurance has the following drawbacks for the Vendors and Investors:
Limited scalability Limits of debtor exposure per Vendor creates liquidity issues in particular for SMEs.
UncertaintyInsurers decrease their limits when the economy slows down thereby making liquidity non-accessible at most critical time
CostCredit insurance is very expensive as a result of the current treatment of dilution risk and the limited vendor loss in case of fraud.
Channelling liquidity from investors to SME post COVID19 17
PEN Underwriter
SME SENs
Debtor payment
100
80
60
40
20
0%
of r
ecei
vabl
ePEN Underwriterpurchased nominal
PEN Underwriterpurchase price
3.3.3.2. Potential Enterprise Notes (PENs): Senior exposure investmentPENs provide an unprecedented quality of underlying to the PEN Underwriter.PENs are a purchase obligation on GENs.
The GEN purchase obligation at redemption date is priced at 50% of Debtor non-payment.
Innovative features Description
Remuneration
The PEN Underwriter charges • on sold GENs by the Vendor• fee in ‘basis point’ of GEN nominal• function of the receivable’s debtor credit score.
The better the score, the lower the additional fee
Purchase obligation The PEN underwriter commits to acquire, at redemption date, not fully paid GENs.
Purchased principal The purchase principal per GEN is the nominal unpaid by the Debtor
Purchase priceThe purchase price per GEN is the unpaid nominal per GEN: GENs are acquired at 50% of their residual Debtor unpaid value
1st rank in collection from Debtor
Upon subsequent payment by the Debtor, the PEN Underwriter receives the first proceeds until full payment and interests.Additional residual proceeds go to the Vendor (see § SBFinance Vendor alignment scheme)
Channelling liquidity from investors to SME post COVID19 18
3.3.3.3. Advantages of PENs versus best practice trade finance credit insurance/reinsurance
For PEN Underwriters
Attractivity Profitability ScalabilityPENs is de facto a senior risk exposure commitment at a 50% purchase discount
☑ Highest seniorityWhile there is disbursement at GEN redemption date of 50% of unpaid amount, the PEN Underwriter collects the first subsequent payments.
☑ Positive F/S impact:
In case of GEN purchase, the GEN purchase price is 50% of outstanding nominal.
☑ Profitability
By acquiring the receivable outstanding nominal at a 50% discount through the purchase of GEN at redemption date, the PEN Underwriter can negotiate up to a 50% discount on the outstanding receivable nominal without loss.
For InvestorsPENs transform GENs into a liquid deposit equivalent with PEN Underwriter credit risk
☑ Highest seniorityWhile there is disbursement at GEN redemption date of 50% of unpaid amount, the PEN Underwriter collects the first subsequent payments.
☑ Positive F/S impact:
In case of GEN purchase, the GEN purchase price is 50% of outstanding nominal.
☑ Profitability
By acquiring the receivable outstanding nominal at a 50% discount through the purchase of GEN at redemption date, the PEN Underwriter can negotiate up to a 50% discount on the outstanding receivable nominal without loss.
For VendorsPENs create an equitable aligned relationship between PEN Underwriter and Vendors.
☑ Fairness The PENs underwriting fee is dependent on the Debtor’s credit score therefore based on the Vendor sales strategy.
☑ Funding rateThe GENs auction funding rate become the PEN Underwriter’s funding rate.
☑ ScalabilityWith GEN purchase at 50% discount on unpaid nominal, the PEN Underwriter de facto multiplies several times its underwriting capacity on a single debtor versus traditional insurance.
Channelling liquidity from investors to SME post COVID19 19
3.3.4. Debtor exposure concentration adding value to the PEN Underwriter
3.3.4.1. Debtor concentration in trade finance: a liquidity bottleneckConcentration of risk exposure causes exposed parties to set limit per Debtor to their client:
Banks The exposure is integrated in the overall bank credit risk management limit with the Debtor
Credit insurers Credit insurers, beside their own limits need to take into account reinsurers’ limit per Debtor.
As a result, trade finance often falls short then enterprise trade finance funding need.
3.3.4.2. Debtor concentration in PEN underwriting: limitlessThe greater the PEN Underwriter position with a Debtor, the greater its recovery capability.The innovative legal design of the PEN underwriting scheme transforms the biggest weakness of trade receivables credit insurance i.e. exposure concentration into a unique strength.In the SBFinance scheme, Debtor non-payment at GEN redemption date
• means payment is later than conservative estimate• means the Debtor has some liquidity problems or made other payment priorities• does not mean the Debtor is insolvent
The credit risk exposure of the PEN Underwriter is moreover mitigated by 3 elements:1. Seniority of exposure2. Title of ownership on receivables3. Leverage of concentration in insolvencies
3.3.4.2.1. PEN Underwriter’s seniority of exposure
Compared to trade finance credit insurance, PEN Underwriters have a much senior exposure:
1. 50% exposure2. Priority repayment
1. 50% exposureThe unpaid amount by the Debtor at GEN redemption date is split 50/50 between the PEN Underwriter and the Vendor.
2. Repayment repayment
The PEN Underwriter collects any subsequent Debtor payment in priority up to its nominal and accrued interests, before any repayment to the Vendor.
3.3.4.2.2. PEN Underwriter’s title of ownership on receivablesCompared to trade finance credit insurance, the PEN Underwriter becomes direct counterparty to the Debtor upon delayed payment.
☑ Upon non-payment at GEN redemption date, the PEN Underwriter: ☑ acquires all GENs on a receivable at 50% discount, ☑ through GEN purchase, becomes the direct creditor of the Debtor, with a 50%
discount. ☑ As direct creditor to the Debtor, the PEN Underwriter can directly negotiate
settlement.
Debtor non-payment at
Redemption date
Final debtor settlement
1st rank debtor collection
GEN Purchaseat 50% discount
Haircut on Vendor exposure
Vendor alignmentpayment
Vendor recovery
Repaymentpriority
PENUnderwriter
Vendor
Channelling liquidity from investors to SME post COVID19 20
Receivable1.1
Receivable2.1
Receivable3.1
Receivable4.1
credit insurerPEN
Underwriter
Vendor Vendor
10% deductible on
unpaid nominal
50% discount on unpaid nominal
Receivable1.1
party 1
Receivable2.1
party 2
Receivable3.1
party 3
Receivable4.1
party 4
3.3.4.2.3. Leverage of concentration in case of insolvencyUnder best practices for trade receivable credit insurers, late collection create administration and heavy direct losses, obliging to limit concentration per Debtor.
Best Practice Scheme SBFinance Scheme
The larger a PEN underwriter exposure towards an insolvent Debtor, the better its recovery.
Channelling liquidity from investors to SME post COVID19 21
3.3.4.2.4. On the contrary in the SBFinance scheme, greater concentration on a Debtor generates:
☑Greater negotiation power:
Aggregating several Vendor receivables increases the PEN Underwriter relative weight within all Vendors.
☑ Profitable settlement:
Having a 50% discount to start negotiations enables win-win, fast settlement with the Debtor
☑Recovery administration economies of scale:
The PEN Underwriter becomes the direct single point of negotiation for several vendors.
By negotiating an equitable haircut; the PEN Underwriter: ☑ avoids losses ☑ paves the way to Debtor’s business continuity ☑ facilitates payment to other trade creditors (i.e. reduced debt)
PEN Underwriting is a highly profitable activity even in case of financial crisis.We provide a synthetic comparative analysis of PENs with trade receivable credit insurance in Appendix 2.
3.4. The process
Sustainable channelling of Investors liquidity to SMEsWith the SBFinance white labeled platform, State Authorities channel investor funds into SMEs, faster, cheaper and more sustainably than through trade receivable securitization.
3.4.1. Involved partiesThe Public Authority fronting the SBFinance white labeled platform contracts with each involved party:
Parties General contractual goal
Public AuthorityParty organizing the service to the different parties with the SBFinance white labelled platform in software as a service
SME VendorsConditional right to sell their receivables.Collateral account obligation of 10% of outstanding receivables.
Investors Access to platform for purchase and sale of GEN on SMEs (GEN-SME+)
State
Underwriting purchase commitment of GEN at 50% discount on unpaid nominal by Debtor at GEN redemption date (PENs)(optionally with a capped exposure through excess loss underwriters)
SBFinanceSoftware as a Service level agreement for operational execution of the white platform for the Public Authority fronting entity.
Channelling liquidity from investors to SME post COVID19 22
3.4.2. Liquidity injection through GEN-SME+ scheme The illustration below outlines the main steps: 1. The SME has trade receivables as a result of B-2-B sales of product and servicesUpload on the Public Authority (SBFinance white labelled) platform:2. Uploaded receivables by the SME go through automated validation checks.3. Accepted SME receivables are proratized in Genuine Enterprise Notes on SMEs with enhancement- ‘GEN-SME+’
• Units of receivables: a 1000.00EUR SME receivable is proratized in 1000.00 EUR GEN-SME+
• With a redemption date, computed to ensure a 95% payment probability • With a credit enhancement ensuring 100% nominal payment at redemption dateI
4. A daily auction takes place on the Public Authority SBFinance white labelled platform.Investors tailor placement of their liquidity in GEN-SME+ in a snap (amount, redemption date, debtor) independently from the receivable size.
I) Comprised of 2 elements above describe in i) § 3.3.2.2. SBFinance Vendor alignment scheme and ii) § 3.3.3.2. Potential Enterprise Notes (PENs)
At auction closure: 1. Investors with the lowest order are credited from GEN-SME+ against cash2. The SME receives the GEN payment from Investors less PENs credit enhancement fee and administration fees3. Part of the proceeds are kept on a collateral account 4. Amount are collected from the Debtor Upon GEN redemption date: 9. The total nominal value of GEN-SME+ is collected:
a) The collected proceeds from the Debtor:b) In case of non-full payment by the Debtor,
ȍ GENs are purchased by the State at 50% of unpaid amount and ȍ The residual amount is paid by the SME (i.e. funded cash collateral)
10. Investors are paid the GEN-SME+ 100% of their nominal value
GEN-SME+Redemption Payment
GEN- SME+(Genuine Enterprise Note)
Prorate unit of SME trade receivable
Redemption date
Purchase commitment at redemption date
SMEs
Trade receivables
Liquidity with no Þnancial debt
Debtors
Receivable payments
State
Public Authorities
Receivables to GEN-SME+
GEN-SME+auction
Cash collateral(10% of outstanding)
Best Price
Inventors(professional)
GEN-SME+
GEN-SME+Redemption Payment
PENs(Potential Enterprise Note)
Purchase commitment at redemption date
on 100% of not fully paid GENs by Debtor
with 50% discount on unpaid GEN nominal
1
6
8
3
4
7
9 10
5
Eligiility test2
State (PEN Underwriter)
PENsPENs
Channelling liquidity from investors to SME post COVID19 23
Upon subsequent collection from the Debtor: c) The State is paid its investment with interest. d) The SME is credited of any residual amount
Invoice to pay timeline
Averagedelay
GENredemption
Redemptionexecution
SME(Vendor)
Investors
Public Authority(SBFinance Platform)
PEN Underwriter(State)
Receivable upload
GEN register management
SME (Vendor) 10% reserve
Invoice issuance
Cash +
yield
GENs holdings
Cashout
PENsIncome
GENsorders
GENsAuction
ReceivableEligibility
ReceivableInto GENs
If uncollected,purchase @50%
Early cash!
Payment terms
Channelling liquidity from investors to SME post COVID19 24
3.5. Profitably boosting the economy through SMEs
3.5.1. SMEs
More liquidity → Less financial debt →Stronger balance sheetsIn COVID19 sharp economic downturn, GEN-SME+ overcome reduced SME short term funding:
☑ the reduced access to straight loans, ☑ reduced factoring capacity i.e. banks and insurance reduced limits
Immediate liquidity Cash is available within a 1-2 days of the uploaded invoice.
Low funding cost
Unmatchable funding cost i.e. • Daily Public Authority short term rate (further to the auction), and• State PEN underwriting cost, for each receivable, directlyfunciton of the SME Vendor ‘s Debtor credit score
Simplicity Simple upload of invoices on the platform.
3.5.2. Investors
Attractive deposit → More liquidity → More funding.The sovereign nature of GEN-SME+ ultimate debtor make them the cash deposit of choice.
Safety GEN-SME+ sovereign risk is a safe alternative to bank cash deposits
Liquidity Ability to resell any part of position any day boosts adoption
Simplicity Easiness and speed to tailors one’s own placements foster investments
3.5.3. Economic eco-system
Client liquidity → Improved working capital → Increased sustainabilityThe recurrence of the process eventually creates a sustainable liquidity injection benefitting all State’s economic actors:
Earlier client payments
Injected liquidity at SME level percolates through the supply chain to eventually reach out all economic actors.
Reduced bank funding needs
Resulting cash appropriately reduce working capital financial debt needs in a period when banks take a more conservative approach.
Stronger balance sheets
Overall solvency and liquidity ratios creates better confidence from suppliers and banks.
Channelling liquidity from investors to SME post COVID19 25
3.5.4. BanksThe State PEN Underwriters and banks ‘feed each other’:Reinforced enterprise balance sheets improves banks‘s liquidity and solvency.In turn banks recover credit capacity at disposal of enterprises with stronger balance sheets.Resulting increased enterprise liquidity further improves the profitability of State as PEN Underwriter.Under COVID19 economic conditions, the State as PEN underwriter indirectly strengthens banks thereby helping economic sustainability:
Reduced overdues Injected liquidity to enterprises reduces the overdues ratio and therefore the need for provision.
Reduced losses Injected liquidity saves several enterprises bankruptcies.
Stronger debtors Strengthened debtor balances sheets positively impact capital utilization per credit.
3.5.5. State
Stronger enterprises → Economic vigor → Budget deficit mitigationThe PENs unrivalled scheme enables the State to seamlessly orchestrate available Investors liquidity directly to its enterprises
Improved State ESA balance sheets
Purchased GENs at 50% discount, financed by additional sovereign debt and fee revenues, de facto strengthen the State balance sheets.
Scalability
The scheme enables fast deployment to all enterprises: ☑ No need for bank credit acceptance ☑ No need for securitization ☑ Increased reinsurance capacity
Easy implementation Implementation is virtually seamless, accelerating its implementation.
3.5.6. Excess loss Underwriters
Attractive alternative → ↗ Underwriting capacity → ↗ SolvencyWhen the State wants to maximize its exposure, it can find ‘Excess loss’ underwriters who find an attractive sustainable alternative to current trade receivables credit reinsurance in post COVID19 economic situation.
Much lower loss ratio
Purchased GENs at 50% discount by the PENs Underwriter facilitates settlement before any XL Underwriter intervention.
Underwriting capacity leverage
The higher seniority of intervention broadens the number of parties interested in XL underwriter capacity.
Transparency Possibility to organize real time statistics on the platform.
Channelling liquidity from investors to SME post COVID19 26
GEN-SME+ is the most effective sustainable tool post COVID19 to channel liquidity from investors to SMEs.
☑ Investors access a sovereign equivalent cash equivalent deposit, accessible in a snap.
☑ SMEs enjoy additional liquidity in record time, without financial debt beside bank credit.
☑ Reinsurance underwriters access a safer credit reinsurance underwriting alterna-tive.
☑ The State, through its remunerated purchase commitment of unpaid receivables with a 50% discount, strengthen its ESA balance sheets. It also can cap its expo-sure through reinsurance.
☑ Fast adoption is facilitated by the simplicity and automation of the platform. ☑ The integrated exclusive patent pending architecture ensures full scalability with
virtually no additional administration effort for the State.
With GEN-SME+, the State strengthen the connection between all actors of its economy.By implementing the SBFinance scheme, the State:
☑ mitigate short term liquidity crunch with no impact on its ESA financial accounts. ☑ create, along banks, additional sustainable funding capacity. ☑ can transfer its exposure to the private underwriters.
4. Why GEN-SME+ is THE most effective ‘economic boost’ tool
SolvencySolvency
Liquidity
CapacitySolvency
State Reinsurers
SMEs Investors
Economiceco-system Banks
Reinsurance
Liquidity
Liquidity
Purchase commitment
Channelling liquidity from investors to SME post COVID19 27
Sustainable Base Finance (SBFinance) is a Belgian Fintech that combines breakthrough financial engineering with state-of-the-art information technology to deliver optimized customer centric financial solutions.
The SBFinance platform proposes efficient, effective customer centric alternatives to asset securitization.
The SBFinance platform integrates exclusive patent pending architecture enables unlimited scalability.
The platform’s agility gives the ability to Originators to deploy new solutions meeting their needs.
Beyond limiting beliefs of the generally accepted paradigms, SBFinance innovates by transforming Finance into a mean of Harmonious Economic Growth.
SBFinance pursues societal goals: contributing to building a better Planet.
Profits are allocated accordingly.
Contact
Olivier [email protected]+32 495 28 07 78www.sbfinance.eu
Sustainable Base Finance SARue Joseph II, 1701000 BrusselsBelgium
5. About Sustainable Base Finance
Channelling liquidity from investors to SME post COVID19 28
SMEs Bank
Credit Insurer
Special Purpose Investors
Discountedreceivables
Insurancefee
Receivables non-paymentindemniÞcation
Discountedreceivables Securities
LiquidityLiquidityLiquidity
8 7 6
5
4
32
1
1. The SME takes a credit insurance providing indemnity rights to the holder of the receivables2. The SME sells at a discount its receivables to a Bank and collecting 90% of the receivable on sale and, 10% if and when paid by the debtor.3. The Bank aggregate them and sell them to a special purpose vehicle (SPV),.4. The SPV, that benefits from credit insurance subrogation.5. The SPV structures securities for investors (prospectus, …) with:
• A redemption date,• A receivable purchase policy, • A certain investment risk rating.
6. SPV securities are sold to investors against liquidity.7. Collected proceeds are use to buy receivables from the Bank, who keeps a 10% exposure8. The Bank pays the SMEs for the purchased receivables.
I) By comparison to regular non recourse factoring
Advantage for the originatorSelling trade receivables through securitization offers the following advantages to an originator:
☑ Funding leverage Funding while retaining 10% of the exposure
☑ Scalability No capacity limitation of one single underwriterI
☑ Funding rate Not integrating banks’ margin
Advantage for investorsBuying trade receivables securitization products offers the following advantages to investors:
☑ Access to asset class: Trade receivables have relative short-term risk
☑ Practicality Simpler than buying receivables one by one
☑ Yield/risk options Investment in rating tranche meeting risk appetite
Appendix 1: The securitization process in a nutshell
Channelling liquidity from investors to SME post COVID19 29
PENs deliver unprecedented credit enhancement quality:
PENs Trade finance credit Insurance
Underwriter exposurePercent of nominal 50% of unpaid receivable
nominal90% of total receivable nominal
Underlying assetUnpaid receivable nominal purchased at a 50% discount
None
Time of paymentAt GEN redemption date (95% probability of debtor payment)
180 days after invoice date
Dilution risk managementVendor exposure 50% of receivable 10% of receivable
Product liabilityContractual product liability insurance subrogation.
Contractual product liability insurance subrogation.
Predictable discounts Managed through limited GENs issuance.
Case by case management.
Recovery management
Recovery breakeven50% discount on settlement
10% discount on settlement
Insolvency negotiationAs receivable owner, direct participation to negotiations
By trade finance receivable owner. Security(securitization)
Financial crisisGreater position in the pool of creditors facilitate recovery
No negotiation leverage.
Appendix 2: PENs Vs.Trade Finance credit insurance
Channelling liquidity from investors to SME post COVID19 30
Payment
Contracts
Documents
Supply Chain
RiskMarket Place
Portfolio
Underlying Registry
The SBFinance software is a Software as a Service platform, accessible through a web browser.
1.ModulesThe SBFinance Platform is organized in different modules
2. InfrastructureSeveral physical servers run all the virtual machines required by the Platform and are interconnected with low latency/high bandwidth links.
User access ☑ Dedicated APIs ☑ Encryption by https
Bank access ☑ Via VPN ☑ End-to-end encryption
Data processing and storage
☑ Virtual machines ☑ Encrypted storage
Physical servers
☑ Owned by SBFinance ☑ Dedicated exclusively to the bank ☑ Located in certified (ISO/IEC 27001) European
data centers
Appendix 3: SBFinance Platform overview
EncryptedVMs
DedicatedPhysical Servers
Datacenter(Germany)
User BankSystem
Internet VPN
User API Bank API
Channelling liquidity from investors to SME post COVID19 31
by Olivier Gazon