Salvatore Rosato, Head of Capital Markets, Intertrust Luxembourg, and Constantinos Kleanthous, Director, CSC Global Financial Markets, provide insights on the industry trends driving supply chain finance—and technology solutions to reduce its complexity.
Supply chain finance (SCF), also known as reverse factoring, is crucial in keeping commerce moving for multinationals and their suppliers—particularly in these testing times. But it is also a complex financing solution, often processing thousands of trades each day.
When finance flows seamlessly throughout a supply chain, companies thrive rather than survive, creating scope for increased product development, sales, and even job creation.
The Covid pandemic and the Ukraine-Russia conflict had a huge impact and caused acute disruption to the global supply chains. This is also reflected in the significant growth of the SCF volumes in 2021 and 2022: global volume of SCF increased by 21% to USD 2,184bn between 2021 and 2022 and in the same period funds in use also rose by 20% to USD 858bn.[1]
This is reflected across Intertrust Group’s client portfolio too, with healthy, steady growth in SCF securitisation mandates over the past 12 months, especially in Luxembourg. Our portfolio figures in Luxembourg show a significant increase in size: up by 145% in 2022, and by a further 115% the first two months of 2023. And this growth is expected to continue.
Factors that helped propel this in Luxembourg were our specialised Capital Markets solutions dedicated to SCF, including a robust, fully-automated process for daily transactions, our proven track record, as well as the new Luxembourg’s Securitisation law, which came into effect in March 2022. This new law could provide an important boost for the local market. It allows for greater flexibility, offering many options for structuring the securitisation of SCF receivables.
Since the law was put in place, Luxembourg has become an even more favoured European financial hub for the domiciliation and administration of SCF platforms.
With this in mind, we see SCF as being one of the fastest-growing asset classes to watch this year. And based on our client activity we are confident that Luxembourg, Ireland, and Italy will be especially active marketplaces for supply chain finance administration.
When the movement of goods gets delayed—as we have witnessed throughout the Covid pandemic, the energy crisis, Brexit, rising freight prices, raw material shortages, and the conflict in Ukraine—any consequential delay in funding flows has a compound effect on all parties.
These supply chain challenges to the global movement of goods, along with growing pressure on sustainability, have collectively made most products and services more costly.
Rising interest rates have also driven up the cost of traditional corporate lending, making it less competitive. But supply chain finance has been able to offer a helping hand.
It is very unlikely that trading companies will go back to the pre-pandemic days of being reliant on a smaller number of suppliers, in one region, or “just-in-time” inventory strategy.
This means supply chain finance will have added complexity as the number of parties in the supply chain and the number of daily trades across multiple jurisdictions and currencies increases.
The more proactive, post-pandemic “just-in-case” inventory trend is likely to remain for 2023 alongside greater reliance on supply chain finance. That is because, in our experience, supply chain finance is benefiting from the shift away from paper-based models to SCF automation tools provided by platform developers and securitised by platform administrators.
For clients in this asset class, SCF’s growth is not a singularly positive thing—high volumes, high complexity, and stress on capital and human resources means there is a need, and opportunity, for innovation.
Let’s paint a picture of trade complexity. A single mandate on an SCF securitisation platform will easily perform 500 trades per day, and for others this figure is higher. With growing numbers of mandates, it is clear that a supply chain finance securitisation platform will help clients focus on what they do best.
Technology solutions can vastly improve how SCF is managed. But with such complexity underpinning these mandates, investors understandably look for proven track records.
Our clients are already seeing the benefits of using our platform:
[1] World Supply Chain Finance Report, 2023 Page iv