Evaluating Working Capital

Building an effective approach to Supply Chain Finance

April 2020

Kieran O'Regan
Head of Working Capital Solutions
Global Transaction Banking Department, Europe Office
Mizuho Bank, Ltd.

An early March EuroFinance conference hosted in Madrid examined the issue of working capital, with a focus on Supply Chain Finance (SCF) which is increasingly seen as a way to support a company’s working capital position and relationships with suppliers. London-based Kieran O’Regan, Head of Working Capital Solutions EMEA within Mizuho’s Global Transaction Banking group attended and represented Mizuho on the panel discussion.

Here are a few key findings from the event.

SCF is very clearly a key strategic product for corporates and their suppliers, with two large corporates – ROCHE and Kimberley Clark – presenting on the success of their programmes. An effective SCF approach allows corporates to manage and meet working capital targets and KPIs, supports the alignment of stakeholders across Treasury and Procurement and drives process improvements. The benefits are well understood but best practice for implementation continues.

Ratings agencies, while supportive of SCF, are still clarifying how programmes can be assessed. Financial technology (fintech) appears to be an obvious answer to some challenges, but is not yet sufficiently well-established or proven. Overall, the eco-system is still developing with the objective of finding ways to improve working capital and free cash flow conversion through integrated solutions. This will require significant collaboration within the industry among corporate users, bank arrangers, funders and fintech as well as with industry bodies, ratings agencies and regulators.

Ratings agencies Moody’s and S&P, both of whom presented at the conference highlighted that with fewer than 5% of users adequately disclosing SCF in their financial reports, there’s significant need for this to improve before the benefits of SCF can be fully appreciated. In particular, ratings agencies are concerned with the hidden liquidity risks that are potentially posed by large-scale SCF solutions where they are material from a balance sheet perspective.

Currently, the agencies are only likely to seek to add disclosed SCF facilities to net adjusted debt for rating analysis when:

(a) where it is of a material nature vis-a-vis overall debt and liquidity for a company;
(b) where the payment terms are deemed to be beyond the norm for the corporate in their specific sector;
(c) where the structure is deemed to be ‘debt like’ and
(d) where it could pose significant liquidity risk in the scenario where it is withdrawn by the funders.

Fintech solutions are developing rapidly, including those based on blockchain and AI, but widespread adoption is not yet being seen. Currently, they can and do make the delivery of SCF programmes more efficient, they rely on the availability of bank funding because capital market-based funding alternatives, while attractive, are much more complex and less amenable to scaling SCF programmes.

For most corporates, the most beneficial process currently is to maintain relationships with their key banking partners when structuring and rolling out SCF programmes. These offer secure credit lines alongside regulatory oversight and control and are therefore well positioned to ensure that working capital requirements and available funding are best managed.

A final consideration is sustainability, which has been flagged as a key driver for the industry. Corporates looking to enhance their ESG objectives have the opportunity to seek SCF solutions that are ESG compliant and it’s likely this will be a key feature in new SCF programmes.


Disclaimer: This publication has been prepared by Mizuho Bank, Ltd. (“Mizuho”) and represents the views of the author. It has not been prepared by an independent research department and it has not been prepared in accordance with legal requirements in any country or jurisdiction designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. More on our disclaimer.
Mizuho’s Global Transaction Banking (GTB) service covers the full suite of GTB services, including working capital and trade solutions, and Supply Chain Finance specifically. SCF solutions are based on the need to provide integrated transaction and funding solutions aimed at improving working capital for corporate clients. Mizuho is a leading provider of working capital solutions for corporates globally.


Related information


Back to top