Access to working capital is a hot topic given market conditions today. Identifying new sources of funding is therefore a key focus at the Tallinn Supply Chain Finance Summit 2023. Jim Turnbull, Deputy Director at the EBRD, describes the institution’s approach to capital and financial markets development in the Baltic countries.
With inflation and war-impacted supply chains currently driving up costs, the search is on to find new ways to finance working capital. To that end, commercial paper (CP) and supply chain finance (SCF) are converging to finance purchase invoices as trade assets, a common enough practice in some parts of the world but still in its relative infancy in the Baltics and Central Eastern Europe.
New debt instruments in the Baltics
Turnbull will lead one of the panel discussions at the summit itself and has already said that the development of financial services in the Baltics is an important goal in its own right.
However, the current geopolitical crises (e.g. rampant inflation, war in Ukraine, etc.) mean that focus areas such as food and energy security are EBRD priorities. “That said, we must not lose sight of climate issues and the environment; promoting cleaner energy sources is, in reality, a potential solution to over-reliance on Russian oil,” explained the Deputy Director.
“From the viewpoint of market development, the goal in the Baltics is to diversify capital markets and to widen the range of debt instruments that have not been widely used so far, such as our support for the development of CP products.
Traditional instruments, such as senior unsecured bonds, are relatively common in Estonia and are purchased by pension funds, banks, insurance companies, asset management companies, and even by private individuals.
However, CPs with a maturity of up to one year are more exotic in the Baltics and the simple fact remains that some legislation and practice remains incomplete. For instance, Latvian pension funds cannot as yet invest in CP.
“CP itself can prove invaluable to cover extraordinary price increases in situations where access to bank financing is limited. However, additional support from pension funds and the asset management industry is needed. Additionally, as these markets develop, EBRD will also look at supporting the development of more complex longer term debt instruments such as synthetic securitisation, subordinated debt and covered bonds,” Turnbull said.
He adds, “EBRD also encourages foreign investors to view the Baltics as a single investment destination for both debt and equity debt instruments. Although local economies are small, volumes for the three countries combined can prove attractive to foreign financiers.
We undertake frequent policy dialogue with institutions such as MSCI and FTSE Russell to advocate a single investor rating to the Baltics. If you then add a proven, and largely uniform, regulatory and technical infrastructure, it is possible to introduce more capital to the region.”
A business environment that develops financial services also creates jobs. A good example is Luxembourg, which has been able to create conditions for the provision of many financial services in its jurisdiction. When it comes to realising such possibilities in the Estonian market, Turnbull concludes, “Luxembourg created an efficient Bond Registry that meets the requirements for investing in listed instruments. Estonia could look for similar opportunities.”
How development of capital markets helps small businesses
SCF is one of the fastest growing trade financing solutions, with the global volume of financed purchase invoices increasing by as much as 38% in 2020-2021.
“This is one of EBRD’s current focus areas. We encourage the development of better technical and legal structures for the financing of purchase invoices,” confirmed Turnbull.
“We see a lot of potential in this product, as the purchase invoices of strong companies are a fairly low-risk asset class and therefore attractive to financiers. On the other hand, the financing of purchase invoices improves suppliers’ access to financing. Considering the current uncertainty in the global economy, the interest in financing business activities in this way is increasing,” he concluded.
Uve Poom, SupplierPlus Group’s Development Manager, said that SCF itself, a.k.a ‘purchase invoice financing’, is an underutilised opportunity in the Baltics. “For example, supermarket chains Selver, Rimi, and Maxima have a huge number of suppliers; on every day, thousands of invoices are submitted to the banks for financing.
Classical factoring is thus already well known to Estonian suppliers, but for buyers from large companies in the Baltic countries, purchase invoice financing, or reverse factoring, is a less well-known solution.
In this case, the purchasing party organises the financing limits, as well as data exchanges with banks. The use of reverse factoring greatly simplifies invoice financing, as a single solution is implemented for all suppliers, rather than tailoring a suit according to the processes of hundreds of suppliers.
The supplier does not have to go to the bank separately, take offers, send invoices, etc. SupplierPlus can automate this process on a much larger scale with the help of the buyer,” said Poom. “Reverse factoring is very convenient for suppliers; they can cash their invoices quickly and the receipt of the invoice remains a concern for the bank instead.”