Read Barclays Corporate Banking’s response to Covid-19 to find out about ways we can support your business.
Listen to the latest from Barclays Trade and Working Capital team who discuss support for businesses trading through Covid-19 (Coronavirus).
On this call we discussed how businesses may be experiencing issues with their ability to deliver against contracts or perhaps that their counterparties may face this challenge. Where this is the case, it may well be that you, your suppliers or your customers are looking to claim “Force Majeure”. We looked at some of the key steps and considerations businesses should therefore be looking at. We also discussed the situation many businesses are facing in relation to claims they are seeking to progress under their Business Interruption insurance policies.
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Support for Businesses Trading Through COVID-19 Conference Call.
At this time, all participants are in a listen-only mode. I must advise you that this telephone conference is being recorded today.
And I would now like to hand the conference over to your first speaker, Mr. Russ Grazier. Thank you. Please go ahead.
Russ Grazier: Thank you, (Ina), and welcome to everyone who's been able to join us today. I know that we've got many people on the call from the U.K., but we're also joined by those in many different parts of the world. So good morning and good evening wherever you are and wherever you are, we very much hope that you and your families are staying safe and well during what we know is a very, very difficult time.
Here at Barclays, we absolutely recognize the huge amount of pressure and uncertainty that the COVID-19 crisis has brought. Wherever we can, we'll look to provide the support, guidance and access to information to help our own people of course, but as well our customers. Over the last 325-plus years Barclays has been around (and has seen some) really challenging and difficult times before, and we very much hope that like in those challenging times before, (that we can work weekly) to help ensure that we all manage to weather the current crisis.
With an aim of helping to provide the insight and support, we've been undertaking a range of measures and putting out a range of information to help our customers and you can access that information through the barclayscorporate.com/covid-19 website. So please do take some time to access that site.
The purpose of this call is very much to continue the theme of providing information to you that we hope you'll find valuable. This call is a first in our Barclays Trade and Working Capital COVID-19 series, and it will focus on force majeure. Our intention is that we will host weekly calls during the (period) of the COVID-19 crisis and indeed the rest of April will see us cover the following topics.
So this time next week on the 15th, we'll talk about the use of documentary trade in a period of increased risk, on the 22nd of April, we'll talk about working capital and how to optimize it in a period of high demand, and on the 29th of April, we'll talk about U.K.'s export finance and the role that the U.K.'s award-winning export credit agency is (doing) to support British businesses.
But back to today. So in response to a number of questions raised by our customers, we thought that the subject of our first call in the series should be force majeure. We know that it's a clause that's normally used to describe a term by which one or more (of the parties) is entitled to suspend performance of its obligations and/or to claim an extension of time for performance, but it may also entitle termination of a contract.
We've got clients operating across many countries, across many different sectors at both ends of the supply chain and we recognize the importance of providing insight on how force majeure may be (of very rare) relevance to you at this time. We also understand that force majeure may be a particular issue impacting many businesses, business interruption insurance claims. So with both of these key areas in mind, we've managed to find two real experts in their fields to talk to us today.
I'll introduce you to both of the speakers in a moment, but just to say that we'll run through two speaker sessions followed by a Q&A, ensuring that we finish no later than 10:45. Unfortunately, due to technical issues today, we can't open the lines of the Q&A. However, we have had a number of questions sent to us in advance and we'll look to cover those during today's Q&A session.
If we don't get to your particular question, then we promise to respond to you separately, but also what we will do is to advise you of an e-mail address so that if you have additional questions, you can send them through to. In fact, I'll mention that e-mail address now and at the end of the call. So it's tradeandworkingcapital@Barclays.com. That's all one word, tradeandworkingcapital@Barclays.com.
So let me now introduce you to our speakers today. So firstly, we've got Sandy Hall. Sandy's a partner at Clifford Chance, one of the world's leading law firms. Sandy's a partner in their international construction group here in London advising on structuring and negotiation of contracts. Over the course of his career, he's worked in Moscow, Dubai and Abu Dhabi. Welcome, Sandy, and we'll hand over to you in a moment.
Before doing so, I'll also just introduce you to John Batty. So John is director of technical services at Bridge Insurance and also chair of the U.K.'s Regional Chair Advisory Board and a board member of the British Insurance Workers Association. John has over 30 years of experience in both company and (growth) environments and is currently involved in difficult technical insurance placements and portfolio arrangements with several of the largest insurers in the world. Again, John, welcome and thank you for joining.
So without further ado, let me hand over to the first of our speakers, Sandy.
Sandy Hall: Thanks, Russ. Good morning, everyone. Just to echo what Russ said, I hope you're all staying safe and coping in these times. As Russ mentioned, I'm predominately a front-end construction lawyer, but as a result of the recent crisis, I've been spending a lot of time recently giving advice to clients about how to deal with the impact of the COVID-19 outbreak on their contracts and also to help navigate claims. Since many of those claims are founded on contractual provisions or legal concepts of force majeure, Russ and I decided it'd be good if we could have a talk about this topic today.
Now, I appreciate we have many different businesses from a whole range of sectors on the call and from both ends of the supply chain. I also understand that some of the businesses will have an exclusively U.K. focus, whereas others are interested in a more international perspective. My particular focus is international projects, so I'll try and keep the discussion to general principles which will hopefully be of interest whether you're looking at this issue as a supplier or a purchaser.
So first off, what do we mean when we talk about force majeure? Force majeure literally means superior force and it's a concept which originates from civil law jurisdictions. More on that point later. First point to note is that English law does not recognize the concept of force majeure as an overriding legal principle. This means that if your contract is silent and the supplier's in the U.K., then force majeure will not be one of the mechanisms available to the parties to help navigate the current crisis.
But assuming that your contract does include force majeure provisions of some nature, then what are they designed to achieve? Well, as Russ mentioned, in broad terms, the purpose of these clauses is to allocate risk for exceptional events which neither party is responsible for and which are outside their control. The classic examples of what we used – of force majeure are what we used to call acts of God, so earthquake, hurricane, tsunami and the like, but also war, general strikes, riots, et cetera.
Now, epidemic and quarantine is often either specifically mentioned in these clauses or may qualify under a general description of events outside of the parties' control. The first thing to note, however, is that market practice regarding the use of force majeure clauses varies widely sector by sector and by geography.
I know that, from looking at supply terms for a major U.K. supermarket for example, that in the wholesale sector, the force majeure clause may be one way only and benefit the purchaser only. In the oil and gas sector on the other hand, it's quite common for the force majeure clause to be a closed list of prescribed events and sometimes epidemic is not included. In the U.K. real estate development market, it's common practice to include the concept of lowercase force majeure as a time extension and also a termination ground, but this concept is not further defined.
As I mentioned at the start, the concept of force majeure is not recognized as a matter of English common law and there's little guidance in English courts as to what force majeure would mean in practice. However, it's generally considered that to qualify as FM in a contract which does not further define the concepts, the event must be firstly an exceptional event which is beyond the parties' control which could not reasonably have been provided against before entering into the contract which when, having arisen, could not reasonably have been avoided or overcome and which is not attributable to the other party.
In fact, these principles underpinning the definition of force majeure are often found in contracts which set out detailed force majeure provisions as threshold hurdles which must be met in order to qualify as force majeure. As you can expect, we've spent a lot of time in recent weeks analyzing whether the coronavirus qualifies as FM, particularly in the early stages when the impact was more limited and restricted to factory closures and quarantining in China.
In some, cases that was because some force majeure clauses restrict the operation of the relief to the country where the supply or the works and services are being performed which makes that analysis of that issue more relevant.
As I hope is clear from all the above, the starting place when analyzing the extent of any FM relief which may be available has to be the contract. Even where epidemic is not listed, the current unprecedented events may qualify as force majeure as an exceptional event, et cetera or via the general conditions mentioned above or it may be caught by other limbs of the force majeure provisions such as exercised by government of statutory powers, for those of you who are familiar with the JCT form of building contract in the U.K., or perhaps political force majeure due to the imposition of mandatory restrictions or new laws or even it might be caught by civil commotion, although hopefully that is not yet to come.
But in summary, unless your contract includes a very narrow and exhaustive list of FM events and epidemic or quarantine is not listed, our general view in most cases is that the current crisis and the measures that are being introduced will in some way qualify as force majeure. In many ways, it is classic FM.
One further point to note before moving on to look at the other tests for force majeure is that it's very important that if your contract relates to the provision of works or services outside of the U.K., to consider whether other supervening principles of local law may apply whatever the governing law of your contract might be. As I mentioned at the start, force majeure is itself a civil law concept.
So in the UAE, for example, whose civil code in terms based on the Napoleonic Code, the concept of force majeure is hardwired into the legal framework and allows parties to terminate the contract if it's become impossible to perform due to the supervening intervention of an act beyond the parties' control.
Many jurisdictions also have principles of economic hardship whereby a party whose performance has become more onerous as a result of an exceptional, unforeseeable event can apply to the courts to have the terms of the contract varied to reduce the burden. Although the bar is often set quite high to qualify for relief under these provisions, it's nevertheless very important for everyone on the call to consider the issue and check the local law position.
Turning back to those contracts which do contain an expressed force majeure clause and assuming that the force majeure clause is wide enough to cover epidemics, quarantine, acts of government, et cetera, there are three further tests that have to be met for a party to qualify for force majeure relief. Firstly foreseeability, secondly, causation and third, mitigation.
The first, foreseeability, we've discussed in brief already. It's common for contracts to exclude events which are reasonably foreseeable to the affected party. The (FIDIC 99) suite of contracts, which will be familiar to many of you, adopt this concept, but given the unprecedented scale of this crisis, that should be an easy test to satisfy in this case in our view.
The more important limb is the – is the second one, causation. This is an absolutely critical factor and is often overlooked. For that, the party has to – claiming force majeure has to establish not only does the event in question qualify as force majeure, but also that the force majeure event have prevented or hindered them from performing the contract. This is sometimes described as a but-for test because the burden is a set quite high, I.E, but for the force majeure event, the party would have been able to perform.
So as a general statement, it's worth bearing in mind that force majeure clauses are not usually so generous as to offer relief because the services or goods will now simply be more difficult or more expensive to perform or to obtain. In fact, some force majeure clauses specifically exclude such circumstances from the ambit of the clause. So it's always, again, important to check the terms of the contract.
A lot of the force majeure notices we're seeing on our projects seem to miss out this causation factor and sometimes it's because the contract itself contains strict notification requirements that make providing notice of a delay event a precondition to any entitlement to an extension of time or to any other relief. So that's meant some suppliers and contractors have been rushing to fulfill these notice requirements, but in so doing have failed to provide the necessary evidence of how and to what extent the performance of their obligations has been hindered or prevented.
The third and final factor is mitigation, I.E., the claiming party looking to seek – seeking relief from its obligations is under a duty to show it has taken reasonable steps to mitigate or avoid the force majeure and that's not an easy dynamic in the context of this virus given the pace of development.
It has not been easy for contractors or suppliers to assess how long coronavirus may affect a certain area or activities and there's been an element of relationship management that's come into play in assessing what steps a contractual supplier might have to take by way of reasonable mitigation because this needs to be looked at at the time and not with the benefit of hindsight. Requiring that suppliers find completely new sources of equipment or materials, for example, would likely constitute more than reasonable endeavours mitigation.
Now, I've talked about the tests that must be met to qualify for force majeure relief, foreseeability, causation and mitigation. Now, what are the consequences? The way it usually works in most contracts is that establishing force majeure will lead to release from performance and therefore the risk of a default termination on the part of the effected party and it will entitle a supplier or a contractor to an extension of time to any target dates. At the same time, both parties bear their costs at least for a period. So if a contractor or a supplier has additional storage costs, for example, or transportation costs, then that is for its account.
Taking the time aspect first, it's important to bear in mind, and we'll come back to this later, particularly for those on the call who are purchasers or employers, what the consequences of acknowledging a force majeure claim or even declaring force majeure yourself are on your other contracts. Extending time under one contract may lead to knock-on delays under another contract or it may trigger notification requirements under the finance documents, for example. That's not to say it's the wrong thing to do necessarily, but it's important to adopt a holistic approach to this crisis and affect all – across all affected contracts rather than look at any one contract in isolation.
And now there's looking at the cost element. As I mentioned, usually force majeure provisions stipulate that each party bears its own costs. This is on the basis that force majeure is a neutral event and the losses should lie where they fall, but that's not invariably the case. Offshore contracts, for example, for the supply of vessels often include a force majeure rate which is payable to cover certain unavoidable, standby costs and which kicks in straight away. On the other hand, some contracts force majeure with a political nature, such as acts of government, can attract costs as well. Again, so check the contract.
(On this) final point on this I'd like to mention is that where restrictions or quarantines have been introduced to contain the virus and these have the force of law or are mandatory, this may entitle the contractor or supplier to release under the change in law provisions.
Now, change in law concept is quite a common feature of constructional supply contracts at least, although the relief is often restricted to change in law in the country where the works or services are being performed, but there's an important advantage in framing the issue in this way in that change in law provisions typically grant the claiming party additional time and money rather than just time, as is the case for force majeure. So again, check the contract on that point.
And finally, many contracts allow parties to terminate the contract in the event of a – of prolonged periods of force majeure and the periods vary from contract to contract ranging from quite short periods of two months to, in some cases, more than a year. Typically the delay arising from force majeure has to be consecutive days.
We've not yet seen anybody exercising this right, but it's getting close on certain contracts and where that's the case and assuming the parties do not want to terminate, we're recommending that the parties confront this issue early on as part of the wider settlement discussion rather than leaving the issue to come close to the point when a party can terminate as naturally if one party is sitting on a termination right, this will give them more leverage in those later discussions to potentially renegotiate terms of the contract or the price.
So that's all I wanted to say for now. There'll be Q&A later, but if I – if I could just hand over to John Batty now, please, to discuss and cover the business interruption angle.
John Batty: Thank you, Sandy. Like Russ and Sandy, I'd like to pass on my sentiments to all the callers that I hope you and your families are all safe and well and OK at such a difficult time. I'm the technical director for Bridge Insurance Brokers in Manchester. I'm going to – and I'm a BIBA board member for the British Insurance Brokers Association and I'd just like to take some time just to talk about the validity of this interruption and the policy cover from a COVID-19 perspective.
So (an introduction and purpose that) the COVID-19 coronavirus has spread aggressively from Wuhan in China to every continent except Antarctica since January. Initially in the U.K. in January, suppliers expenses were being considered following supply chain interruption. However, those policies require damage to the suppliers' property as opposed to the absence of people as the trigger for cover to operate. The coronavirus disease is now here in the U.K. and the U.K. government has taken a number of emergency actions and initiated steps to support businesses that have been affected. In those cases, non-essential business have been forced to close on the instruction of the government.
The purpose of my presentation this morning is to highlight some of the areas where the validity of business interruption may be questioned. This is especially necessary given statements by the government and the press to the effect that losses caused by coronavirus will be covered. In those cases, they will not.
Existing and ongoing business interruption claims and businesses dealing with business interruption losses resulting from (an insure peril) where cover is already engaged and where the indemnity period is forecast to stretch into 2020 and maybe beyond should immediately review the situation and the application of the other circumstances clause and the loss estimates with their insurer and loss adjuster.
While many sectors will be affected, those businesses, in particular in the hospitality and leisure sector, with losses will need to review policy (worthiness) and in many cases engage with the insurer and loss adjuster to understand loss modeling that may have been previously agreed for 2019 and will now need to be substantially revised for 2020. Force majeure losses will have an impact on this.
(It's) important that these discussions occur quickly so that businesses that need to apply for government-backed emergency loans and funding do so without delay. Claimants who carry on in the belief that their BI losses will be met in full because their loss predated the arrival of COVID-19 or because they believe statements made by the government and the mayor of London do not apply to emergency funding will be left without funds and will quickly cease to exist.
Now, with regards to coronavirus and damage at the premises, ordinarily for business interruption cover to operate, it requires damage at the business premises such as a fire or a flood and it might be difficult for any business to sustain an argument that damage has occurred at their premises due to coronavirus. Whilst the presence of coronavirus confirmed by swab testing requiring subsequent cleaning would likely constitute damage, closure periods will be short and BI loss is modest. We understand that the virus can only survive for 48 hours outside a host.
(As) notification and claims are being received, it is clear that they mainly relate to the following extensions rather than damage at the premises. These BI extensions are for notifiable diseases and acts of incompetent authority. Businesses are reminded, as ever, to review the precise policy wordings and the peril of notifiable disease can be excluded as a non-damage extension and is particularly relevant to policy holders in the hospitality and leisure sectors.
Some extensions include loss in consequence of any occurrence of a notifiable disease at the premises or within one mile of the premises (as part) of the notifiable disease extension or as part of a loss of attraction extension. Some insurers decided to list the diseases that are actually covered following the SARS incident in 2003. Coronavirus is unlikely to be on such a list. An act of the competent authority extends the application of the – and the – of the denial of (access) extension.
Maximum (damage) periods are likely to be 12 months or less. Just because there has been an outbreak within the specified distance in the policy, it does not mean that the policy holder's business interruption loss flows from that. A simple test of causation must be followed.
The impact of the lockdown (applying) in the U.K. from Monday the 23rd of March is currently being considered by insurers and businesses are encouraged to submit a claim where they believe a valid loss is covered. In particular, this should be considered where the policy wording includes a notifiable or contagious disease extension and does not list the diseases that are covered. It is important to understand that many policies contain these extensions and where they do, insurers will argue that the disease has not manifested itself on the premises. It is inevitable (though) that the Financial Ombudsman Service will start receiving complaints and their rulings will naturally impact how insurers will respond.
Now, from a current position, insurers are now imposing new exclusions on COVID-19. In large part, they say that these are tightening and clarifying the exclusions that already existed and to make it clear that it was never their intention to cover pandemic exposures. BIBA are puhing for exclusions on its covenant renewal or applied to new business and (in the main), this protocol is being observed.
I'd now like to hand back to Russ.
Russ Grazier: Thanks, John. Very much appreciated and also many thanks to Sandy. I guess just before we move into the Q&A session, I guess, gents, please correct me if I'm wrong here, but I think it's probably fair to say that what we've said here this morning is that early discussion, engagement and action is key, reviewing policies and contracts is key and then speaking to your relevant legal professional advisor or insurers is key ..
John Batty: Quite right.
Russ Grazier: ... and that'll be the (way the clients), that if there is remedy, that that can be agreed early and if there isn't, then again equally at least you're on notice of that factor early in the process. Is that fair, chaps?
Male: It is from our perspective, yes.
Russ Grazier: Yes. OK. So as we said earlier, we've had a number of questions that have already been put in and we've had a flow of them during the call also into the e-mail address that I gave earlier. So we'll now try and put some of those questions to John and Sandy. And gents, if you wouldn't mind trying to answer as many as possible in the remaining time that we've got, that would be great.
And just a reminder that if we can't get to your questions, we will certainly come back to you separately and if you've got any other questions following the session today, then as we said earlier, please send them through to us at tradeandworkingcapital@Barclays.com. That's all one word. So tradeandworkingcapital, then @Barclays.com.
So on to the Q&A. So what have we got here? So I'll start, if I may, with you, John. So my business interruption insurance policy contains a notifiable contagious infections disease extension. Should I, therefore, submit a claim?
John Batty: OK. There are two aspects of this. There's one where the extension in particular may list the diseases that are covered under the policy. In the majority of cases, COVID-19 and coronavirus will not be a listed covered disease, but if the wording of the notifiable contagious infectious disease extension does not contain a list of diseases, then it is definitely worth submitting a claim to your insurer.
Speak to your insurance broker and encourage them to argue with the insurers that the government shutdown (order constitutes the) closure of your premises by a relevant authority due to an infectious disease and obviously this is no guarantee of success at this stage, though, but we're hoping that insurers will consider those claims favorably.
Russ Grazier: Yes. Let's hope so, John. Thank you. That's great insight. Sandy, if I now come to you next, if I can read my own handwriting. So it seems from what you were saying that suppliers and contractors stand to benefit more from making a force majeure claim as this will potentially give them more relief from their fixed delivery obligations. Have you seen any cases of purchasers declaring FM themselves?
Sandy Hall: Yes. So the tactic, at least to keep the discussion in the context of the force majeure provisions, which, as I mentioned in my talk, are more favorable to purchasers and employers than other provisions potentially like employer suspension or change in law, but also in some cases because the employer (or purchaser team) is generally concerned about their ability to perform their obligation under the contract, such as granting access to the site or to a warehouse or to comply with their permitting obligations, so declaring FM on their side would excuse them from performance and potentially avoid the purchaser employer being in breach of contract and exposed under the contract.
As I mentioned in the talk, I think one of the most important messages we're trying to get out to the market is that – when we're having these discussions with our clients is that analyzing force majeure entitlements should be considered, but as part of a wider force majeure strategy. For example, it's not just force majeure. You need to think about other potential scenarios under the contract including suspension, breach prevention, change in law, termination.
It's also, as I said, not enough or you should not just be thinking about the ramifications in individual contracts. Try and look at the full chain of contracts including the finance docs, but most importantly, there's a risk – if clients are taking an overly adversarial or aggressive approach at this stage, our advice is that this may give rise to bigger and more serious issues down the line such as counterparty insolvencies.
Now, our more sophisticated clients, they appreciate that to a large extent we're all in this together and that it's not in their long-term interest to be faced with fighting numerous court cases or arbitrations when the crisis eventually blows over. So we're looking at, in some cases, granting short-term compensation to suppliers to assist with cash flow even where the contract doesn't provide for this, but in return for waiving the right to terminate the contract for prolonged force majeure, for example.
Russ Grazier: Thanks, Sandy. I mean, I guess we all hope it does blow over sooner rather than later and when it does, you're absolutely right. Many businesses will continue to thrive and will need to do so by working cooperatively with their current counterparties. So that discussion and early negotiation is absolutely key.
Sandy Hall: Exactly.
Russ Grazier: Thanks, Sandy. John, a couple of questions if I can. I'll take them in turn. So the Chancellor of the Exchequer said (that our) business interruption insurance (would pay our) claims for pandemics under the business insurance – business interruption insurance that we have. Is that correct? I think you may have touched on this earlier, but can you just clarify, please?
John Batty: Yes. The Chancellor qualified his comments to a parliamentary select committee the following day where he reiterated that it was only those with specific pandemic insurance would receive claims payments under the issue of a shutdown order. Pandemic insurance is very rare and policyholders with this specific cover are very much in the minority. It's very expensive. It's hardly ever been taken up and unfortunately a lot of businesses interpreted that as though he meant the infectious disease cover and it isn't. It's only those with specific pandemic extensions where payments will be made.
Russ Grazier: OK. Thanks, John. Yes. I guess kind of (many) businesses now have been sort of lulled into that sort of sense of security ...
John Batty: Yes.
Russ Grazier: ... in relation to the Chancellor's initial announcement, but that was covered, I think, (in the select committee) commentary that was given by the Chancellor.
John Batty: It was.
Russ Grazier: Sorry, John. Yes. Another question if I might. So again, sorry, apologies, my writing, but hopefully I've got this down correctly. Will the government force insurers to retrospectively include cover for the coronavirus disease and thus make them liable to pay claims?
John Batty: No. It's highly unlikely. You can't really – the government can't retrospectively force insurers to change the policy wordings and include cover and if they did, it would – it would cause serious solvency issues for the majority of the insurers in the U.K..
Russ Grazier: OK. Understood. Thanks, John. Sandy, one for you here. So it was helpful to hear your views on the issue from the perspective of existing contracts where the parties' obligations have been affected by COVID-19. What about new contracts? What are we seeing? Are we seeing parties introduce COVID-specific provisions into the contracts?
Sandy Hall: We are. What we're seeing parties do in the sort of the tender stages is trying to include limited exclusions in the force majeure or the change in law provisions to try and benchmark the known effects of COVID-19 as of the date (to sign) the contract. The reason for that is that if you didn't and were to sign a contract today, there's a high risk that force majeure claims would come in immediately. So it's trying to sort of set a standard and a benchmark that then establishes the contract and allows performance and then anything other than what we know today that is unforeseeable would still trigger the relevant provision.
So we haven't actually seen that play out in full and we haven't got a fully negotiated, finalized contract position yet on those points, but it may be perhaps somewhat naive to expect contractors and suppliers to be able to program and price the risks of what we're seeing today when everything is changing so rapidly, but this is what we're looking at with certain clients.
Russ Grazier: OK. Thanks, Sandy. And another one for you if (I may). So I have a contract which – a contract which grants relief for acts of God, but acts of God only. Would this be wide enough to capture the coronavirus?
Sandy Hall: So acts of God, as I mentioned, is ordinarily used to mean things like tsunami and flood, hurricane. If it's only – I mean, it would turn on an interpretation of the relevant clause. If it's only acts of God and nothing else, then that's obviously a bit narrower than normal. When we've looked at this, acts of God in sort of a – in legal sense had a – the definition means that there is no element of human agency. So in a case of coronavirus, I don't think that would satisfy the test because you obviously have the human element, but it's quite unusual for contracts to be written in that way. Tends to be slightly broader, but yes, would turn on the interpretation.
Russ Grazier: OK. Thanks, Sandy. John, one for you here. Why does my business interruption policy not include cover for pandemics?
John Batty: Wow. I've been asked this (one) quite a lot recently ...
Sandy Hall: That's a good one.
John Batty: Yes. I suppose we go back to the – to the basic, really, overriding principles of insurance in that the mutual premium fund of the many pays for the losses of the few and with pandemics, the premiums of the many are not sufficient for the losses of the many. The losses are incalculable, cannot be risk modeled or capitalized for and this makes them commercially uninsurable such as war or nuclear risks. For this reason, they must be viewed as a fundamental risk where government must intervene.
Russ Grazier: OK. Yes. That's understood. Thank you, John. Look, gents, I'm conscious we do have more questions and we'll put those to you and to the Barclays team following the call and revert back to those on the line (that put) those questions, but just to say thank you to you both. I'll just give you the opportunity, Sandy first. If there's anything in closing that you'd like to add, then please feel free to do so and then over to John.
Sandy Hall: No, I think just to – just to reiterate the point about looking at the issues as broadly as possible and to try and have collaborative discussions with everyone involved in the – in the particular supply or trade and look beyond the crisis where hopefully relations can get up back to normal again.
Russ Grazier: Understood. Yes. Thank you, Sandy. And John, I think you may well echo those, but anything that you'd like to add?
John Batty: Yes. No, I echo those words of Sandy, but also to check your policy wording in detail, engage with your professional advisors early. If there is potential that any claim, even where insurers currently are trying to argue against doing so, that it's definitely still worth submitting a claim and obtaining an official response from the insurer.
Russ Grazier: Thanks. Gents, thank you for your respective words of advice and guidance this morning. I think at this point, we will look to move towards closing the call, but again, thanks for your excellent insight this morning which we hope everybody on the line has found useful. Can I thank everybody that's been able to join us again, as we said earlier, wherever in the world you are today and whatever time of day it is.
A quick reminder again that we'll be holding further Wednesday weekly trade and working capital webinar sessions throughout the COVID crisis. So the next call will be next Wednesday the 15th, again at 10 A.M., on documentary trade, followed by the 22nd which will be around working capital optimization and then on the 29th around U.K. export finance and the support that our U.K. export credit agencies can deliver for businesses.
A quick reminder again just of that e-mail address in case you've got any further questions. So tradeandworkingcapital@Barclays.com, tradeandworkingcapital, as I've said, is all one word, @Barclays.com or do please reach out to your usual Barclays relationship (points) or your trade and working capital specialist. Thanks once again for joining us today and finally, I know it's been said many, many times before, but genuinely please do stay safe and well and with that, I'll hand back to – hand you all back to (Ina) to close up the call. Thank you.
Operator: Thank you. That does conclude our conference for today. Thank you all for participating. You may now disconnect. Speakers, please stand by.
The use of Documentary Trade in a period of increased risk
In this call we will look at documentary trade through a Covid-19 lens, covering key products considerations, operational challenges, associated funding options and a number of external factors such as shipping, easements policies, warehousing and more.
Deviash Moodie: Thanks, (Heidi). Hello, everybody. Good morning, good afternoon, good evening depending upon where you're joining us today. Welcome to the second webinar in this weekly series of webinars focused on helping businesses overcome the challenges they're currently facing due to COVID-19.
Thank you for joining us today. I hope you, and your friends, family are keeping safe in the current environment.
We started these webinars last week, specifically, focusing on trade and working capital topics. Management of cash and working capital is crucial for businesses at the best of times. In the current environment, it can make all the difference.
Keeping that in mind, these webinars are focused on demystifying certain areas, which we believe businesses will find useful in navigating the unprecedented disruption we are currently witnessing. Last week, the webinar was focused on the topic of force majeure, and received a great response. The content is now available as a podcast on the Barclays website, as well as the Barclays Corporate Banking page on LinkedIn.
Today's webinar focuses on documentary trade, as well as the impact of COVID-19 on the international movement of goods and services. After enduring economic and political crisis, we typically see a significant increase in the usage of documentary trade. This is because of the increased risk or perception of risk in international trade. We are expecting a similar increase in the usage of documentary trade.
In the first part of today's webinar, (David Whyman) will focus on the typical documentary trade solutions available to businesses. David looks after trade and working capital requirements; so, one of our largest client segments here at Barclays.
He has a lifetime of experience in providing the solutions and we hope you find his insights valuable. I'd like to specifically draw attention to the flexibility of these solutions, which make them ideal for a whole variety of situation.
In the second part of the webinar, Kevin Shakespeare from the Institute of Export and International Trade will focus on the impact of COVID-19 on the international movement of goods and services, and talk about freight and shipping.
He'll also cover changes in customs regulations, as well as new import and export regulations currently in place due to the pandemic. There will be an opportunity to ask questions at the end of the call. We'll try to end the presentations by around 10:30 to 10:35, leaving us a good 10 to 15 minutes to answer any questions.
We have a few that we've already received. So, we'll start by answering those, but we would really welcome any questions that you may have on the topics that we're covering today. With that, let me hand over to your first speaker today, David Whyman.
David Whyman: Thank you, (Deviash), and a very good morning to everyone. I’d like to add my best wishes to you and your families in these extraordinary times.
Worrying times, indeed, on global wellbeing as government's naturally work to protect the health of the citizens augmented by the economic impact with the World Trade Organization having recently forecast the recession caused by the COVID-19 pandemic, with evidence global trade followed up via (inaudible) with no rebound anticipated until early 2021, but only then if countries work together.
Yesterday’s stark forecasts from the Office of Budgetary – Budgetary Responsibility provides detail and the extent of the challenge we face here in the UK. Trade and the ability to input and export is, however, more crucial than ever as businesses move to both preserve and secure supply chains with pharmaceutical and food sectors being most prominent.
As was evidenced through the 2008 nine financial crisis cases, the use of traditional documentary trade increased substantially with risk appetite being considered by businesses through both a buyer and supplier lens.
Uncertainty increases risk, and many businesses may evidence suppliers requesting documentary trade products, as opposed to what may have been previously conducted on open account terms. Securing supply chains with new suppliers may only include to increase this likelihood.
Barclays, alongside most global banks, has a comprehensive suite of products that can be considered in a solution laid the course to both risk mitigate unpaid preservation of cash flows. And they run through some of the – a high-level overview of those considered most relevant.
Import letters of credit, import letters of credit are conditional payments issued by your bank to another supplier on your behalf. A secure payment for your supplier providing they meet the terms of the letter of credit. For example, presentation of documents such as a bill of exchange, an invoice, and bill of lading or air waybill.
This can offer importers more control, which can be a particular advantage when buying from new suppliers. Import methods of credit can also enhance your trading capabilities by supporting your credit status. They can also provide valuable – negotiate the – valuable for negotiating preferential terms such as longer credit periods, thereby, assisting cash flows and, indeed, lower prices.
Export letters of credit, export letters of credit are conditional payment undertaking – excuse me – it’s undertakings issued by your bank – buyer’s bank on their behalf. They give you certainty that you will receive payment for the goods you export provided you meet the terms of the letter of credit. If you ask your bank to confirm the letter of credit, you will have protection against payment default by the buyer’s bank.
In addition to being a secured and fast way to receive payment, export letters of credit can assist the effective management of your cash flow by giving a nonpayment date, currency, and amount, and kind of goes with the – and kind of goes with the fair terms be eligible for discount.
Export collections, export collections provide you with some more secure payment when you export goods. How does it works is as follows: when goods are shipped, you sent documentation such as an invoice and transport document to your – to your bank. Your bank then forwards to the buyer’s bank. The buyer only gets access to the documents after making payment or accepting to pay on a certain date.
Thus, you have – thus, you can benefit from reassurance of payment and can use the banking system to maintain control over your goods. It's important to note, however, there is no recourse to the banks in the event of wrong payment. So, the credit profile of your buyer still needs to be carefully assessed.
Import collections, import collections are a risk mitigant rather than paying for goods in advance, since you make a payment only when you receive evidence of the shipment protecting your business against non-delivery of goods.
When you order goods, the supplier delivers the goods and sends the documents to your bank, who will inform you of their arrival. As the buyer, you will receive documents to take receipt of the goods when you have made payment.
All these guarantees and identities are known within Barclays as BGIs. In a competitive marketplace, BGIs can elevate your credibility and attractiveness as a trading partner assuring customers worldwide of your commitment to deliver.
To be successful in trade, you want to demonstrate that your business can meet its contractual obligations. Our range of BGIs provide your customers with a clear financial commitment to supply goods or services agreed.
Using standard or bespoke working, they can be issued for domestic – for domestic or overseas contracts for any amount subject, of course, to available of suitable facilities, and then a range of freely traded currencies.
Well, what therefore BGIs can achieve for you, including but not limited to the – not limited to the following. One, to provide your buyer with a clear financial commitment to supply goods or services agreed by contract. Two, demonstrate your financial credibility and makes your position more attractive to buyers. Three, issuing BGIs in your buyer’s currency when available gives you great negotiating flexibility.
Four, can be used by bar – can be issued by Barclays from the UK, as well as our international branches an extensive list of correspond – correspondent banking partners. Five, can be used to support you through the lifecycle of the contract.
Finally, the product I just wanted to make aware of this trade loans. Barclays trade loans and green loans offer a flexible way to finance purchases while you wait payment of goods. We construct – we can structure laws to suit your trading cycle on regular, on – or one-off financing needs.
Trade loans are an important and well-established trade finance technique, enabling finance to be provided until payment of goods is received. Particularly suited to wholesalers – wholesalers and manufacturers, trade loans can be used to fund regular or one-off purchase of goods and raw materials.
Barclays’ trade loans can support UK-based businesses with short term working capital needs of 30 to 364 days. So, what the trade loans do for you? Provide funds and until payment from goods is received.
It can be used on open-account collections or documentary credit terms. It can accommodate both high volume and bespoke transactions and can be adapted to your trading cycle. It provide funds to pay import collections and import letters of credit at site while extending your working capital.
It can enhance your reputation with suppliers by allowing you to accept shorter payment terms. We fully appreciate this has been around a whistle-stop – stop run through, but more information could be provided on request through firstname.lastname@example.org.
Queries can also be raised either directly through your trade director as known or relationship director who will support the nominee to trade and working capital director. PwC continuous discussions with our clients and RDs alike to ensure we are aware of supply chain challenges, of engagements and solutions as and when required.
Final point for me is to advise it's very much business as usual at Barclays. And, notwithstanding the majority of staff – staff working remotely, we are pleased to advice execution and delivery had not been adversely affected.
And, in terms of delivering application request to trade operations team, we are left to the impracticality of obtaining wet signatures. Workarounds solutions are in place to overcome this on a case by case basis depending on specific circumstances and can be discussed as and when required.
With that, I’ll now hand over to Kevin Shakespeare from the Institute of Exports to the run through what the IOC is seeing from its members in terms of corporate-related issues together with easements in place with the likes of customs and excise. Over to you, thanks, Kevin.
Kevin Shakespeare: Thank you very much. Excuse me. Good morning, everybody, or good afternoon, good evening. Like the others, I would very much like to hope everyone is well and safe at the current time. And, certainly, we at the Institute of Export and International Trader are very aware of the potential difficulties that businesses face trading internationally in the current environment.
On today's call – webinar, I'm going to go through the impact on exports, impact imports, and the overall supply chain.
So, we're going to look at some of the things that our members are telling us, some of the experiences that are happening currently in international trade, and some of the solutions or easements that are being put in place, predominantly, I guess today from a UK customs perspective, but we can also refer to globally as well.
So, first of all, let's look at the freight impacts of COVID-19. And it is fair to say what we're seeing from members that goods are still moving, but they are subject to delays. So, goods are arriving, but not necessarily on time.
The other issue is the availability of the actual purchaser to be open for business to collect the goods. In some sectors, possibly in what we'll refer to as non-essential businesses – now, I'll talk more about essential versus non-essential businesses shortly – the goods are not being delivered. And they are being, to some extent, stacked and held in warehousing.
So, certainly, at the big trend shipment ports globally, both in Europe and in the Middle East and Asia, for example, some of the large shipping lines like MSC and Maersk and CMA CGM, there is – there is undelivered goods being held at their warehouse facilities at the – at the large ports.
Clearly, there is a push towards good – priority goods and non-priority goods. And, clearly, priority goods in terms of PPE, medical equipment, and some food processing are receiving priority, but I'll talk more about that.
It is fair to say that rail freight is particularly popular at the moment, especially on routes from China to Europe and, to some extent, in intra-Europe rail as well. In terms of ocean freight, clearly, the number of blank sailings or cancellations has increased.
And it's not always easy for importers and exporters to keep up to date with what's happening. So, communication with your freight forwarders becomes absolutely essential. It's essential at all times, but it's particularly crucial now.
What we're also seeing on some of the large global routes is the actual ports or port stops, certainly, of the – of the mega vessels, the large container vessels, is they're not necessarily stopping all the ports that they would have previously done.
So, for example, a route from China to Europe, majors call the likes of Jebel Ali and Dubai and then onto Europe with some of the ports in between, not necessarily covered. So, that is trying to make sure that the goods reach their destination on time, but it's also a reflection of the fact that seafarers and crew are not being allowed into the actual country.
We're also seeing, generally, higher shipping costs, although, sea freight has fallen. Similarly, with air freight, it is heavily influenced by supply and demand. So, sea freight rates have fallen, but they are subject to fluctuation.
But, also, because of pressure on the – on the vessel companies, they're looking at different routes. So, for example, the tolls on the Suez Canal are quite expensive for vessel operators to use. So, to some extent, the Suez Canal is being used less, which means longer sailing times.
In terms of air freight, clearly, the priority is on PPE and medical equipment. And the volume of air freight has dropped by probably over 40 percent. There's a big push, obviously, to move what we're passenger-only aircraft to air freight-only aircraft. And freight rates probably are increasing probably sometime by five times as much if not more.
So, the cost of air freight is more expensive. Some large freight forwarders have been able to charter flights to actually try and keep up with demand from their customers. So, a – very much a mixed picture there, but probably the key takeaway is to make sure that businesses are in contact with freight forwarders all time, especially now.
In the context of impacts on supply chain, clearly, what we've seen from some businesses is that trying to move away as possible from a reliance, if that were the case, on single supply sources. And that very much started in January with China, where – where some European businesses were let's say caught out with just having those single supply sources.
So, in some cases, that's looking at other parts of Asia for supply sources, even other parts of Europe before the problems really occurred in Europe, and even looking at UK supply sources. So, clearly, for some businesses on this webinar today, there could be like ongoing opportunities to be part of supply chains.
But the important thing is on the supply side, whether you're – you’re purchasing or you're a supplier, is to understand your wider supply chain. What is the product you're providing, and where does it fit in?
We have seen some businesses try and move manufacturing from Northern Italy, which is a relatively large manufacturing powerhouse area to other parts of Europe. So, for example, Germany and, possibly, Eastern Europe. So, again, all companies are looking at supply sources and cost possibly will no longer be the main factor in terms of sources of supply.
So, similarly as dealing with suppliers, dealing with customers and clients is important. And what we've seen a lot is generally good communication between customers and suppliers. So, it is important to keep in communication to make sure there's visibility of supply chain for everyone and to try and work together.
And, also, with your employees, if you have employees working from home, that they have access to trade documentation, and all parts of the company are communicating so that goods can be moved, whether that's the finance department, the trade department, export department, procurement department. Everybody's communicating to make sure the goods and the documentation are moving.
Excuse me. Now, there has, obviously, been announcements, certainly, in the UK and globally in terms of what are essential and non-essential businesses.
So, the likes are storage and distribution facilities, which, obviously, covers freight forwarding the movement of goods on ports is an essential business. So, goods are still moving from ports and through freight forwarders. Clearly, again, it's understanding where you are in the supply chain.
So, clearly, do you supply supermarkets and other food shops, which are open, pharmacies, the medical sector, but also the engineering manufacturing sector as well? Do you provide essential services?
And that can also apply for software consultancy services as well. So, trying to, if you like, I understand which I'm sure – which I'm sure you are of that, whether you are in the supply chain for essential or non-essential goods.
Now, in terms of some of the announcements, we've just got some important announcements you may be aware of. There's been a lot of talk of the European Union and other countries in the world requiring export licenses for the exports of personal protective equipment.
So, the likes of facials, gloves, and garments. And it is the case that, if you want to export these outside the European Union, you will require to seek approval and provide evidence of the need, because, clearly, these products are seen to be in the national need at the moment. So, if you like, the national requirements will take priority.
So, if you are providing these essential goods – and we can certainly, after this webinar, provide you with various links, which gives definition of goods and, also, equally the commodity codes, because a lot of this is being run and operate through commodity codes.
You may – you may know them as Harmonized System codes, HS codes, classification, and product codes. They are essential to whether these are classified as good requiring a license.
Now, certain goods coming into the United Kingdom, also, following announcements by the European Commission, can be imported free of import duty and VAT, however, then very much linked to the commodity code – and we can provide you with the – with the government notice. And it's, again, however, very much linked to medical supplies, equipment, and protective garments.
So, if your product fits within that and you are, for example, part of supply chain to the National Health Service, to care homes, to not for profit organizations, it's possible that your goods could be classified and free of import duty and VAT. And we can make the announcement available to you. It is fair to say that the – that this announcement is very much around the national need in the UK and not, if you like, around commercial profit.
The HMRC in the UK have also announced certain easements in terms of how they do business. So, in some cases, that can – can involve accepting paper documents and not electronic documents, fax documents, digital documents. And, again, we can make the announcement available to you. So, if you are struggling to get documentation or get it electronically, there could be some relief for you there. Again, certain goods will receive priority in that respect.
UK Border Force announced late last week that shipments of medical equipment will clearly be flagged as priority items.
So, again, if you are importing those goods liaise with Border Force in advance so that your goods can effectively be fast tracked through Customs. Again, if necessary, liaise with suppliers, the National Health Service if appropriate to make sure that your imported goods are prioritized.
Now, a very important announcement, which was made yesterday and over the weekend, is around import duty and import VAT. Now – and I must stress this, in particular, to the UK, but each Customs Authority in each country the world is open to making similar announcements.
So, the next set of import duty and import that if you hold a duty deferment account with HMRC issue today, the 15th of April, that you can apply to defer payment of import duty and import VAT. Again, we can make the – we can make the link available to you and the telephone number to COVID-19 HMRC helpline to actually make contact.
You will need to provide evidence of financial impact to allow the extension. So, that's if you have a duty deferment account, and your payments are due today. And, as I say, that was an announcement that we rushed out literally very recently.
If you do not have a duty deferment account and duty is payable upon import, it is possible also to seek an extension deferment of payment. And, again, contact details are available there. So, that is a very important announcement with regard to try and alleviate an impact on cash flow.
And they also wanted to talk about trading services. So, we focus a lot on trading goods. What we're seeing in some businesses – excuse me – and I appreciate it's easier – easier said than done.
Some businesses are trying to look at trying to move some production online. Obviously, 3D printing has been talked about a lot, but it is any element of what they do physically that can be turned into an online virtual format.
So, we, at the Institute, for example, have seen a big demand, at the moment, for our training, our education, which is on all parts of the world. So, in the likes of education, language, and consultancy services, the UK is seen as amongst the best in the world.
So, again, UK companies in this sector are seeing lots of inquiries as services can be delivered more online. So,probably just coming to the end of what I'm going to talk about, clearly, some companies are looking at how to use employees favorably. So, training qualification is important.
But I just want to mention – I hope most of you are aware that there is an HMRC grant scheme, which was initially introduced with Brexit in mind – I'll talk quickly about Brexit very shortly – which was originally £24 million, which was allocated towards the training and education of UK businesses in customs procedures, which clearly will be very important from the first of January next year after the end of the transition period.
There is roughly around £5 million left. But we're seeing, at the Institute, for example, a lot of businesses are taking advantage of trying to access what is effectively free money for training and upskilling staff. So, we want to make sure all businesses and not just certain businesses are aware of that.
So, the final point I wanted to mention – and we've spoken a lot about Brexit – is, whilst we've had lots of announcements on COVID-19, Brexit, in terms of the transition period, negotiations has continued.
So, draft legal texts have been exchanged between the UK and the European Union. But there was a big announcement last Thursday, which I think has largely gone unnoticed, which really relates to procedures from the first of January next year.
So, if any of you are using custom special authorization procedures like warehousing and inward processing, simplified declarations, some of those especially around warehousing and inward processing and dues will no longer require a bank guarantee or applications from the first of January.
So, there's no longer requirement for customs comprehensive guarantee. Now, we, at the Institute, are trying to clarify what that means for businesses that already have customs comprehensive guarantees, and also have these special procedures.
But this is potentially a big relief for businesses to use customs authorizations and custom special procedures to improve their supply chain and enhance the way they do business. Now, if anyone is an authorized economic operator on this call, please raise a question, because there was also an announcement around how AEO is going to be recognized in the UK versus the EU.
Now, if there isn't anyone who is an authorized economic operator on this call, then fine. But they were big announcements there. So, thank you very much for listening to me. And that concludes the points I was going to raise. Thank you.
Deviash Moodie: Thanks, Kevin. Thanks for raising some very important points here. As you kind of laid out, there have been a series of important announcements. And, given the volatility of the environment, some of these announcements may go unnoticed. So, thank you very much for putting them all together in a very succinct manner.
We’ll now take some questions. We have got, like I said, a few that we've already received. So, we'll probably start with those. But, before we do that, (Heidi), do you want to just let everybody know what the process for asking questions is?
Operator: Of course, if you do wish to ask a question, please press star one on your telephone, and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, if you do wish to ask a question, please press star one.
Deviash Moodie: Thanks, (Heidi). And, while we – while we kind of compile any questions that we might get, why don't we start with a few questions here? Kevin, if I may start with you, you know, given the disruption in the supply chain that we've experienced over the last few weeks, how confident can we be that ports will stay open and customer operations will stay open?
Kevin Shakespeare: Yes, that's a good question. Thank you. So, certainly, there is priority to port staying open. So, clearly, examples would be – would be Singapore, one of the largest global ports in the world.
So, there is a priority on port staying open. However – and, again, a priority for Border Force staff and Custom staffs at the ports not to come into contact with other people, whether that's freight forwarders, traders, (haulers), et cetera. So, there is that priority. However, it is fair to say – excuse me – some ports are taking preference.
So, if you look at air freight, for example, East Midlands is probably the largest airport in the UK in terms of percentage of freight that goes – that goes by air. Heathrow is keeping one runway open at the moment. So, again liaising with the freight forwarder to make sure that your port and airport is still – you know, will be open for business, but it can take the business.
So, clearly, the large UK ports like Felixstowe, Tilbury, Southampton, and Liverpool, for example, are still open for business. But liaising with freight forwarder are under trade route, just in case you're using, for example, a feeder port is very, very important to make sure it's still open and the (haulers) can get to a port and then the vessel is sailing.
So, that becomes essential – that communication. I would say, if you have track and trace technology working with your freight forwarder, that is particularly important at this time.
Deviash Moodie: Thanks, Kevin. If I can go to David now, David, you laid out a whole host of, you know, work out documentary trade solutions. Now, I know we have a large variety of customers on this call.
Some of whom might be very well versed with these solutions, but, if there’s a customer on the call, who is not familiar with the solutions and who has not used this before, how easy or difficult is it to kind of start using the solutions? And what should be the first step they should take?
David Whyman: Yes, good question, (Deviash), and thank you. Yes. I mean, from my – from my walkthrough or very brief overview of the products, you know, some might think there's a certain mystique around that trade pulpit and there's a wealth – wealth of doctrine.
But the products I guess in terms of what the RM are varying in terms of complexity. You know, the guarantees, for instance, are relatively straightforward and easy to do. And I have to say that’s probably the lion's share of what we do within – within Barclays trade and working capital.
But then you get down to documentary credits that are a little bit more complex in nature, but what we offer is that any client that's got an interest and that wants to talk further on that, then we will talk to them through one of the trade directors or one of the relationship directors to understand what the clients are looking to achieve and what products and solutions might be most viable for their particular business needs, because it's important for us to protect our clients at all times, whether it be seen in risk mitigation or assistance on cash flow requirements.
So, you know, I would say that anybody that's got an interest from anything that's been discussed on this morning's call and want to talk that through a bit further and they feel that they might want to avail of any of these products, then please, please make contact with us through the e-mail and number.
I refer to your trade director if you knew who he was, but I suspect if he hadn't done that before, you don't. So, possibly to go to your relationship director, because the relationship director will be in a position to come back and restart with his supporting trade director.
In terms of reliability, they've been around for hundreds of years – these products. So, they’re entirely reliable. So, if they’d be used for the right purpose – and it's up for us to define what life is – then I'm sure it will work very effectively.
Deviash Moodie: Perfect. Thanks, David. (Heidi), can I check with you? Are there any questions on the line?
Operator: Yes, we have a question from the line of Mark Smith from the System Power. Please as your question.
Mark Smith: Good morning, gentlemen. My question relates to export documentary credits – letters of credit, where one of the terms of the credits is a requirement for legalized documents such as a CFO, invoice, et cetera. As a number of the embassies in the UK, specifically, thinking of the Iraqi embassy are currently closed, how are those discrepancies going to be treated by the bank?
Deviash Moodie: David, can I point the question to you?
David Whyman: Yes. So, it’s a – it’s a very good question. I'm not sure I have – I have the answer on this call without – without making some further inquiries. But, yes, clearly it's an issue. It's an issue for a lot of the documentary requirements when we need such things.
There are a number of workarounds, shall we say, that are – that are being looked at and we’ve put into force within Barclays. In terms of that specific one, apologies, but I don't know what the answer to that is off the top of my head. But I can make some inquiries, Mark.
So, you know, Mark, could you – could you read – you're a client of Barclays I would assume. So, you're aware of your relationship director or –
Mark Smith: Yes.
David Whyman: You are. So, maybe raise it to your relationship director and then that relationship director can get in touch with the supporting trade director. But I will make some inquiries so that I've got that information at hand when that query comes through.
Mark Smith: OK. Thanks.
Deviash Moodie: I think –I think, Mark, I’m going to also add that what we're finding in this situation is that some of these are questions which we have kind of, you know, dealing with them on a case by case basis.
And, often, it's a – it's a dialogue between yourself, your customer, and the bank. And we can facilitate that and find a kind of a bespoke solution to a specific situation that you might – you might be in. So, I’m very happy to kind of pick that up and try and find a solution.
Mark Smith: OK. Thank you.
Operator: Your next question comes from the line of Richard Schneiderman from Captive Clothing, and please ask your question.
Deviash Moodie: Hi, Richard.
Richard Schneiderman: Hi. Hi. Sorry. Sorry if I've missed this, but I've got things going on in the background. This opening letter of credit, does that come out of our normal facility or is that a separate facility that's available to us? A borrowing facility.
Deviash Moodie: Typically, it is a separate facility. But, often, it can be – it can be a carve out of your existing facility. So, it can be quite easy to modify your existing facility to allow for an issuance of a letter of credit.
It does use your existing kind of credit availability with the bank, but whether the facility can be used in its current form or you might have to make a slight variation, it will depend upon your specific situation and – but that can be easily – easily achieved.
Richard Schneiderman: OK. Thank you.
Operator: Once again, if you wish to ask a question, please press star one on your telephone.
Deviash Moodie: Thanks, (Heidi). While – again, let's give it a few minutes. I might go back to Kevin for another question. Again, if you can gaze into your crystal ball and tell us a few things about the current situation, if you see a big, big shift of businesses moving out from China into other Asian countries.
Kevin Shakespeare: Yes, thank you. So, that's an interesting question. I think, obviously, in January, we – as China had the had the initial impact, there was a certain shift and as China largely went into lockdown.
And there was a shift towards Southeast Asia, clearly, some Chinese manufacturers have had subsidiaries in other parts of Asia as well. So, there was that initial move. But it's fair to say that some parts of Asia are now obviously in different – different extremes of lockdown. So, the impact has become wider.
And China, to some extent, has reopened for business. So, the actual world situation has almost changed and turned on its head to some extent. But what this has clearly shown is the – is the reliance on single suppliers or single countries is maybe not – is, certainly, that strategy requires to be reviewed.
So, there possibly will be changes in supply chains, whether that is to put more towards European and, clearly, we have Brexit and also BUK companies to consider, whether that is UK, whether that is North America, whether that is South America.
So, it’s really – clearly, trade strategies and supply chains will become important. What will also become important will be in trade agreements that the UK negotiates with (NHD) and the European Union. So, it has to be renegotiated. Probably I think, at the last count, over 40 trade agreements with obviously some big countries like South Korea, for example, like Chile.
So, they – clearly the whole supply chain brings in lots of different issues around tariffs and use of custom special procedures. But it is fair to say I think that what COVID-19 has as bought home to a lot of companies is the need to have a varied supply chain, which is not just about the number of suppliers but also the location of the suppliers.
Deviash Moodie: Thanks for that, Kevin. We are almost out of time. I'm going to ask you one more question, Kevin, again and check on a second if there are any other question on the line.
You shared with us a lot of information. And one of the things that was – that was coming out was that, you know, there's a lot of announcements being made.
Is there a single place where some of this information can be found in in a reliable fashion where a client can kind of, you know, keep visiting on a regular basis? Or is it that we – they're going to look at multiple sources for information?
Kevin Shakespeare: Yes. Again, it's a good question. It is fair to say a lot of announcements are coming from gov.uk, which was obviously similar in the run up to potential Brexit last year. But the challenges for businesses is that those announcements are not always in the most easy to read format.
And they use a lot of technical terminology. So, clearly, it's good to be linked up to gov.uk. What we're trying to do, at the Institute – and it's not necessarily a selling point – is, for our members, to obviously try and – I don’t like use the word – decode things.
But to try and make sure that the announcements are put in certain ways that the businesses can interpret. So, clearly, that's one way. If you're a member of a trade association, it may be a trade association is providing information as well, but there isn't necessarily, unfortunately, one source.
Obviously, we – at the Institute, we're trying to keep our members up to date with everything, but, effectively, the source of information will be gov.uk. In terms of freight movements, that will probably not be gov.uk.
That will be liaising with freight forwarders and shipping lines and airlines, which we do constantly at the Institute to actually check what's going on. So, again, it's – unfortunately, it's through a couple of sources that businesses have to try and operate, but thank you. It's a good question.
Deviash Moodie: Thanks, Kevin. And, (Heidi), again, make a – one quick check if there are any other questions on the line.
Operator: There seems to be no questions from the phone lines.
Deviash Moodie: And thank you, (Heidi), for that. We are – we're right on time as well. So nothing left for me to do but to thank our speakers today. Kevin and David, thank you very much for your insightful presentations. That's also a reminder that this is a weekly series of webinars.
There will be another webinar next Wednesday, and we'll release the details of the speakers and the topic very soon in the next couple of days. So, please do join us there.
We will make this content available on our – on our website as well as on LinkedIn. So, please do access the information there. And thank you all for joining. Have a good day.
Operator: That does conclude our conference for today. Thank you for participating. You may disconnect. Speakers, please stand by.
Working Capital – how to optimise working in periods of high and low demand
In this call we will look at Working Capital. During the current Covid-19 crisis many businesses will be experiencing varying levels of demand impacting working capital and the methods used to manage and finance the cycle. As we enter week 4 of lockdown managing cashflow remains a top priority for our clients so if you’re seeing cash conversion cycles lengthen, working capital asset values outside normal levels, supplier/customer behaviours offsetting their own liquidity pressures, then during this call we will help you explore the options available to help maximise working capital efficiency.
Russ Grazier: Thank you, (Laurel). And welcome to everyone who's been able to join us today. I know that we've got many people on the call from here in the UK but we're also joined by those in many different parts of the world. So good morning, good afternoon and good evening wherever you are.
And wherever you are, we very much hope that you and your family are staying – staying safe and well at this difficult time. As a COVID-19 crisis continues, we fully recognized the huge amount of pressure and uncertainty brings with it across very many different as they supply. Wherever we can, however we can, we look to try and provide the support guidance and access to information to hope you navigate these testing times.
As I said before on these calls, Barclays' has been around for over 325 years. And during our time, Barclays is customers in the world at large. We're looking through very many challenging times.
We very much hope that it's – as in those challenging times that have come before, we can work with you to help ensure that you can weather the current crisis. With the name of helping to provide insight and support, Barclays have been taking a range of measures and are providing information through our corporate websites. Please do refer to barclayscorporate.com/covid-19 for more information. That's barclayscorporate.com/covid-19.
The purpose of this call is to continue the theme of providing information to you that we hope you'll find valuable. This is a third in our Barclays trade and working capital COVID-19 series and it focuses on how to optimize working capital at time when it's never been more important or pertinent for many businesses. The weekly program of calls as previously covered force majeure and document through trade and playback of these calls are available.
If you haven’t listen to those previously then I’d certainly recommend both of those calls with some excellent speakers on both of them. Indeed the next week's call will cover UK's (inaudible) finance and how the UK's award winning export credit agency may be able to support your business going forward and we really hope that you'll be able to register for that call too.
We're back to today. So given the significant impact, the current crisis is having our many businesses normal trading cycle and indeed their cash conversion cycle. We felt that the subject of today’s call should be around businesses and how they can look to optimize their working capital are very high or indeed very low demand. More generally, we hope this call will give you some pause for thoughts around how to optimize working capital, whether within this current COVID crisis or indeed otherwise.
Working capital represents the operating liquidity of a business. It's the money that our business needs to service maturing debts and fund operational expenses. It equates to the sum of the short term assets minus some of the short term liabilities of the business. Some practical terms, working capital translates as cash inventory and accounts receivables minus accounts payable.
With COVID-19 impacting each aspects of working capital for so very many businesses, we have with us today two senior members of Barclays trade and working capital business to talk around each of these areas and how to optimize them.
I'll introduce you to our speakers in just a moment. But just before doing so, can I say in terms of today's call, we'll run through two speaker sessions followed by Q&A session, ensuring that we finish no later in 10:45. As it was mentioned early, we'll open the lines for Q&A, so we've already got the number of questions which have come to as via e-mail and we'll look to try and cover those off as well.
If we don’t get to your questions today then please be assured, we'll respond to you separately. If you got a question and we can't – and you can't get through on the lines, then please do e-mail us. We've got an e-mail address that as follows, so please take this down if – if you can. Spell in one word, tradeandworkingcapital. So that's email@example.com.
So, let me introduce to your speakers. Firstly, we will have Adam Turrell. So Adam's been working in the Trade and Working Capital arena for over 20 years. And currently heads a team of large corporate originators working across trades and sales finance in the south of England. Adam will then talk about the importance of working capital and how we can be influenced. Welcome Adam. We’ll come to you in a moment.
Before handing over to Adam, can I also just also introduce Paul Woodward. Paul started his career as a civil engineer. But fortunately for us, he then moved into Barclay, some 29 years ago. He probably won’t thank me for saying that. But Paul currently is our large corporate ABL head for UK and Ireland. Welcome also to you, Paul.
So without further ado, what I'll do now is hand you over to our first speaker, Adam Turrell. Adam, over to you.
Adam Turrell: Yes. Good morning everyone and thank you Russ. Can I too just add my best wishes to you and your families in this extra ordinary times.
So, working capital and cash is not any king, it's critical. Companies require liquidity to maintain competitiveness for your growth strategies and cover periods of unexpected demand whether that be high or low. (Inaudible) the cash in your company can experience significant distress or even bankruptcy. Therefore, working capital work for you and managing it efficiently should be one of the financial director’s top priorities since it's an accurate barometer for assessing the long term financial health of a business.
This is a specially challenging in current times where the unexpected is happening placing additional pressure on the current funding structures that you may have in placed and importantly, the assumptions that underpin them.
For examples, overdrafts often have veteran stock covenants and confidential invoice discounting relies on you having a better book to discount. Additionally, there's more pressure than ever on working capital at this time, as companies need to cover overheads and all too often this comes out the same facility or financing pot.
I should stress at this point. Now I don’t mean to take a negative tone. COVID-19 is impacted sectors in different ways and while some industries are challenged, others are saying unprecedented levels of demand. Before I'll move on to looking at what influence is working capital (itself), it's work just reiterating the benefits of positive working capital.
Firstly improve liquidity by obtaining a high level of working capital organizations is sure adequate cash levels are available for up and coming opportunities. It also gives more flexibility in how you run your operations, enabling you to fulfill custom orders, expand and invest in new products or faster rate.
Secondly, it provides a safety net available to protect against changing supply terms and lack of production, increase stockholdings or temporary lower sales. Lastly, at least to increase profits by utilizing resources efficiently.
So what is the optimum level of working capital, not an easy question. You know, we influence by industry, business lifecycle, opportunities, threats, underlined in the current environment, plus a wider economic climate. It may even liquidity but do you have a cash management strategy to make sure it's where it's needed in the correct business function or jurisdiction.
If it's too high, it might not be invested correctly or company growth maybe neglected in favor of higher liquidity. If it's too low, it's not just the obviously implications, it's the impact on your reputation in the eyes of suppliers, missed opportunities as well as the time and effort it takes to manage stakeholders and prioritize work load.
In it's simplest form, people will often point to the quick or (asset test) ratios to judge working capital. Also look at whether you have the ability to make short term obligations are also suggest looking at stock and better days, less creditor days over a 12-month period particularly if you have – if your business have some seasonality to determine a working capital cycles length, as well as debtor plus stock less creditors to determining the cash invested in cycle itself.
However, as one is looking back, you also need to look forward, giving the changing nature of this asset classes in the current environment. While there are other lenders out there, at Barclays we spent over the last 18 months helping clients with precisely this analysis through trade and working capital, the division I work in. We visited clients for the aim of creating pictorial working capital timelines and undertaking peer comparisons for them.
More recently, this is being rolled out to clients through a business specific tapestries. Additionally, both relationship directors and trade and working capital originators at Barclays have industries specialisms.
Let’s now review the four areas where working capital can be most easily influenced. So firstly, supply terms in paying vendors on time. Companies that pay on time developed better relationships with their suppliers and are in a stronger position to negotiate better deals, payment terms and discounts.
You may think counterintuitive way of improving working capital. If you keep suppliers happy, it could save you money in the long run when it comes to getting larger discounts, being offered longer payment terms or having your orders prioritize in periods of high demand. Conversely paying earlier may even offer discounts, offsetting the cost of funds if you borrow to do so.
Going into the COVID-19 era, how would you classify your supplier relationships and what are your suppliers drives? Because this can impact upon the solutions that are available to manage working capital. In fact, are their existing suppliers or all you having to find (intermitted) sources. Are you able to stretch payment or did they need to be paid quicker. If they need to be pay quicker, is just because they need the cash or is it just because they want to manage risks.
Paying early could be done while drawing on an overdraft or an RCF. But increasingly popular are bespoke tools such as their trade loan which is an umbrella facility where you draw loans to pay suppliers and they’re repaid when the goods are sold and paid for. If it's risk mitigation, you could use documentary trade such as import LCs, import collections or standby letters of credit. The use of these products typically increase in uncertain times. It may also help support longer payment terms. The larger businesses you could even look at supplier finance programs.
Secondly, managing procurement and inventory. Prudent inventory management is an important factor in making the most working capital. Excessive stocks complies a heavy burden on the cash reserves of any business. On the other hand, insufficient stock can reflect in our sales and damage to customer relations.
When looking at inventory, it's important to monitor what you buy just as much as what you sell. The key challenge is to establish optimum stock levels. This can be done by having a better communication channel between purchasing and sales and forecasting demand more accurately to prevent you from holding unnecessary stock.
If you're holding unnecessary stock as well as driving up cost for physical storage and insurance, the stock may be wasted if it's time sensitive. Things to think about are how do your manage your stock. Is it purchased just in time? How do you prioritize stock i.e. kind of what item sale? Does it matter if you run out (some) lines? And also, it's important to consider supply lead times and payment terms.
There are various solutions to help manage increase stock levels. As before, you could look at an overdraft or RCF as an option. But trade loans can again provide additional working capital where stock is readily turned or even to support work in progress.
ABL structures have a place and allowing you to borrow against the percentage of stock value as determined by an audit and can be appropriate in the right scenarios. Also, I'll mention UK Export Finance and you are able to support export orders. And although we'll cover this in our next webinar, they can provide the bank with a guarantee of up to 80 percent under the bond and export working capital support schemes subject to your eligibility and of course credit approval.
Thirdly, you need to look at the receivables process. It's important to have a good collection system and send that invoices as soon as possible, make sure money is coming in on time and a (inaudible) whether you – your contract or credit terms are appropriate. How does it compare to your peers?
To reduce bad debts, you should implement more rigorous credit checks and ensure that effective credit control procedures are in place to chase by paying customers. (DNA) credit insurance, albeit make sure your debtors are covered as limits often decrease so it can be pulled in times of uncertainty.
From a trade perspective again, documentary trade can assist with debt collection and risk mitigation by using products like export letters of credit, export collections and bonds guarantees and indemnities.
And you can also consider confidentially invoice finance, where you sell an invoice bringing cash in to the business on either a whole debt of book or selected basis. It may also be worth asking if your buyers have supplier a finance programs that you could take advantage of.
Number four and lastly the ability to making informed financing decisions. How do you monitor the business? What (KBPI's) do you have? Banks will often set covenants but we may also have reporting triggers. Do you have the same? Continuous monitoring of the metrics is crucial to maintaining the sound working capital strategy.
To summarize, in periods of high demand, you may require more working capital and subject to a credit review. This can often be structured and aligned to the working capital cycle. Stocks may be high and debtors high. In periods of low demand, you may still be holding high stock levels and this may be made up at the slower moving lines plus debtors may be a lot of (inaudible), will have a longer payment profile.
Therefore, you need to assess the current and future capacity within existing facilities to meet your business outlook. The structured working capital solutions I have mentioned, given the transparency of many author can provide financers with increased comfort when making lending decisions and in some cases, support higher quantum facilities or more competitive financing rates. Therefore, consider all your options.
To reiterate and fully conscious at the current time, that working capital in the overheads of a business are closely aligned. Perhaps with excess working capital or additional bank that being used to keep the lights on. However, it's critical that current facilities are aligned for the correct purposes. So when we do return to some level and normality, your business has a financial resources to maximize available opportunities.
I hope that's been helpful. And I just want to remind you that where we're taking questions shortly. But first, I'd like to hand over to Paul to share his thoughts for this – this morning.
Paul, over to you.
Paul Woodward: Thanks, Adam, and good morning, afternoon, evening to everyone. It's good to be able to join the call this morning and likewise. I do hope you, your family and your love ones are all safe and well.
And look, managing cash flow remains a top priority for businesses and therefore I suspect that many of you on this call will already be progressing applications for the various government support schemes. And to obviously (reasonably) cash flow concerns there.
I think it's probably worth reminding ourselves that some of those schemes that have been made available is the job retention scheme where all UK employers will be able to access supports continued paying – parts of their employee salary. For those that would otherwise have been laid off.
And there are also various tax deferral measures available, perhaps the most notable being the deferral payments due between the 20th of March and the 30th of June this year to the 31st of March 2021.
In addition, business and self-employed people can apply for time to pay arrangements to assistant corporation tax payments under the taxes. Further liquidity is also available via the Coronavirus Business Interruption Loan Scheme which knows a mouthful to say so it become known as CBIL.
In the original CBIL Scheme helps those businesses whether turn up of below 45 million to access banking lending of up to 5 million – 5 million pounds. So these CBILS, the government work make a business interruption payment to cover the first 12 months of interest payments and any lender leverage fees. You have seen on Monday this week, the large business and CBIL scheme was launch where the maximum loan size for clearance with a group turnover of over 250 million is 25 million. And for clients with a group turnover of above 250 million, the maximum loan size is 50 million.
Finally, I'll mention the COVID-19 Corporate Financing Facility or CCFF allows larger corporates have investment grade to raise short term finance through the issuance of commercial paper purchase by the Bank of England.
As I said, of course just the worth a quick reminder of those schemes and I think most of us on the call will recognize and understand more to point that the immediate focus for any business has been to look after their employees and pay salaries rather than perhaps making supply chain payments.
However, it has been interesting to see the updates provided by UK Finance on debtor behaviors and these have been reported by the invoice finance lender membership of UK Finance. To note that the weekend in the 3rd of April witnessed a 74 percent increase in debtor receipts form the previous week, clearly due to month end debtor payments rooms as expected.
April will no doubt migrate to currency on where firms and sectors will be moving to, perhaps core payment perhaps is emerging. However, we have certainly seen some debtors paying ahead of terms to help support their own supply chain. Somewhat the supermarket is certainly falling into this category.
From your own experiences, you have already know that those firms thrive in going large sectors and perhaps take for day to day essential needs such as food and healthcare. Whiles those struggling are those much physically restricted and impacted by the actions to reduce COVID-19 spread such as retain and hospitality.
Recruitment, will that certainly received a mixed response which is clearly reflective of the diverse industry sectors that these agencies operate with.
For any business, once you've identified the short term and medium term funding gap COVID-19 has created. It is then advised what’s considered a cash quantum and timing of any government support you can access. I.e. the job retention scheme, tax deferrals et cetera. Then with the continued import of your lend and advisers, just think through whether that you have done everything reasonably possible to get through the short term distraction.
All lenders understand that the speed of response to working capital support is vital. And by thoroughly analyzing accounts and cash flow forecast, it might be considered that an increase in existing facilities such as an overdraft is the most appropriate next step.
If the business has an invoice discounting facility then in response to these unprecedented times, lenders will be considering how they can assist these businesses. Perhaps in certain circumstances, extend in the recourse period which is, that's the time given to debtors to pay the debt before the debt is disallowed.
So as an extension could minimize the immediate impacts on working capital. That's the time when lenders know and understand that debtors will be experiencing in their own working capital issues. And may not be able to pay on time.
Such an extension to the re-cost period will also provide sometime to range for additional working capital arrangements. We know that all banks will be encouraging that customers to think about the total working capital need over the coming months assuming that higher percentage of debtors will in due course become (inaudible) purposes. And without the business being able to raise sufficient new invoices to maintain their working capital need through an invoice discounts and facility loan.
This may result in businesses accessing or the traditional working capital facilities. So it's just some of those already highlighted by Adam as well as asset base lending as quick way of accessing additional liquidity.
As a reminder asset base lending or ABL as often referred is much more than invoice discounting with liquidity being generated across a wider a asset class set including receivables, inventory, planting machinery and property.
It's certainly plausible I believe to consider that there will be an increase demand for invoice discounts in ABL as an answer to cash flow requirements in the early stage of a post COVID-19 recovery if not before. I’d just encourage you to reach your lender to help you work through the COVID-19 perhaps only working capital. And to consider how traditional working capital products such as overdraft, invoice discounting, ABL and trade finance could help you in the short, medium and long term.
It's also worth mentioning that receivables purchase program should be considered as part of your working capital planning. This is where the bank will purchase select receivables from a company at a discount on a true sale and without recourse. In other words that the lender will be looking at a sale by the company of receivables rather than a loan by themselves secured by receivables.
With these kind of working capital programs, the risk of debtor failure is transferred from the seller i.e. the customer to the lender improving the financial resilience of the business in doing so. Some (active) receivables purchase programs are an attractive way of improving the clients working capital and effectively managing balance sheet risk especially if the debtors including the program I’ll say central government, public sector or agency rated.
I think in summary discussions will continue between businesses and their accountants, their lawyers and their lenders regarding request for existing facility limit increases and accessing all the working capital products, deferrals, capital repayment holidays and (inaudible) labors. Plus (inaudible) the government support schemes sort of to create the working capital liquidity and headroom needed.
However it will be remiss of me not to say that whilst you are working hard and so is the fraudster. They are always looking for new opportunities to target your business. And I’m sorry to say that think COVID-19 pandemic is nothing different. We already know there are a number of Coronavirus related scams and malware campaigns in the UK which are designed really to encourage you to giveaway sensitive banking and personal information.
I mentioned this today just as a reminder. Some fraudsters will be looking for opportunities to exploit any vulnerabilities in your processes while you’re starting to working remotely. So please stay vigilant. Whenever you and your colleagues are working from. And just make sure that any urgent or unusual payment request including changes to the details of the beneficiary are checked on a known and trusted number before making the payment.
Well, that's our main theme this morning of working capital. Life is different and it will be different after lockdown. But remember the consumer changes we are seeing now and in the coming weeks are driven by supply and demand. Forecasting these changes and reacting accordingly is something I know you will all be closely working on with your advisers and lenders alike.
I speak for us all. We are all here as a professional community to offer support, help, guidance and access to working capital solutions wherever possible. That must be of some help and Russ perhaps I’ll come back to yourself for some questions.
Russ Grazier: Perfect. Thanks Paul and also thank you to Adam as well. As I said yes, we’ve already had some questions that have been sent in. So we look to try and cover those off in a moment.
But just before doing so (Laurel) would you mind just opening the lines for questions. And then we’ll take a blend of that calls from the lines as well as questions that we’ve got sent into us already. Thanks, (Laurel).
Operator: Yes, sir. Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask question, you need to press star one on your telephone and wait for your name to be announced.
And if you want to cancel your request just press the hash key. Once again please press star one for question.
Russ Grazier: Thanks (Laurel). We’ll just cover off a couple of questions that we’ve already have sent in to us. And then I’ll come back to you (Laurel) once people have had the chance hopefully to get in touch with you. But just to say again, you know, if we don’t to your question today please be assured that we’ll come back to you.
And also note that if you got any questions even now or following today’s call that you can contact us – contact us at firstname.lastname@example.org. That's all one word so it's email@example.com.
So if I can, Adam and Paul, I’ll just come to you with a couple of other questions which they have already come to us.
Paul, if I might, I'll come to you first. So this one says cash flow forecasting is extremely difficult whilst many part of the economy remain in lockdown. How will an asset-based lending facility support my business or/and should I seek access to additional working capital via various government schemes that seem to be available?
Paul Woodward: Sure. And hopefully we’ve helped (inaudible) what we just covered. But certainly, I think that the short answer is yes, Russ. Accessing traditional working capital facilities, the ABL particularly as we said there. That is a problem which provided by the banks which monetized these assets across a whole balance sheet looking at the receivables, inventory, the plant machinery and the property.
And I think once the client has taken the time with our advisers and the bank and the lender to identify that the short term funding gap. We also need to plug in as we said the government schemes and understand how that can be helping themselves believe that those can pull the tax deferral schemes, the liquidity schemes and the job retention schemes. What is the result and impact.
But certainly ABL working along side those schemes is a very sensible solution to be considering. As we said ABL looking at monetizing a wider asset base more than just receivables can provide that extra liquidity.
Russ Grazier: So I guess in summary, Paul, it's not necessarily one or the other. It might be – it might be one or the other. And it might be both in combination. But it's certainly about assessing current working capital and go forward working capital requirements and discussing that with the opera professional advisers. And obviously speaking to your relationship director or trade and working capital specialist at your bank.
Paul Woodward: Yes.
Russ Grazier: Yes.
Paul Woodward: And I think – I think just what I covered in (inaudible) as well, Russ. Hopefully came cross early about really whilst lenders – invoice discounts lenders will be considering ways of flexing their facilities and the parameters that maybe slight increase, you know, the payment centers or extending the (inaudible) period. There will be a point and time there invoice discounting facility will be at its limits. And debts will naturally become too old for funding purposes.
And it's including that kind of forward thinking as to debts (inaudible) something of a certain age even beyond any extensions which are granted by your lender. That needs to be considered as well as part of what additional working capital support is required and that maybe available through the different instruments we (seldom) refer to as well. But also the government exchange which are available.
Russ Grazier: Sure. OK. And thank you, Paul. I appreciate that response. We’ll just cover off one more of the emailed questions, (Laurel). Then see if we have any questions on the line. So Adam, this question is as follows.
I’ve enjoyed a stable supply – so a stable supply of relationships over the years. But due to current challenges in the supply chain, and having to look at new suppliers. And I guess this will (might be true) for very many customers out there. So two – and these new suppliers require quick payment terms. Is there anything that you can suggest to support me?
Adam Turrell: Yes. Thanks, Russ, and that's a good question. So firstly, I would encourage you or the client to undertake the usual due diligence on the supply based from the product and credit perspective. It's important that if you are changing the supplier that perhaps fit the purpose. And it's important to understand their credit perspective particularly if they are requesting quicker payment which could mean that you’re paying cash in the bonds.
I would also say it's more important – it's also as important to consider I guess whether it's a permanent move to diversify your supply base or move to plug a gap that you’ve got in your supply chain. If it's more permanent, it will obviously help with the negotiations.
I’m not sure if the question relates to suppliers that are in the UK or overseas or where the balance of power will reside in this relationship. But if they require upfront, could you look at paying a deposit with the balance on delivery or if you need to pay fully up front, could you actually open the discussion to talk about documentary trade particularly import letters of credit or collections to help mitigate the risk. That could also help your order being prioritized. And similarly if any of those instruments could be term, it will obviously support cash flow.
Lastly, I mean you could look at overdrafts and trade loans as I mentioned to support working capital if needed. However, it is important to ask whether you have the cash within the business to do that or whether you are looking for bank facilities because obviously they would then be subject to credit approval.
Russ Grazier: Adam, just before I move on, just you touched on documentary trade then and had mentioned that in utilizing a documentary trade product that's in light mean that supplies and prioritize orders. And can you just explain a little bit more about why that might be the case?
Adam Turrell: Yes, certainly. Well, you’ve issued a documentary trade instrument so focusing on saying import letter of credit. So let’s say, you know, that an instrument that be issued through our bank to their bank to the supplier. So they would have confirmation that when they perform and ship goods under the letter of credit that they will be paid. And that letter of credit will also include within it a date for shipment.
So if, you know, product is in short supply given the supplier is in possession of that letter of credit they would look to prioritize you because if they didn't ship the goods by their required shipment date then the letter of credit would then be a discrepancy under the LC.
We’ve seen that particularly in the past around Chinese New Year where often there can be a lot of demand for supplies coming out further east. And our experience tells us that those orders have always been prioritized. And I don’t think that's too different in the current COVID environment where, you know, it's just – is around trying to source in some cases scarce resources.
Russ Grazier: No. That makes – that makes sense. Thank you for clarifying. I appreciate that. (Laurel), can we just see if there are any questions on the line please.
Operator: Sir, no question at this moment. But if you want to ask question just press star one.
Russ Grazier: OK. Thanks, (Laurel). So we’ll continue to cover some of the other questions that have been sent in to us. So Paul back to you, if I may. So what are the main challenges being seen by clients in terms of working capital and management in the current crisis?
Paul Woodward: I think – I think it’s adapting to new working environments as well. Clearly we’d start working from home. I think that's one of the perhaps core challenges around maintaining the focus on the cash flow of the business and the cash collections. Having said that, we have referred on the call today the difference among sectors and the ability for debtors to be making those payments so I think it's contacting debtors to obtain payments and debtors actually having the ability to make payments.
So I think lack of cash collections is more on cash (inaudible) I think. The other understandably is generating sales at the other end. And it gained the impacts across different sectors are noted. Yes, we did see good collections at the end of March into April with month end runs. And I think April will tell us a lot more once we see the statistics going from April into May as to how this really is now starting to impact on those debt receipts and payments.
And clearly with some businesses where they are experiencing almost thriving, you know, that's the word that Adam used earlier. They can't seem to perform while it's those where they are restricted by the – I supposed the action of having to be taken to restrict any further spread with retail and the hospitality sectors. That's where this additional support and thinking outside the box needed.
Russ Grazier: OK, Paul. Thank you so very much keeping a close eye on the debtor performance statistics that you have mentioned earlier really key. So that could be key for many businesses currently. Thanks, Paul.
And Adam, we’ll come to you for another question before. We just have one last check to see if there are any questions on the – on the line. And this one says, most of my projects have had – do you have long lead times where I’m tied into contractually defined delivery dates. How can I source additional finance to help fund these especially in light of COVID-19? I currently use an overdraft.
Adam Turrell: Yes, again a good question. So firstly, the delivery of the contract is in question, I’d first encourage them to, you know, speak with the buyer. In the current environment, they maybe willing to look at extending the contract or as was the subject of the first webinar. You’ve always got kind of is there a force majeure clause within that contract. Given the project nature, I’d also consider if you issued any performance bonds under it.
We’re seeing a number of (inaudible) extend request at the moment. And it's best to be on front foot rather than the beneficiary making a – making a claim. I’d also ask for the project (head) milestone payments and at which point delivery will be impacted or whether you’re being paid under (oath) account terms or export letters of credit which may need to be amended.
If it's an export LC, it's worth speaking to your bank about pre-shipment finance. Lots of banks will do that probably through a trade loan type structure. But it gets it down to your performance within the contract you getting paid and therefore banks will feel comfortable to lend the bank subject to your usual credit criteria.
Overdraft can also be used – I mean just touching on trade loans again. We use them a lot for kind of project finance type structures at the moment almost to provide a kind of ring fenced funding pot to support the contracts. So it could be that the contract that they’ve referenced in the question is quite large. And we could do something bespoke around it.
If that project was export related or certainly if you are kind of first (here) supply going into an exporter, you also got the ability to take advantage of UK Export Finance. Offer bank guarantees up to 80 percent on both the bond support and their export working capital schemes. I won't go into too much detail but just to wet your appetite there for the next webinar that we’ve got.
But lastly and perhaps I should attached on this first. Just keep close to supplies, what are their challenges and do they similarly need support?
Russ Grazier: So thanks to (John Philip) for that question first of all. And Adam thank you for that full answer. I hope that proved really useful.
(Laurel), we’ll just see if there are any questions on the line.
Operator: Sir, still no question at this moment. But if you want to ask question just press star one.
Russ Grazier: OK. Thanks, (Laurel). So I mean I guess we covered an awful lot of ground this morning already. So Adam, you know, covered a numbers of variables. But in particular I guess kind of focused on working capital and explore the sense talking around the impact of supply as inventory and debtors and indeed in terms of managing both – all of those aspects. And setting KPIs in terms of the cash conversion cycle so setting key KPIs around supply days, inventory days and debtor days and how that can effectively manage your working capital.
And Paul also talked about the government schemes, talked about current debtor performance, talked about accessing working capital and what might be most appropriate for you in terms of working capital finance whether that's ABL, selective receivables, purchasing, overdraft, trade, finance or indeed traditional, other forms of working capital finance such as invoice finance.
So we’ve covered off a number of barriers and then went on to just to issue a reminder which I think is extremely useful about some of the scams and malware campaigns that are going on at the moment, you know, please let’s all be alert to those. And I guess kind of one of the most important aspects that Paul touched on is just that early engagement with your professional advisers so speaking to your relationship manager, speaking to your trade and working capital specialist at your bank. And making sure that you have a good overview of what you both current and go forward working capital requirement looks like so that we can try and build out most appropriate solution or setup solutions to match your business requirement.
So I’ll look to probably close out the call in a moment, (Laurel). But any questions just quickly before I do so?
Operator: Sir, no more question at this time.
Russ Grazier: OK. And by the way, thank you, (Laurel). So hopefully we have provided some useful insight this morning which we already hope that you found useful. And I think everyone whose been able to join us on the call today, I know we’ve got people from different parts of the world at different times of the day. So very much appreciate you being able to join us.
A quick reminder that we’ll be holding the next in the series of COVID-19 Trade and Working Capital calls next Wednesday, the 29th. And that’ll focus on UK Export Finance and the support that's our award wining export credit agency here in the UK is able to provide.
A quick reminder also that if you’ve got any questions following today’s call, then please send them into firstname.lastname@example.org. That's all one word for email@example.com or do please reach to your usual Barclays relationship point or your Trade and Working Capital specialist here at Barclays.
Thanks again for joining today. Please do stay safe and well. And with that, I’ll hand you back to (Laurel) to close out the call. Thank you.
Operator: Thank you, sir. That concludes our conference for today. Thank you for participating. You may now all disconnect. Speakers, please standby.
UK Export Finance (UKEF)
In this call we will look at UK Export Finance (UKEF) and how the UK’s award winning Export Credit Agency may be able to help your business. As the world’s first Export Credit Agency, UKEF have a long and proud history of supporting British exporters. The support UKEF can provide has never been more important or more relevant, with both Covid-19 and Brexit giving increased focus to the UK’s global trading ambitions.
On the call we will look to cover UKEF’s current capability, capacity and the innovative ways in which UKEF are seeking to support businesses during the Covid-19 crisis and beyond. We will also provide insight into how Barclays works with UKEF to enable businesses to access the various schemes available.
OPERATOR: This is Conference # 6371996
Operator: Thank you for standing by and welcome to the support for businesses trading through COVID-19.
At this time all participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press "star" "1" on your telephone and wait for an automated message stating your line is open.
I must advise you the conference is being recorded today and that's Wednesday the 29th of April 2020.
I'd now like to hand the conference over to our speaker today, Russ Grazier. Please go ahead, sir.
Russ Grazier: Thank you, (Leanne), and welcome to everyone who's been able to join us today. I believe that as with our previous calls in this series we're joined by people outside the UK. So good morning, good afternoon or good evening, wherever you're joining us from.
We very much hope that you and your families are all staying safe and well during these continued unprecedented times. As the COVID-19 crisis continues, we fully recognize the huge amount of pressure and uncertainty it brings with it across very many different areas of life.
Wherever we can, we look to provide support and guidance and access to information to help you navigate these testing times. As I've mentioned in previous calls, with the aim of helping to provide insights and support, Barclays have taken a range of measures and are providing information through our website, so please do refer to that. It's barclayscorporate.com/COVID19. That's barclayscorporate.com/COVID19. Please reference that for more information.
In our weekly call service we've so far covered the following topics. On the 8th of April we looked at force majeure. On the 15th of April we looked at the world of documentary trade. And last week we looked at working capital and how to optimize that during periods of high or indeed extremely low demand.
Replays of the calls in the series can be accessed through the Barclays website, or through our podcast channel which is available via Barclays corporate (insight). You can also ask for replay details via your relationship point or trade and working capital specialist.
Today's call will focus on exports, U.K. export finance. U.K. export finance is the UK's export credit agency and indeed the world's first export credit agency. It's highly regarded across the globe and has won various awards which stand testament to the support for U.K. businesses exporting around the world.
Today we'll hear about how our award winning export credit agency may be able to support your business. During my time at Barclays, it's genuinely been a pleasure of mine to work alongside the UKEF team. Their approach is consistently positive, and there's been a real desire to improve the schemes and to innovative wherever possible to find new ways and better ways to support the U.K. exporting agenda.
On today's call I'm delighted to say that we're joined by two senior members of the UKEF teams, (Chris Aroan), Mathew Enright, who's part of the Barclays structure trade and export finance team. I'll introduce you to all three speakers in a moment. But before doing so, can I just say terms of today's call we'll run through three speaker sessions following which we'll have a Q and A session, ensuring that we finish no later than 10:45.
During Q and A session we'll look forward to answering as many questions as we can coming from the line. We will also look to answer some of the questions that have been sent into us already via e-mail. If we don't get to your question today then please be assured that we'll respond to you by phone or by e-mail as quickly as we can.
If you've got a question and you can't get through on the line or you'd simply prefer to e-mail it to us then please do so via the following e-mail address. Tradeandworkingcapital@barclays.com. So all one word. Tradeandworkingcapital@barclays.com. Before handing over to the first of our speakers I'll firstly introduce them all to you.
So firstly we'll hear from Carl Williamson. So Carl is head of trade finance and U.K. export finance. Carl joined UKEF in September 2019 from Lloyd's Banking Group where he spent 31 years in a wide variety of roles including relationship director across a portfolio of manufacturing and industry clients, and also where he was head of cash management and trade finance.
So long and illustrious career at Lloyds Bank before joining U.K. export finance. At UKEF, his role is head of trade finance as we said earlier, but he's also got oversight of not only the short term business and underwriting unit but he's also responsible for UKEF's 25 strong team of export finance managers as they go round corporates across the U.K. to drive the uptick and adoption of U.K. test products around the UK.
So we'll come to Carl in a moment to kick us off. But let me first introduce you both to Jon Watson and Matt Enright. So Jon Watson's had a long career across a range of banks in senior positions covering a number of roles and responsibilities in and around the commercial credit markets. Over time he's had a particular focus on trade and working capital finance.
He joins UKEF as head of the short term underwriting business in 2017. His team worked across the corresponding U.K. export finance sector including the bond support scheme and the exports working capital team, and he's been absolutely key to the development of the soon to be launched general exporting facility and more of that particular facility shortly on this call.
And then finally on this morning's call we'll hear from Barclays own Mathew Enright. Mathew works in our structuring team for trade and export finance. Having studied history and politics at the University of Warwick, he joins Barclays on his graduate scheme, and during six years at Barclays he's undertaken a number of roles in correspondent banking coverage and syndications.
Matt's worked with U.K. support finance in different capacities over the last three years, now focusing mainly on larger structured facilities. So good morning to all of our first speakers. Thank you for joining us. And with that, I'll hand you over to the first of them, Carl Williamson. Carl, over to you.
Carl Williamson: Thanks, Russ. And good morning to everyone on the call. Russ gave quite a nice introduction to UKEF there, but I'm going to spend a few minutes just giving an overview of U.K. export finance. Around our sort of current product, what we do, and how we work with exporters. I'll then also talk a bit about how we're responding to the COVID-19 situation alongside other government departments.
And then as Russ mentioned, I'll hand over to Jon who will talk you through a bit more of the product innovation we're looking at currently and some more specifics on new products, et cetera. So as Russ said, U.K. export finance, it's the world's oldest export credit agency.
I'm sure some of you on the call will know what an export credit agency is, some won't, but effectively, export credit agency is the country's aim to sort of help exporters drive business and to increase GDP. As Russ said, we are the oldest export credit agency in the world. We celebrated a hundred years last year.
Our mission is to ensure that no viable U.K. export fails through lack of finance or insurance. And we look to operate across the board in terms of the UK. We don't different between size of business. So we can look at a very small business all the way up to a multinational business.
We are there to ensure that exporters will still get paid for export contracts, and we operate in over 200 markets worldwide. We currently, in terms of helping U.K. exporters, we operate a couple of main schemes, and John will also talk about some new schemes that we're bringing forward.
But our two main schemes that we're best known for, really, is one, our bond support scheme. So this is where we help companies who need issuance of performance bonds, warranty bonds, et cetera. And we also operate working capital scheme. It should be said that we do not direct lend. We actually support banks in the issuance of these products. And we provide guarantees to banks to help them help their clients.
So we can issue guarantees up to 80 percent of the value of those either working capital or bonding, and we do this through working alongside exporters and the banks in identifying opportunities where UKEF may help. These will usually be instances where companies are coming to the bank, the bank has either reached its limits with the company or needs additional security, and UKEF can provide that through a government guarantee.
With bonding, where this can particularly help a lot of time, you may be asked to cash cover bonds. We can obviously replace that by providing that guarantee which frees up additional cash for the business. So we work a lot with the banks to try and identify those sort of opportunities.
As Russ sort of mentioned, we have 25 export finance managers. These are located all across the country, including the (vold) regions of Northern Ireland, Scotland, and Wales. And they're prime aim is to work alongside the banks and exporters to identify these opportunities where we can help.
They will also engage with local trade bodies, chambers of commerce, et cetera. And they really are the people on the ground who are able to talk to yourselves as companies around our product range. And in terms of the current situation, obviously this is unprecedented times. We've not seen, obviously, anything like this before. UKEF is part of the government. Is it part of department for international trade.
As such, we are working alongside our colleagues in HM Treasury and department of business to try and see where we can assist with, obviously, cash requirements and issues that companies are facing. Obviously, all of you will be aware of the various schemes that the government has introduced including CBIL, CLBILS, they've recently announced a new scheme, the bounce back loan scheme, which provides loans up to 50,000 pounds to small businesses, which is actually a hundred percent backed by the government.
There is also, for larger businesses, the Bank of England scheme as well. These schemes were put in place to provide emergency liquidity to companies. It should be said that we now sit, we sit alongside those schemes. We are not a replacement for them. And actually, we continue as business as usual. We, as schemes, can operate, even if you take out one of those other sarcomas.
So if you take out CBILs, at UKEF, you can still come to us or come to your bank and talk about product range that we have. And we will still work alongside those other schemes. So it isn't a case of if you have one of those you can't access UKEF. You still can.
We continue to sort of talk to colleagues in government about how we may help going forward, and particularly as we come out of this crisis how we might be able to assist. And, as I said, my colleague Jon will talk a bit more about some of the innovations that we're coming up with in terms of new produce ranges.
So that's a very quick sort of overview of UKEF. And obviously very happy to take questions at the end. But for now I'll pass over to Jon and as I say, he can talk to you a bit more about the new products that we're looking to launch shortly.
Jonathan Watson: Good morning, all. Thank you, Carl, for your words there. My focus today is to talk about the news. What is UKEF doing? Some of these initiatives were already in the pipeline in terms of their development pre COVID. Some are actually specifically COVID related. I'm going to focus today on three aspects.
One is a new product, which is the export development guarantee scheme. I will go into those details in a minute. The general export finance scheme, and finally, the changes that are being made to the export insurance products that UKEF has always provided.
But this is in a reaction to the needs of the market because of the impact of COVID. Firstly, export development guarantee scheme. There was a pilot out last year and some of you may be aware of this. It was a 625 million facility that we supported through JLR, or Jaguar Land Rover.
It's used in the public domain, so I can talk about it. This really highlights that the export development guarantee scheme is really focused on the larger mid corporate and the large corporate. Typically what we anticipate is that the risk share between bank and UKEF will be 20 percent bank, 80 percent U.K. export finance.
Typically the (tenner) will be up to five years. It will behave as an amortizing term loan. And it will be underwritten as such based on the business and the cash flows of the business. The premium to UKEF or the cost would be expected to be paid up front. And is it because it's large mid corporate, large corporate, is it looking at the ratings of the business.
Now what we're seeing in the market as the market goes into degrees of downgrade on ratings, what UKEF is doing is looking at the ratings through the cycle. So we're looking at the rating of the business and what it would have been rated as of the first of January this year, and then extrapolating a rating through the cycle based on the underwriting and the information that we're provided.
So do not be concerned that UKEF would judge and underwrite a credit based on where a business is as of March or as of June this year. In terms of sizes, in terms of facility sizes, it could go from tens of millions to hundreds of millions. And this is really seeing us putting some heavy weight support into the market where it is needed to support the large mid corporate and large corporate, to support them and their supply chain.
The second innovation is the general export finance facility. This is focused on the SME and the smaller mid market corporate. Facility sizes would be probably up to about 25 million pounds. And here the exporter, and as with the exporter, sorry, the export development guarantee scheme, the eligibility is that the exporter has to have export sales of 20 percent in a year or a minimum of five percent in all of the last three years to be proven as an eligible exporter.
Again, it's an 80-20 risk split between bank and UKEF. (Tenner) is a maximum of five years. The availability can either be supporting overdraft facilities, bonding, letters of credit, terms loans, working capital, and also receivables financing. So it's very versatile in terms of it's application.
We are, the pricing we would take, the banks pricing. And there is a premium share between bank and UKEF. And this scheme is in the final stages of roll out with the banks. We're in the documentation phase with the banks. And it should be launched within the next couple of months.
Moving on. We have made some changes to our export insurance product. The concern within the market, and this is not just a U.K. concern, it's a global concern, is the private market. The intelligence we've had is that the private market is beginning to roll back coverage within the marketplace.
So what we have always done is that we have provided cover to the market in markets and the risks that the private market cannot or will not provide. So we are talking about certain countries in Europe, Africa, Middle East, South America. We underwrite the difficult markets and the difficult names.
We can provide cover up to two years. It can be single contract, single name cover, it can be revolving cover. And we would provide cover typically between 80 and 95 percent of the cover of the risk. What has happened, and there are certain rules that we have to adhere to as government and as an ECA, in the past couple of weeks the rules have been relaxed that allows us to cover all of the markets, whereas historically we have only been able to cover non OECD rich list countries.
So that would have excluded US, Europe, Australia, Japan, and New Zealand. But we now have a mandate. And albeit it is likely going to be a temporary concession, we can now cover all markets. So if you are finding that your credit insurer has withdrawn cover on certain names or certain markets because of the market conditions, please contact us.
Thank you for listening. I'll now pass you over to Mathew Enright from Barclays who will cover the next stage of the presentation.
Mathew Enright: Thanks, Jon. Good morning, everyone. So as Jon and Carl have alluded to, we've got a very strong working relationship with U.K. export finance, and that's really developed over a number of years and across the numerous transactions that we've worked on.
We also work really closely with U.K. export finance on the initiatives and the product developments that Jon's alluded to. And I do think it's important as well just to flag that the banks do that as a group as well, as a industry body. So we come together as part of U.K. finance, which is our industry body, to make sure that we're really doing everything that we can to work with U.K. export finance support all U.K. exporters and potential exporters.
So in terms of Barclays capability and our experience, I think it's fair to say that we're very experienced in the two products that Carl spoke about, the bond support scheme and the export working capital scheme. And over the years we've supported hundreds of export contracts and with both of those.
We took a lead role on initiative that was rolled out a couple of years ago called bank delegation. And this has been really good. And it's just worth flagging. This has really sped up the approval process and the end to end process to get an export working capital scheme loan or a bond issued.
Previously, when an export would come and ask for U.K. export finance support, we would need to go through our credit finance desk at Barclay's and then effectively mirror that at U.K. export finance. With bank delegation, subject to certain criteria, Barclays is able to put that UKEF guarantee in place automatically.
So that has really sped up the end to end approval process. Another one is the tier one supplier scheme which I'll talk about in a little bit more detail later on. One of the other products that UKEF have and which Barclays is also actively involved in is the buy credit program. And this is where we provide finance to overseas buyers.
And that's also, some of that particularly will be of interest to some of you at the moment. As Jon said as well, we took an active role in that first pilot of the export development guarantee. And also we're actively working with U.K. export finance to get the general export facility up and running.
I think, really, the message from me on that is that whatever the issue is, or the opportunity that you have, we're very happy to look to see if there's a solution that we can come up with either on our own at Barclays or indeed alongside with U.K. export finance.
In terms of engaging with us on that potential opportunity or that solution, I think the first point of call really is always your relationship manager at Barclays. They will be able to pull the right people together which could be myself or Russ other members of the team.
And also talk about other potential products there could be and other solutions that could be for you. And also, of course, as Carl mentioned, the U.K. export finance managers, the ESMs, they're also a really, really good place to go and talk and flush out ideas.
So I thought it would just be good to talk about a couple of examples to try and bring some of these products to life. So we spoke about the export working capital scheme, and I did briefly mention the tier one supplier scheme. So typically, UKEF, when we're talking about the working capital scheme, we're providing finance, working capital finance to a U.K. company that is exporting.
But what the tier one scheme allows us to do is provide that working capital finance to a U.K. company that has a contract for goods or services with another U.K. company who is then, in turn, exporting. So this scheme's only been going on around for, I think, a couple of years.
But it's, yes, it's a really, really great scheme and really opens up that UKEF support. So we had a client at the end of last year that won a contract with a large U.K. car manufacturer. This is a really large contract for our client and that was a great opportunity for them but then that obviously brought its own problems.
And one of those was that there was quite substantial up front fees, up front costs, sorry, that our clients had to pay to suppliers. And this affected them in that they had around a six month working capital gap. Between making payments to their suppliers of the raw materials and then also getting paid by their buyer.
So it was a large contract for them but we were really confident that they'd be able to fulfill it. But we couldn't quite get there on our own so we came to U.K. export finance, came up with a solution, and in the end, we provided them with a five and half million revolving trade loan facility.
And that's been really great as sort of a really good example of how the working capital scheme and the tier one scheme work really well. Without that combined Barclays and UKEF finance support, that corporate probably wouldn't have been able to complete that contract.
One thing to note is that with the U.K. export finance schemes, there are occasional documents to complete. That's about reduced over the years. One key document is a supplier declaration which basically is the U.K. supporter or the tier one supplier attesting to various different things.
For example, that you're eligible for U.K. export finance support. When to come to the tier one scheme, there are some additional documents which we can talk through if you have any specific questions. Another one and Carl did the lead to this is on the bond scheme. So we have a defense company that had won an overseas contract.
And again, this is a fairly large contract for them. As part of this contract, the Overseas Ministry of Defense asked for a performance bond. And as Carl said, often banks will ask for a hundred percent cash cover to issue that performance bond. If it was a smaller contract that probably would have been OK in this case, but this was a large contract, and our client really needed that cash to be used and to be active rather than tied up in its performance bond.
So again, we worked with U.K. export finance to find a solution, and UKEF supported 80 percent of that performance bond and Barclays took the residual 20 percent risk. That meant we were able to issue the bond without any cash cover. And that then obviously freed up that cash for our company to use to fund that working capital. So, for example, making payments to suppliers, et cetera.
I think I'll leave it there so we've got enough time for questions and answers. So, Russ. I'll hand back to you now.
Russ Grazier: Thanks, Matt, and also, many thanks to Carl and Jon. So as I said earlier, we have some questions already sent in, and we'll look to cover some of those over the remaining time that we've got. But I'm also keen to try and open up the line and see if we've got any questions.
(Leanne), could I just ask you to open up the lines for us and see if there are any questions that we have?
Operator: Of course. Thank you. As a reminder, ladies and gentlemen, if you wish to ask a question, please press "star" "1" on your telephone keypad and wait for an automated message advising your line is open. Please then state your first and last name. If you wish to cancel your request, it's "star" "2." So once again, please press "star" "1" if you wish to ask a question, "star" and "1."
Russ Grazier: Thank you, (Leanne), and as we wait for questions we'll try and cover some of the e-mailed questions into us and just as a quick reminder, if we don't get to your question today, then we'll make sure that we come back to you after today's call as quickly as possible.
And please do remember that you can contact us with any questions after today's session on the e-mail address which we gave earlier which is firstname.lastname@example.org. That's all one word for email@example.com.
So as (Leanne) just collects some of the questions, let's just take a quick look at maybe the first couple of e-mailed questions into us if I can. I think during kind of the latter part of your respective speeches, I think some of these questions have been covered. But we'll just clarify.
So quick question to Jon or Carl. So how do we start to access UKEF support and how long does the application process take?
Jonathan Watson: That's a very good question. It has to be understood that in terms of the way we operate, there are two methodologies we use. OK. In terms of the initial contact, please talk to your relationship manager within Barclays who will then contact the product team centrally for support.
The other route and the engagement as Carl has mentioned, we have this extensive network of export finance managers located across the country covering the reasonings with good knowledge of industries within the geography.
We obviously liaise very closely with our colleagues at DIT who are also engaged within the sectors and the community. So either go through either of those channels or both of those chances and then we will link up and support the relationship management team.
Once the application is coming together, that comes into the center in London. Now with Barclays we have a delegated scheme on the existing bond support and export working capital scheme where we, subject to criteria, have delegated authorities up to two million pounds, that allows Barclays to put UKEF cover and support for contracts in immediately.
That's a streamlined lined process. It's through a portal. It's digital and it works well. If is it above the two million or the criteria are not met, that does have to come into London. Now, my team is the underwriting team. Pick that up, understand it, and it has to be understood that we underwrite to a similar standard to your bank in terms of understanding the risk and the credit and the features of the support.
Now, that can take time. It can take ten days, it can take weeks. We're currently working on an application that we've had through Barclays that actually came in November. Is it complex. The information that hasn't all been readily available for a variety reasons.
So the point I'm making is that the time it takes can vary given the complexity of the case. But we will liaise with you during the process so you know where we are to manage your expectations in order that we deliver on time to support the contract or the facilities that we are looking to support.
Mathew Enright: Thanks, Jon. Yes, I appreciate that answer and sometimes, you know, these cases can take longer than others depending on upon the nature and complexity of the case. But I guess early engagement is pivotal. And we, both at Barclays and yourselves at UKEF, we work to manage expectations through the process and certainly we'll constantly keep in mind the execution of the underlying contract and try and ensure we hit those times scales.
Russ Grazier: OK. Before maybe I'll look at any of the other e-mailed in questions, (Leanne), did we have any questions on the line?
Operator: Yes. We currently have three questions on the phone lines. We'll take your first question. Caller, please go ahead. Your line is now open. Please state your first and last name.
(Mark Whiteley): (Mark Whiteley). We've seen some announcements from the Pakistani government about extending their debt repayments and, obviously, in the current environment, they're probably not going to be alone. What impact do you think this will have on the UKEF appetite for some of these markets where U.K. exporters have traditionally sold their products or services to? Thank you.
Jonathan Watson: Thank you, (Mark). I mean. We are engaged as government with the Paris Club. And the Paris Club is key in terms of negotiating with governments. To be honest, it is not the only government that has started a conversation with the Paris Club regarding debt and debt rescheduling.
OK. It is possible. OK. We can work with that. And this is (what I'll give away) UKEF is that we can provide confidence into the market that allows exporters to continue to export into those markets, but obviously, we will be engaged. With regards to the debt, we can provide insurance, and we can support that.
So all I can say is that we are very much aware of what is going in the markets. Our cover within the markets currently has not changed. OK. It's subject to constant review. So all I can say is that if you are looking to contract into those markets and are looking for export insurance, because that is the key, come and talk to us.
Russ Grazier: (Mark), does that help?
(Mark Whiteley): Yes, that's excellent. Thank you very much.
Russ Grazier: Perfect. Thank you, (Mark), and thanks, Jon, for answering. (Leanne)?
Operator: Thank you, and I take our next question. Please go ahead, caller. Your line is now open.
(Andrew Green): Hi. This is (Andrew Green). Looking at the export development guarantee, the new lending product, backed by UKEF. You mentioned the requirement for ratings, and I was just wondering does an entity looking to take up that scheme have to have recognized rating already it attributed to it? And if so, is there a minimum requirement to access that product? Thank you.
Jonathan Watson: The answer, we actually rate, you know, if a company is not rated, we extrapolate our own rating based on the credit metrics and we've got a team of underwriters and analysts who are who are skilled in that. So you do not have to be rated.
The second is that, yes, there is a minimum credit standard. That is confidential to UKEF under the Acts of Parliament. And the permission is that we operate, we have to maintain a minimum credit standard. That, all I can say is that from experience, that typically aligns with the minimum credit standards that a bank would typically operate for senior debt.
So if your bank is supported because they've got to take a minimum of 20 percent of the risk, if they are able to feel comfortable in support of that. But it has to be understood that fundamentally, UKEF is (primarily) of its prime functions is to facilitate exports by taking risks. So we are risk takers.
So all I can say is that if you're not rated, that is not a barrier to apply to either EDG or the general export finance procedure.
Russ Grazier: (Andrew), again, does that help in terms of your question?
(Andrew Green): Yes, it does. Thank you. It's very helpful. Thank you.
Russ Grazier: Perfect. Thanks, (Andrew). (Leanne), I think you said that there was a third call?
Operator: Yes. Thank you. I'll now open that line for you. Caller, please go ahead. Your line is now open.
(Stefan Butler): Hello, there. My name is (Stefan Butler). The simple question I had was, obviously, U.K. export finance have restrictions around local content and other restrictions around eligibility, as do other overseas export credit agencies. To what extent do you work with those other overseas export credit agencies?
Russ Grazier: Jon or Carl, would you be able to take that for us?
Carl Williamson: Yes. Do you want me to take that, Jon?
Jonathan Watson: Yes. Carl, you take that one.
Carl Williamson: Yes. So clearly, we do work with other overseas export credit agencies, particularly in terms of financing, buyer financing that Matt was talking about. We obviously review how other export credit agencies operate and what their criteria is or are.
It should be said, though, that we are, as Jon mentioned, we operate under an act of parliament. We are a part of government. Not all export credit agencies are. Some of them are private institutions who are contracted by their government and who have different remits and will offer slightly different products in how they support their exporters.
So, for example, the German ECA is much more concentrated on the credit insurance market than probably some of the other products that we would offer. In terms of eligibility, yes, you know, Jon mentioned that we do have eligibility for an exporter. A minimum 20 percent in one year revenues being exported of over three years, sort of 5 percent per year.
I would say that's fairly sort of low. It's probably in line with most other ECAs, if not in some ways slightly better. But we constantly review what other ECAs are doing. We have good relationships with those ECAs. We do look at how they're changing, how they operate in their banking sector, and, as I say, we also help particularly newly formed ECAs sort of establish themselves, and they often talk to us about products.
So very quickly, I've had conversations recently both with the Australian ECA and ECA in Saudi Arabia who are looking to develop. And they're talking about to us about how products work and eligibility, et cetera.
Russ Grazier: Thanks, Carl. (Stefan), does that answer?
(Stefan Butler): It sure does. Thank you very much.
Russ Grazier: Thanks, (Stefan). (Leanne), do we have any other callers on the line?
Operator: Currently no further phone questions, sir.
Russ Grazier: OK. Gents, we've just got, I think, time maybe for one other quick question that was sent in to me. And as a Yorkshire man, that's ever close to my heart. So can you tell me how much it costs to obtain U.K. export finance support?
Jonathan Watson: That's a good question. There are two methodologies that we are – (we tend to) work on. Firstly, for the existing scheme, the (played) finance bond support, export working capital, and it will be on the general export working capital scheme.
We will take the pricing that the bank sets. So the banks evaluate the pricing. The bank will have a pricing model, and we will take that pricing, and we then take a percentage of their risk premium. And that is agreed, essentially, between us and the bank. And we are a taker of that pricing because that meets our model.
When it gets to EDG and exits, as I say, we have our own pricing model. It operates very similar to any insurance and or bank pricing model. Is it complex. I won't go into the detail. But essentially, what we ask in those circumstances is the bank evaluates the pricing that they would apply for the risk that they see before them.
Having set that pricing, they will then come to us and tell us what that pricing is, and we will then evaluate whether it meets our minimum pricing threshold. What we can't do is we can't set the price because that starts to cut across market investor principals, and we can't make the market in terms of pricing.
So all we can do is the market sets the pricing, we then validate whether it meets our pricing criteria. Hopefully that is clear.
Russ Grazier: Jon, thank you. Yes. It certainly was. And we do have a number of other questions which have been e-mailed in which we're clearly not going to get time to now get to this morning. But as I said earlier, absolutely full commitment that we will respond either by phone or by e-mail to all the remaining questions that have been sent in to us.
So I think at that point I'll have to thank Carl, Jon, and Matt once again for their excellent insight this morning. Thank you, gentlemen. I genuinely hope that for everyone on the line that you found that useful. And can I also thank again everybody on the line for joining us today?
I think it's been clear that there's a variety of schemes that have been developed historically and that are being developed today to enable UKEF working alongside the British banks to support customers with export ambitions.
So for me, a quick reminder that replays of our previous calls are available via or website, our podcast channel, or indeed via your relationship team. Next week we'll issue a quick (praise) of the last four calls that we've held during the course of April, and we'll also take a look forward to what the future program of calls may look like.
A quick reminder that if you do have any remaining questions then please do send them into firstname.lastname@example.org. That's all one word. Tradeandworkingcapital@barclays.com. Or please do reach out to your usual Barclays relationship points of trade and working capital specialist.
Thanks once again for joining us today. Please stay safe and well in these difficult times. And with that, I'll hand you back to (Leanne) to close out the call. Thank you.
Operator: Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now disconnect. Speakers, please stand by.
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