Financing the Supply Chain

1
Financing the Supply Chain

• Legal Issues

Harriette Resnick, Executive Director Assistant
General Counsel Central American Meeting on
Secured Financing and Related Commercial Law
Reform Tegucigalpa, Honduras February 28-29, 2008
2
Background

• Financing the Supply Chain changes in Customer
  needs and the market and business environment.
• Historically, Banks Supported Import Transactions
  by
• Letter of Credit
• Purchase of L/c Drafts
• Purchase of negotiable instruments (Trade Drafts
  or bills of exchange
• Market trends
• Declining Usage of Import L/cs
• Increased preferences for open account
  transactions
• Longer payment terms

3
Background

• Products that help Customers obtain financial
  support for trade transactions on an open account
  basis
• Supply Chain Financing
• Receivables Purchase/Discounting Facilities
• Silent Payment Guarantee issued to suppliers

4
Common Features of These Products

• Buyer owes account (payment obligation from sale
  of goods or services) to Seller.
• Bank makes a payment to Seller in consideration
  for assignment of Buyers account to Bank.
• Receivables (accounts) are assigned to Bank.
• Bank takes the Buyers credit risk but has
  limited recourse to the Supplier in the event of
  nonpayment due to Buyers commercial dispute with
  the Supplier.

5
Common Features of these Products

• Not an Independent Undertaking.
• Buyers payment obligation to Bank as assignee
  from Supplier would be subject to defenses
  available to Buyer against Supplier.
• Not subject to standard practice terms such as
  UCP or ISP.
• Rights and obligations of the parties are
  determined by contractual terms.
• Receivables purchase agreement between Bank and
  Supplier.
• Contract between Buyer and Supplier determines
  Banks right to receive payment, unless Buyer
  waives defenses to payment.

6
Common Features of these Products

• Relationship with Parties/Due Diligence.
• Buyer/Obligor is a customer with available
  unsecured credit lines.
• Full KYC review of Buyer, OFAC screening and CIP
  process.
• Supplier may or may not be a credit customer of
  Bank
• If a customer, including an account holder Bank
  conducts a full KYC review
• OFAC screening before any payment to Supplier,
  and CIP process.

7
Common Objectives

• Bank needs to acquire an enforceable payment
  obligation to Buyer/account debtor
• Bank needs to have a perfected interest in the
  payment obligation, ahead of the claims of
  suppliers creditor.
• owner of asset is purchaser of receivables
• receivables are not Suppliers assets
• receivables are not subject to prior claims of
  Suppliers creditors

8
Legal Issues

• What are the necessary steps for Bank to obtain
  ownership?
• Can Buyers account be assigned?
• Are future accounts assignable?
• How to ensure that Buyers payment must be made
  directly to Bank?
• What defenses to payment can be raised by Buyer
  against Bank?
• What law determines the answer to these questions?

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Answers under US Secured Transactions Law

• -What law determines the answer to these
  questions?
• US Look to the law of Suppliers /Assignors
  Location
• Relevant Excerpts from Uniform Commercial Code
  (UCC) Article 9
• -What are the necessary steps to obtain ownership
  of the payment obligation?
• Perfection of Ownership/Security Interest
  Filing UCC financing statements
• Benefits of Notice Filing System Transparency
• Any financing party that has been granted a
  security interest in, or sold accounts
  (receivables) by the debtor (Supplier) does not
  have an interest that can be enforced against
  third parties unless it does the appropriate
  filing.
• This prevents secret liens or disputes as to when
  security or ownership interest were assigned to
  the financing party.

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• - What do you file?
• Filing of a simple record (financing statement)
  with limited information
• Name of the debtor (Supplier) secured party
  (Bank) and a description of the collateral which
  reasonably identifies it (UCC 9-108, 9-502, 9-504
  )
• - Where do you file?
• This record is filed in a centralized, public
  recording office.
• If Supplier is a US corporation, the financing
  statement is filed with the secretary of state of
  Suppliers state of incorporation.
• To perfect under US law, Bank can file in
  Washington D.C. against foreign Suppliers from
  countries that do not have notice filing systems

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• - Effect of filing?
• The only way in which to perfect an ownership or
  security interest in accounts to file a
  financing statement in the appropriate public
  recording office.
• Financing statements generally are effective for
  5 years unless terminated or there has been a
  change in Suppliers name or location.
• - How to get Priority?
• The rule is First to file. (UCC 9-322)
• A financing statement covering the same
  collateral which has been filed previously in the
  appropriate public recording office will give the
  named secured party a prior interest in that
  collateral.
• If there are prior filings, waivers must be
  obtained or the filings terminated for subsequent
  filings to have priority.

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• - Lien Searches Waivers
• These records can be searched and copies of any
  filed financing statements obtained.
• As a result, can determine with certainty whether
  there are other existing liens or security before
  agreeing to purchase accounts or provide secured
  financing.
• - Who can file?
• Bank, if authorized by Supplier or if Supplier
  has signed a security agreement covering the
  collateral described the financing statement (UCC
  9-509)
• - When can you file?
• A financing statement can be filed before the
  security interest attaches or becomes
  enforceable.
• The security interest attaches or becomes
  enforceable against Supplier and its creditors
  only after it is granted by Supplier to Bank and
  value is given by Bank. (UCC 9-502(d), 9-203)

13
Can the Buyers payment obligation be assigned?

• Buyers payment obligation can be effectively
  assigned or pledged, even if the contact between
  Buyer and Supplier prohibits such assignment.
  (UCC 9-406(d)).
• These provision enables free assignability of
  such financial assets.
• It also protects Supplier from being in default
  under or subject to termination of its contract
  with Buyer solely due to such assignment or
  pledge.

14

• Are future payment obligations assignable?
• An agreement may create or provide for a
  security or ownership interest in accounts
  acquired by Supplier after the date of the
  agreement. (UCC 9-204(a)).
• This permits multiple financing or purchase
  transactions without the need to sign a separate
  assignment or security agreement for each
  purchase or pledge of accounts.
• A financing statement covering accounts will be
  effective to give Bank a perfected interest in
  Supplier accounts created or sold after the date
  of the filing.

15

• How does Bank ensure that Buyers payment must be
  made directly to Bank, not Supplier?
• Buyer must pay Bank if it receives notification
  that the amount due or to become due has been
  assigned and that payment is to be made to the
  Bank.
• After receipt of such notification, Buyer may
  only discharge its obligation by paying the Bank.
• The notice may be provided by Bank or Supplier
  (UCC 9-406(a)).
• Notification can be given by electronic means
  that meet authentication requirements giving such
  message the effect of writing.

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• -What defenses to payment can be raised by Buyer
  against Bank?
• As assignee, Bank would acquire the right to
  receive payment of Suppliers subject to the
  following defenses of Buyer
• All defenses available against Supplier in the
  transaction generating the account and
• Any other defenses available against Supplier
  that accrue before Buyer receives notice of
  assignment. (UCC 9-404(a)).
• However, Buyer may make an enforceable agreement
  not to assert such defenses or claims against
  Bank.
• This agreement would be enforceable by Bank so
  long as it has given value to Supplier in good
  faith without notice of a defense to payment.
  (UCC 9-403(b).
• A waiver of defenses by Buyer is part of the
  Supply Chain Finance product.
• As this may not be true of all receivables
  purchases from Supplier, Bank requires the right
  to recover from Supplier any reductions in
  payment due to contractual disputes with Buyer.

17

• Challenges of Cross-Border Transactions
• Choice of Law rules (which countrys law applies)
  vary
• Absence of notice filing system
• Notice of assignment to Buyer
• - Formalities of Assignment Documentation
• - Assignment of Future Receivables may not be
  possible
• FX Restrictions
• Delivery of original invoices may be required