The view from Europe

In the first of a series of articles, experts of Credit Agricole/Eurofactor representing five of Europe’s major factoring markets – France, Germany, Italy, Spain and the UK – provide their insights into developments and market conditions across ‘old Europe’.

They examine volumes in 2009-2010; the development of the product mix; the impact of the crisis upon two-factor business; the increasing take-up of supply chain finance and the expected impact of the single euro payments area (SEPA).

Céline Gasiglia, Head of the Strategic Marketing and Group Products Department at Crédit Agricole Leasing & Factoring (France):

In 2009, we saw a drop of 2.2% of the turnover factored by Eurofactor France while the wider French market experienced a 3.6% drop. We have affirmed our leadership with a 22.8% market share. International volumes decreased by 1.4% and represented 14.5% of the total market. Eurofactor France is the number two in this area of business with 26.2% of market share.

We expect to see an increase of more than 15% in 2010, Eurofactor France having already experiencing 23.2% growth in the first quarter. Our strategy is focused on the SME sector, as well as working with our banking (LCL, Crédit Agricole) and broker network. Nevertheless, we still compete for large corporate deals, thanks to our international tailor-made solutions.

Stephen Bohner, Marketing and PR Manager at Eurofactor (Germany):

We experienced an increase of 2% in total turnover (from 8.4 billion euros in 2008 up to 8.6 billion euros in 2009) mainly due to the fact that many companies were looking for more diversified and stable funding sources during the financial crisis, and for alternatives to capital market instruments. International turnover however decreased by 4% (from 3.3 billion euros in 2008 down to 3.2 billion euros in 2009) due to the very weak development of certain export markets, particularly in eastern Europe and Asia. For 2010, we expect strong development based on the continuing recovery of the general economy and an increasing need for funding for working capital purposes.

Massimo Mancini, Credit Department Director at Eurofactor (Italy):

Eurofactor Italy’s situation is not representative of market activity elsewhere. The business was established here in late 2007 and new business activity didn’t commence until April 2008. Consequently our volumes (international and domestic) have grown month on month. Whilst the economic crisis has had the effect of slowing down our business plan, 2010 is looking very positive, giving careful consideration to the market within our forecasts.

Josep Selles, General Manager at Eurofactor (Spain):

2009 volumes reached the same level as that of 2008 and we are pleased with the way in which the sector is evolving. However, in 2008, credit insurance companies cancelled and reduced credit limits across the board. The review, consolidation and management of our client portfolio have been a major focus. Whilst it has not been easy to maintain new business volumes in this challenging market, the final result has been creditable.

In 2010, we anticipate a marginal increase on volumes as the credit insurance companies have now timidly started to grant and re-stabilise new credit limits.

Ian Flaxman, Strategic Director of Crédit Agricole Commercial Finance (UK):

Due to the prevailing market conditions and the subsequent liquidity drought, 2009 was a difficult year for many companies, as good businesses retrenched and required less cash and bad ones struggled to survive.

However, Crédit Agricole Commercial Finance has bucked the industry trend by experiencing significant growth in advances to clients – a substantial increase of 72% year-on-year against an industry decline of 17%.

The reason for this performance is three-fold: Firstly, investment in growth at a time when others have been unable to find liquidity and have retrenched; secondly, having the Crédit Agricole Group behind us, which means that we have not had the same liquidity issues as many of our competitors; and finally, adherence to traditionally sound banking principles.

We expect to see continued growth in 2010, although nowhere near as steep as in 2009, since competitors and liquidity are slowly returning to the market.

Céline Gasiglia, Crédit Agricole Leasing & Factoring (France):

The main change is concerned with an increase in full factoring contracts signed with SMEs. Larger companies seem to have significantly reduced their inventories in 2009 and will not need extra funding before their activities rise again.

Regarding our portfolio, invoice discounting represents more than 50% of the turnover and we consider that this percentage will grow further in response to demand.

Stephen Bohner, Eurofactor (Germany):

The make up of our product mix has not significantly changed. In-house factoring (funding and protection against bad debt) and full service factoring (funding, protection and receivables management) remain our key products. The percentage of in-house factoring (measured against our total turnover, excluding import factoring) has slightly increased from 78% (in 2008) to 81% (in 2009) as large companies have increasingly sought out factoring solutions. The percentage of full factoring has slightly decreased from 17% (in 2008) to 15% (in 2009). Our product solutions are generally non-recourse, offering clients a true sale solution to optimize their balance sheets. In order to optimize bad debt protection for our clients, we have widened our range of solutions, by for example integrating public export guarantees into factoring.

Massimo Mancini, Eurofactor (Italy):

Our business model is founded on non-recourse facilities, backed fully by credit insurers. The problems of insurance have been evident during the crisis. Consequently, this has been a sensitive area balancing a mix of facility types. The fact that these have been tough times for many clients to obtain financing has helped, even though the non-recourse product is the factoring service in greatest demand. The Italian market is highly concentrated (the top five dominating over 70% of the market) and those players do not follow the same business model (no credit insurance or limited use). In Italy, neither invoice discounting nor confirming feature within the product offering.

Josep Selles, Eurofactor (Spain):

There has been a notable increase in our with-recourse business, as a consequence of the lack of credit limits that I have already mentioned. Also, there has been a reduction on non-notified deals, linked with the general downgrading of the risk of companies in the country.

Regarding confirming, the volumes have been the same as 2008 and we hope that we will see an increase in 2010. Naturally, whilst some contracts have been reviewed for risk reasons, acceptances have increased to counterbalance the shortage of credit in the market.

Ian Flaxman, Crédit Agricole Commercial Finance (UK):

We have seen the sharpest growth in recourse confidential invoice discounting (CID), largely because of our intent to be in that space in the market. Even pre-crisis, the UK market in general was seeing fairly mature conditions for factoring, with growth still evident on CID and asset-based lending. During the crisis, it has been factoring and import/export funding that have seen the most severe downturn.

Stephen Bohner, Eurofactor (Germany):

Our turnover figures of export factoring reflect the development of German export business, a drop in 2009 and a strong recovery in 2010. The development of our turnover generated in import factoring was only slightly detached from the negative development in German import business. It increased to 1 billion euros in 2009 a rise of 4%. This result is way above the factoring market average of minus 22.7%. Our total export factoring turnover has decreased from 2.4 billion euros (in 2008) to 2.2 billion euros (in 2009) a fall of 9%. The decrease in total export factoring turnover is still below the market average of 13.5% which can be attributed to the sharp drop of turnover in German export business last year.

Our export factoring turnover resulting from two-factor business also decreased from 327 million euros (in 2008) to 280 million euros (in 2009) a 15% fall. Our export factoring turnover results in the two-factor business from the first quarter in 2010 show a strong recovery in export factoring with an increase of 110% compared with the first quarter in 2009, turnover growing from 51 million euros to 107 million euros. A similar positive recovery can be noted in the import factoring business. Turnover figures from the first quarter 2010 showed a 79% increase, from 215 million euros (1st Q 2009) to 386 million euros (1st Q 2010). This reflects the strong recovery of international business in Germany.

German exporters are still challenged in this unstable economic environment by two main questions: how solvent are my foreign debtors and how can I protect my export receivables?

Economic and political country risk – even within the European Union - has further intensified export risk. Protection from these risks and the rising demand for fresh and flexible liquidity in the economic up-turn have increased demand for factoring (i.e. instead of letters of credit or D/A terms), particularly in export business where long payment terms of 120 days are tightening room to manoeuvre. This is on one hand positive for the sales side of the factor, but on the other hand risk management, the anticipation of fraud and the monitoring of client’s business development, has been intensified. And standard credit insurance does not always sufficiently cover the risk of bad debt.

Due to the deteriorating financial situation of some economically weak importing countries, a public ‘Hermes export guarantee’, backed by the German state, is occasionally used alongside the standard credit insurance offering. This public guarantee protects the exporter/export factor against bad debt caused by economic or political risks within the respective importing country.

Along with the growing counterparty risk faced by import factors within the 2-factor system, the risk and compliance requirements of import factoring have also raised requirements for more profound proof and clarity on counterparty deals.

Massimo Mancini, Eurofactor (Italy):

In the last eighteen months, two-factor business has gone on developing for our company. We are starting relationship with new contacts all the time, keeping a balance between established relationships and new ones. We work to understand our clients and partners, striving continually to improve communications. We are also gaining more insight into the different ways of working in different countries. This is a ‘richness’ of this kind of market that is always evolving.

Josep Selles, Eurofactor (Spain):

As you are aware, the volumes of direct export have increased over the past few years. This has been due to the risk quality of the client and the low cost of the credit insurance companies, which were backing this business. Both of these elements have however changed. We will nevertheless continue to improve and control portfolio risk. Receiving the funds from the debtor directly has been an essential condition to control our risk. Secondly, and importantly, the rates of the credit insurance companies have increased significantly.

Consequently, a number of deals have been switched to the two-factor system.

Ian Flaxman, Crédit Agricole Commercial Finance (UK):

This has been significantly impacted by the ability of funders to secure credit insurance cover to facilitate this type of transaction. For our part, we have seen a 31% reduction in two-factor business, despite some of our UK-based competitors withdrawing from the market altogether – which would have generally led us to believe there would be more demand. The key to the return in this market will be almost entirely driven by the credit insurance market.

Céline Gasiglia, Crédit Agricole Leasing & Factoring (France):

We provide reverse factoring in the French product mix. This facility is still quite new in the French market and our main competitors only have a few clients using this product. In 2009, it represented 1% of our turnover. We expect it to grow within the next five years to reach an average of 5% of our volumes.

Stephen Bohner, Eurofactor (Germany):

We provide reverse factoring as a supply chain finance product in our product mix. In contrast to classic factoring the initiator for supply chain finance is usually the debtor. Reverse factoring has therefore developed to a common financial instrument among larger German mid-sized companies and even blue chips. Its importance within the German factoring market is constantly growing, but in relation to the common products such as in-house or full factoring, the product has much potential for development. However, as the product offers a win-win situation for the debtor (for example in extended payment terms) and for the supplier at the same time (immediate funding of receivables, bad debt protection) we expect a continuously increasing demand in this field.

Massimo Mancini, Eurofactor (Italy):

We provide reverse factoring in our product mix, a widespread service offering in our market. We anticipate that the use of this product will become even more popular with clients in the future. However, this will also raise some issues, given that it is frequently accompanied by a non-recourse product. For some companies that can be an obstacle.

Josep Selles, Eurofactor (Spain):

Very much so. Today, confirming involves 47% of the Spanish factoring market. We consider that the product will increase proportionately with the decrease in the crisis. However there is a shadow of doubt in respect of this evolution, which is the potential approval of a ‘late payments law’ currently on the Parliamentary circuit. This will reduce the terms, either in the private or public sector. The reduction of the number of days to finance (you must discount the days that buyer takes to approve the invoice) would make without recourse facilities less attractive.

Ian Flaxman, Crédit Agricole Commercial Finance (UK):

We have a strong supply chain finance product in our offering and expect this to take-off rapidly over the next 2-3 years. As we emerge from the economic crisis, many SMEs could find themselves heavily reliant upon a smaller number of key buyers. SCF will provide a way for a willing buyer to facilitate more advantageous funding arrangements for its suppliers – hence securing or protecting the viability of the supply chain.

Céline Gasiglia, Crédit Agricole Leasing & Factoring (France):

The impact of SEPA on our business is not considered to be significant. Of course, we are in position to handle SEPA payments. Nevertheless, additional data is not always available to make allocation easier and does not improve our allocation ratios that are already very good thanks to optimized algorithms.

Massimo Mancini, Eurofactor (Italy):

Belonging to an international group for foreign debtors, we have opened bank current accounts in most of the European countries where SEPA is operational. These accounts work with a cash-pooling system and our banking partner employs a very advanced system of cash management.

Josep Selles, Eurofactor (Spain):

The increase of devolution terms in the case of certain receivables still remains a point of concern. This can cause difficulties and could result in no option other than to refuse certain payment tools.

Ian Flaxman, Crédit Agricole Commercial Finance (UK):

We would expect to see payment terms on export sales improve slightly, which may mean a modest reduction in like-for-like advances due to debt-turn improvements. Given our strong pan-European presence, I would actually see SEPA as an opportunity to focus on import/export businesses that will likely make us feel more confident dealing with other territories, if the mechanics of payment are streamlined.

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