Last November, $4 billion, Irvine, Calif.-based Gateway faced a confluence of liquidity challenges that threatened to take the momentum out of its recovery. "After several years of burning cash, we were positioned to start generating cash. Then, things happened," says Craig Call?(C), vice president and treasurer for Gateway and vice president of finance for the company's professional and direct divisions. "We had to reassess our supply chain finance strategies to keep our turnaround on track."

GMAC had just been acquired by Cerberus Capital and announced that it would require security to continue factoring Gateway receivables. One of the computer seller's biggest suppliers had been using GMAC to factor its Gateway receivables and would require cash-in-advance unless an alternative credit protection strategy could be identified, further depleting Gateway's shrinking cash position, reports Call?(C). Gateway's ability to offer conventional letters of credit through its receivables-backed facility faced a pinch as retailers scaled back purchases of Microsoft XP-based hardware before the launch of Vista.

The solution was to convince the supplier to buy a derivative called a credit put, which was cheaper than factoring, allowing it to receive face value if a bankruptcy filing occurred. The supplier was highly liquid and cared more about credit protection than expedited collections, so it agreed.The credit put market has become more competitive and liquid in the decade since it was created by hedge funds. "Several investment banks were willing to write puts on Gateway at attractive premiums," says Call?(C). "While the supplier's finance team was sophisticated, it was not familiar with derivative-based solutions," he notes. "Derivatives aren't always pitched to the credit managers and business unit heads who deal with credit issues on a tactical level." But, for Gateway, it was the right solution at the right time.