Receivables Financing in a Challenging Locale

In 2014 to 2015, oil prices took a beating, and it became clear that they were not going to rise much in the short term. Companies and government entities across the Middle East began pushing to extend payment terms on purchases, and the software sector was not exempt from this trend. “Cash flow was an issue with virtually all our customers,” says Rahul Daswani, senior manager in the Structured Finance group for Microsoft’s Worldwide Payment Solutions division. “Our public-sector customers were adjusting to the new realities of their own budgets, so they were wanting longer payment terms.”

Microsoft’s business model in the Middle East involves licensing sales through local software integrators, and these companies were getting squeezed. Microsoft didn’t want to accept non-standard payment terms from the software integrators because of the business complexities that doing so would raise. Microsoft sets credit limits, companywide, based on an analysis of customer financials and uses various credit management solutions to mitigate those risks. However, this process is more difficult in the Middle East compared with other parts of the world, because many Middle East markets are designated “high risk.”

Microsoft didn’t want to increase the credit risk on its books, but also didn’t want to see sales decline because of constraints on partners’ credit capacity. That’s when the Structured Finance group launched an initiative to research bank financing options for Microsoft’s receivables in the Middle East. The problem with a conventional solution was that the lines available to Microsoft’s software-integrator partners were expensive.

Microsoft Structured Finance organized a project team that included representatives from Credit Services, which had an obvious interest in the outcome; from Microsoft’s Field Finance team, which manages volatility in sales; and from the company’s accounting, legal, tax, and sales groups as well.

In July 2015, with oil markets in turmoil, the project team began working on a new financing solution that would enable Microsoft to extend to its partner integrators six-month payment terms on software licensing invoices for large public-sector entities. The project team wanted to be able to sell these longer-term receivables to a bank on a non-recourse basis. The Microsoft partner would still be responsible for collecting from the end customer, but it would gain much longer payment terms without requiring the invoices to languish for half a year on Microsoft’s books.

The team spent a good deal of time determining which types of Microsoft customers would fit in the program. “We put a lot of intelligence resources into identifying which entities really needed this,” Daswani says. “We weren’t interested in providing a blanket model that would cover all sales. We wanted to target large sales to entities in specific sectors. Keeping the program targeted helps us manage the risk fairly well for the bank.”

After defining the desired characteristics of the program, the project team had to find a bank interested in buying these receivables. Because the partner integrators are software companies, they don’t have a lot of fixed assets on their balance sheets. The cross-border nature of Microsoft receivables further complicated the process. Invoicing for all of Microsoft’s business in the Middle East and Africa is handled from Ireland. “Therefore, we have a very unique situation where the receivable lies in a country outside where the debtor lies,” Daswani says.

Microsoft needed a bank that understood how to buy corporate receivables, while also understanding how to underwrite receivables in the Middle Eastern countries where the program’s payers reside. The company found that one of its global partner banks was both qualified and interested. Microsoft and HSBC worked together to build a solution in which the bank would buy eligible receivables once a month, with no recourse to Microsoft in the event of a default, and then the bank would use syndicated credit insurance to manage its risk.

Microsoft rolled out this model in four countries: Saudi Arabia, Kuwait, Oman, and United Arab Emirates. It originally worked with HSBC, but has since expanded to other global banks as well. “We spend a lot of time articulating our order-to-cash process to our prospective banking partners,” Daswani says. “We also explain the historical payment performance of our software integrator partners and the relationship value we have with some of these partners. We make it clear that our core objective is to solve a timing issue, but because receivables also contain credit risk, these financing solutions allow us to meet risk management objectives also.”

Now Microsoft’s Middle East sales and field finance teams keep an eye out for customers that might work well in the program. “They identify which customer accounts need different payment terms because of the broader economy,” Daswani says. “They send that information to the Credit Services and Structured Finance groups. We research to make sure that the software integrator is well-disciplined in terms of their own payment processes—we’re very careful to introduce our banks only to partners that really understand the payment discipline needed for this type of program. If they seem like a good fit, then we reach out with that partner to some of our banks.”

The software integrator plays a crucial role in the process. “Some of our banks want a lot of detail during due diligence before they can provide the credit risk appetite,” Daswani explains. “Whichever bank is willing to provide the credit risk approval, we will set it on the receivable on a disclosed basis such that the partner actually signs off that they will get a longer term for the financing from the bank and then pay the bank on the due date.”

Thus far, participants’ reaction has been positive. “All our counterparties who have gotten support under this model have been exceptionally pleased with it,” Daswani reports. “There have been many sales deals that have happened, that we would not have been able to close without the receivables financing solution.”

Daswani estimates that the benefits of this program for Microsoft run into the millions of dollars. “This project isn’t just a working capital solution,” he concludes. “The biggest advantage has been the unblocking of sales. This project is a very good example of ways in which treasury folks can become closer to the business. For Microsoft’s Structured Finance group, receivables financing is allowing treasury to get reconnected with the front end of the organization. And building a closer connection between our banks and the front-end sales organization is immensely valuable.”