Online receivables auction platforms are growing in number and prevalence, spurred by commercial and regulatory developments in the commodities and banking industries. This briefing looks at some of the high-level issues that industry players should consider when negotiating an agreement to sell trade receivables on these digital platforms.
Over the past year, there has been an increase in off-balance sheet transactions pursued by participants in the commodities industry, including receivables discounting facilities, securitizations and repos. This increase has been driven by a variety of factors, including the need for additional working capital as a result of increased commodity prices, a reduction in committed capital provided by certain banks and regulatory costs imposed on traditional forms of lending. A similar trend has occurred across a wide range of other industries. As a result, several online receivables platforms (“Receivables Platforms”) have emerged to meet this increased demand and provide a liquid marketplace for companies to sell their trade receivables.
Receivables Platforms are administered by platform sponsors (“Platform Sponsors”) and serve as electronic marketplaces that provide a venue to connect sellers of accounts receivable (the “Sellers”) to potential buyers (the “Buyers”), including banks, funds and corporations. Sellers access the Receivables Platforms by negotiating an agreement with the applicable Platform Sponsor (the “Seller Agreement”). The Seller Agreement dictates the terms pursuant to which Sellers may offer accounts receivable for a live auction open to the bids of potential Buyers on the Receivables Platform. The Platform Sponsor will then select the winning bid pursuant to the terms of the Receivables Platform’s general terms and conditions, and the Seller can expect to receive the purchase price for the accounts receivable within one to two business days of the sale.
As the prevalence of Receivables Platforms continues to expand, we thought it would be useful to highlight several high-level issues Sellers should consider when negotiating a Seller Agreement:
- Balance the need for consistency between the Seller Agreement and the Seller’s other financing arrangements with liquidity on the Receivables Platform – Sellers must balance their desire to revise the Receivable Platform’s template Seller Agreement to conform with the representations, covenants and events of default in the Seller’s other financing arrangements with their need for a liquid auction process on the Receivables Platform. While Platform Sponsors are typically amenable to negotiating their template Seller Agreements, Platform Sponsors seek to maintain uniformity in their documentation to boost the liquidity of their auctions. Potential Buyers are given the opportunity to review a redlined Seller Agreement showing each revision a Seller has negotiated into the template. A redline that indicates significant, material revisions may bear a chilling effect on bidders who are unwilling to comb through numerous alterations to evaluate their full impact. In other words, Buyers may avoid auctions with highly customized documentation.
- Protect confidential information – Unlike a bilateral factoring or discounting arrangement, Receivables Platforms create a marketplace for numerous bidders to review and consider receivables purchases. The Seller should consider whether it is comfortable with the pool of Buyers who may purchase its accounts receivable on any Receivables Platform, and determine whether any actions may be taken to mitigate the chances that competitors can gain access to the Seller’s confidential information by participating in an auction on the Receivables Platform. Some Receivables Platforms provide the Seller with an option to elect for a “private auction,” whereby the Seller can select the pool of potential Buyers who may participate in the auction, thus excluding any competitors that may have joined the Receivables Platform as a Buyer. This option affords the Seller enhanced control over who may access its information.
- Ensure the Seller Agreement complies with the Seller’s intercreditor agreement – The Platform Sponsor will often act as collateral agent for the auction Buyers. If the Seller has an existing intercreditor agreement with its other secured creditors, the Platform Sponsor may be required to join as a party to such existing intercreditor agreement. The Seller should be aware that the Platform Sponsor differs from the typical party that joins an intercreditor agreement in that the Seller has no ongoing commercial relationship with the Platform Sponsor. This lack of familiarity and commercial relationship may make it more difficult to deal with the Platform Sponsor, and may increase delays if consents and waivers to the intercreditor agreement become necessary.
- Weigh the rights the Seller Agreement provides to Buyers – Each Receivables Platform’s template Seller Agreement typically permits each Buyer, in addition to the Platform Sponsor as collateral agent, to enforce its rights with respect to the receivables it purchases. This makes it more difficult for the Seller to control the interaction of third parties with the Seller’s customers, because several different Buyers may have purchased accounts receivable owed by any given customer. The Seller should consider the potential benefit of negotiating restrictions with respect to a Buyer’s ability to directly contact the account debtors of the sold receivables such Buyer has purchased.
- Ensure that the collection arrangement is acceptable to the Seller – The Seller and Platform Sponsor can structure the Seller Agreement so that collections on the accounts receivable are processed in one of the following ways: (a) account debtors pay into a separate blocked account in the Seller’s name that is subject to a deposit account control agreement with a shifting notice mechanism that transfers control over the account to the Buyer in the event of an event of default, (b) account debtors pay into the Seller’s existing operating accounts, and the Seller agrees to transfer collections within a commercially reasonable period of time (typically within two business days) to the Platform Sponsor’s account, or (c) account debtors pay directly to an account held in the name of the Platform Sponsor or the applicable Buyer. When a Seller signs up to a Receivables Platform, it should consider the extent to which it is willing and able to change its current collection mechanics. Option (b) described above allows a Seller to maintain its existing collections mechanics, while the other two options require the negotiation of a deposit account control agreement and/or the Seller to direct its customers to make payments to a different account.
- Limit the scope of permissible assignment by Buyers – Sellers may also consider whether they want to restrict a Buyer’s ability to further sell and assign the accounts receivable to another third party. One way to accomplish this is to negotiate the Seller Agreement such that a Buyer who purchases the receivables via a private auction will only be allowed to sell or assign such receivables to the other member Buyers who participated in the original private auction. In making this determination, the Seller should consider the impact that such restrictions may have on the true sale analysis of its accounts receivable on the Receivables Platform, as a restriction on assignability of receivables is typically a factor that weighs against a true sale characterization.
- Limit the scope of a Buyer’s communication with the Seller – In addition to the concern that a Buyer may contact a Seller’s customers, the Seller should also consider to what extent the platform documents permit the Buyers to contact the Seller directly. A Seller may want to ensure that it interacts exclusively with the Platform Sponsor (on behalf of the Buyers), except in the case of certain limited circumstances, such as following an insolvency event with respect to the Platform Sponsor or a breach of the Platform Sponsor’s obligations to the Buyer under the applicable platform agreements.
- Review underlying documents between the Platform Sponsor and the Buyers – The Seller should review the underlying documents between the Platform Sponsor and the Buyers to ensure they are consistent with the Seller Agreement. Since the sale of receivables via the Receivables Platform is often a back-to-back arrangement, there is no contractual privity between the Seller and the applicable Buyer, which creates potential for uncertainty and ambiguity as to which terms control if there is a conflict in the documentation.