In 2014 to 2015, oil prices took a beating, and it became clearthat they were not going to rise much in the short term. Companiesand government entities across the Middle East began pushing toextend payment terms on purchases, and the software sector was notexempt from this trend. “Cash flow was an issue with virtually allour customers,” says Rahul Daswani, senior manager in theStructured Finance group for Microsoft's Worldwide PaymentSolutions division. “Our public-sector customers were adjusting tothe new realities of their own budgets, so they were wanting longerpayment terms.”

Microsoft's business model in the Middle East involves licensingsales through local software integrators, and these companies weregetting squeezed. Microsoft didn't want to accept non-standardpayment terms from the software integrators because of the businesscomplexities that doing so would raise. Microsoft sets creditlimits, companywide, based on an analysis of customer financialsand uses various credit management solutions to mitigate thoserisks. However, this process is more difficult in the Middle Eastcompared with other parts of the world, because many Middle Eastmarkets 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 onpartners' credit capacity. That's when the Structured Finance grouplaunched an initiative to research bank financing options forMicrosoft's receivables in the Middle East. The problem with aconventional solution was that the lines available to Microsoft'ssoftware-integrator partners were expensive.

Microsoft Structured Finance organized a project team thatincluded representatives from Credit Services, which had an obviousinterest in the outcome; from Microsoft's Field Finance team, whichmanages 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 teambegan working on a new financing solution that would enableMicrosoft to extend to its partner integrators six-month paymentterms on software licensing invoices for large public-sectorentities. The project team wanted to be able to sell theselonger-term receivables to a bank on a non-recourse basis. TheMicrosoft partner would still be responsible for collecting fromthe end customer, but it would gain much longer payment termswithout requiring the invoices to languish for half a year onMicrosoft's books.

The team spent a good deal of time determining which types ofMicrosoft customers would fit in the program. “We put a lot ofintelligence resources into identifying which entities reallyneeded this,” Daswani says. “We weren't interested in providing ablanket model that would cover all sales. We wanted to target largesales to entities in specific sectors. Keeping the program targetedhelps us manage the risk fairly well for the bank.”

After defining the desired characteristics of the program, theproject team had to find a bank interested in buying thesereceivables. Because the partner integrators are softwarecompanies, they don't have a lot of fixed assets on their balancesheets. The cross-border nature of Microsoft receivables furthercomplicated the process. Invoicing for all of Microsoft's businessin the Middle East and Africa is handled from Ireland. “Therefore,we have a very unique situation where the receivable lies in acountry outside where the debtor lies,” Daswani says.

Microsoft needed a bank that understood how to buy corporatereceivables, while also understanding how to underwrite receivablesin the Middle Eastern countries where the program's payers reside.The company found that one of its global partner banks was bothqualified and interested. Microsoft and HSBC worked together tobuild a solution in which the bank would buy eligible receivablesonce a month, with no recourse to Microsoft in the event of adefault, and then the bank would use syndicated credit insurance tomanage its risk.

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

Now Microsoft's Middle East sales and field finance teams keepan eye out for customers that might work well in the program. “Theyidentify which customer accounts need different payment termsbecause of the broader economy,” Daswani says. “They send thatinformation to the Credit Services and Structured Finance groups.We research to make sure that the software integrator iswell-disciplined in terms of their own payment processes—we're verycareful to introduce our banks only to partners that reallyunderstand the payment discipline needed for this type of program.If they seem like a good fit, then we reach out with that partnerto some of our banks.”

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

Thus far, participants' reaction has been positive. “All ourcounterparties who have gotten support under this model have beenexceptionally pleased with it,” Daswani reports. “There have beenmany sales deals that have happened, that we would not have beenable to close without the receivables financing solution.”

Daswani estimates that the benefits of this program forMicrosoft run into the millions of dollars. “This project isn'tjust a working capital solution,” he concludes. “The biggestadvantage has been the unblocking of sales. This project is a verygood example of ways in which treasury folks can become closer tothe business. For Microsoft's Structured Finance group, receivablesfinancing is allowing treasury to get reconnected with the frontend of the organization. And building a closer connection betweenour banks and the front-end sales organization is immenselyvaluable.”