Welcome to this week’s edition of the Baker Ing Bulletin, where we sift through the nuances of global trade like a tax inspector on a billionaire’s yacht…Expect the unexpected, and keep your notebooks handy as we dive into the latest headlines that will leave credit managers on the edge of your swivel chairs.

Grab your tea, and put your feet up, as we navigate the chaos of commerce with ease…

The European Union is turning up the heat on parallel trading, a move that will send shockwaves through the operations of multinational companies trading within its borders. This regulatory drive targets price discrepancies for branded products sold across member states, a practice that has apparently been costing consumers an estimated €14 billion annually.
On Friday, EU ministers are set to demand Brussels enforce stricter rules against territorial supply constraints (TSCs). These constraints prevent retailers from buying products in low-cost member states to sell in higher-cost ones. Led by the Netherlands and backed by eight member states including Belgium, Croatia, Denmark, and Greece, the proposal aims to ban TSCs outright.

The European Commission has already fined Mondelez €337.5 million for restricting wholesalers from engaging in parallel trade. This hefty fine underscores the seriousness of the crackdown. For credit managers, the challenge now lies in reassessing the credit risk of companies that have long relied on price differentiation across the EU. With uniform pricing on the horizon, margins could be squeezed and established sales channels disrupted, necessitating a reevaluation of creditworthiness.

Industries such as FMCG, pharmaceuticals, and automotive parts could be directly impacted due to their reliance on cross-border pricing strategies. FMCG companies, selling products like chocolate and biscuits at varied prices across the EU, will need to recalibrate their pricing structures. This adjustment might lead to financial strain in the short term, affecting their credit profiles. Pharmaceutical companies, which also rely on differential pricing, could see significant disruptions, particularly in price-sensitive markets. The ripple effect on their creditworthiness must be closely monitored.
Retail and wholesale sectors will not escape unscathed either. Retailers, who have thrived on purchasing lower-cost goods from certain member states, may face tighter margins, elevating their credit risk. Wholesalers may find themselves renegotiating supply agreements, with potential cash flow challenges impacting their credit profiles.

However, it’s not all doom and gloom. Opportunities abound for those who can navigate these changes adeptly. The push towards uniform pricing may level the playing field, allowing smaller firms to compete more effectively against giants who previously leveraged TSCs to their advantage. Credit managers who can identify and support these emerging players stand to gain.

We need to pivot from risk mitigation to strategic enablers of business transformation in these circumstances. It’s important to not just monitor regulatory changes but to actively engage with clients, and potential clients, offering insights and solutions that help them adapt.

The UK Payment Systems Regulator (PSR) is set to introduce new rules that will require Visa and Mastercard to disclose more information about the fees they charge merchants. This proposal, targeting the two companies that handle 95% of all debit and credit card payments in the UK, aims to enhance transparency and fairness in the payments sector.

The PSR’s proposal stems from findings that Visa and Mastercard have increased their scheme and processing fees by over 30% in real terms over the past five years, without a corresponding improvement in service quality. These fees, which are charged directly to sellers for accessing card networks and processing transactions, have largely escaped the scrutiny applied to interchange fees. The new rules would require Visa and Mastercard to regularly disclose financial information and consult with merchants before changing their fees.

Increased transparency into Visa and Mastercard’s fee structures will allow businesses to better understand their cost bases and forecast expenses more accurately. However, this increased scrutiny and potential operational adjustments could impact the financial dynamics of the card networks, with significant downstream effects on merchants. Visa and Mastercard may need to make operational adjustments to comply. These adjustments would likely include restructuring fee models to be more transparent and justifiable, which might involve reducing some of the rebates and discounts currently offered to banks. In turn, this could impact overall pricing strategies and potentially increase the costs for banks, which may then pass these costs back onto merchants. Credit managers will need to monitor these developments closely, as they could affect the liquidity and risk profiles of customers.

Moreover, the push for transparency may well allow smaller and newer payment processors to gain ground, such as Stripe or Square, which have been gaining market share with innovative, user-friendly solutions. These companies could find it easier to compete against Visa and Mastercard if regulatory changes reduce the incumbents’ ability to leverage opaque fee structures and rebates to maintain market dominance. This increased competition would mean more options for businesses seeking payment processing solutions, potentially improving their financial stability and creditworthiness.

Whilst Visa and Mastercard face increased regulatory burdens which may ultimately increase costs for merchants, the resulting market dynamics could offer opportunities for smaller payment processors with lower fees. We’ll need to keep a close eye on developments and maintain open dialogue with merchants as this progresses.

UK-based activist investor Palliser Capital is calling for Rio Tinto to abandon its primary London listing and unify its corporate structure in Australia, echoing a move made by rival BHP two years ago. This proposal could have wide-ranging effects across various sectors.

Palliser Capital contends that Rio Tinto’s dual corporate structure is a strategic hindrance, preventing major acquisitions and resulting in a $27 billion discount for its London-listed shares compared to its Australian counterparts. The investor argues that consolidating the primary listing in Sydney would unlock significant value, streamline operations, and close the valuation gap.

This underscores a broader issue we should always keep in mind: the complexity of corporate structures which can significantly impact financial health and strategic capabilities. For credit managers, moving towards a unified structure generally enhances financial transparency, simplifying the assessment of creditworthiness and risk management. Yet, the transition to a unified structure is not without its challenges. Short-term volatility is likely as Rio Tinto adjusts its operations and capital allocation strategies. Such disruptions could affect cash flow and alter strategic priorities, impacting relationships with suppliers and creditors.

The broader market implications are also noteworthy. The potential exit of Rio Tinto from the FTSE 100 would be a considerable setback for the UK stock market, already facing pressures from companies shifting their listings abroad to close valuation gaps with global competitors. Such a move may impact investor sentiment and market stability, critical factors when evaluating the broader economic landscape.

Watch this space…

Baker Ing and Callisto Grand are set to host an exclusive workshop designed to address and resolve bottlenecks in accounts receivable (AR) management. The event, aptly named “The Situation Room: Manchester,” aims to equip professionals with the tools and insights needed to achieve peak KPI performance and optimise financial operations.

Held at The Midland Hotel, this workshop brings together industry leaders and experts to provide actionable strategies for managing high-value, sensitive, and complex receivables. The initiative underscores the importance of efficient AR management in enhancing overall financial performance.

This workshop is particularly timely given the current economic climate. By addressing bottlenecks in the AR ledger, businesses can improve cash flow, reduce bad debt, and ultimately enhance their creditworthiness. For credit professionals, the insights gained from this event will be invaluable in assessing and mitigating credit risk.

Baker Ing and Callisto Grand’s workshop in Manchester represents a significant opportunity for professionals to gain cutting-edge insights and hands-on practical strategies for optimising AR management. Attendees will leave equipped with the knowledge to tackle AR challenges head-on, ensuring their businesses are well-positioned to thrive in an increasingly complex financial environment.

For more information please visit: https://bakering.global/the-situation-room-manchester/

National Grid has unveiled a plan to raise £7 billion through a fully underwritten rights issue, gearing up for a transformative £60 billion investment in energy network infrastructure over the next five years. This move, aimed at modernising the UK’s grid, is set to have far-reaching implications for a range of industries.

National Grid’s ambitious investment underscores the critical role of large-scale infrastructure projects in driving economic growth and stability. As the company seeks to enhance its grid to accommodate growing electricity demand and renewable energy projects, the ripple effects will extend to new opportunities for suppliers and contractors in construction, engineering, and renewable energy. Credit must consider the increased demand for materials and services, which will boost the financial health of companies in these areas.

Chief executive John Pettigrew emphasised that the £60 billion investment would not only modernise the energy grid but also contribute to long-term reductions in consumer energy bills. This highlights another key consideration: the broader economic benefits of such an investment. Improved energy infrastructure leads to cost savings for businesses and households, enhancing overall economic stability and reducing long-term credit risk.

The substantial capital expenditure is expected to support over 60,000 additional jobs by the end of the decade, creating a positive knock-on effect across a number of regions. It will be important to evaluate the potential for regional economic growth and its impact on credit risk profiles.

However, the scale of this investment also introduces potential risks. The significant share dilution caused by the rights issue, reflected in the initial 8.21% drop in National Grid’s share price, signals investor concerns about financial strain. We need to closely monitor National Grid’s financial health and its ability to manage this substantial capital raise. Ensuring that clients involved in these projects maintain robust receivables practices will be essential to mitigate credit risk.

Finally, the transition to a more electrified and decarbonised economy underscores the increasing importance of the renewable energy industry. Companies involved in the production and installation of renewable energy systems are well-positioned to benefit from increased demand. Conversely, industries dependent on traditional energy sources may face challenges. We’ll need to assess the strategic positions of clients within this evolving landscape, identifying those best positioned to capitalise on the new opportunities whilst managing exposure to at-risk sectors.

National Grid’s £7 billion rights issue and £60 billion infrastructure investment plan clearly present both substantial opportunities and a few risks across various industries and regions. Understanding the broader economic impacts and drilling down into the opportunities will be key to managing exposure effectively.

That’s it for this week’s rollercoaster ride through the world of trade credit. We hope you’re leaving more enlightened and slightly more interested than when you arrived. Stay tuned for more thrills and spills in our next edition.

Until then, keep your wits sharp, your balance sheets balanced, and your sense of humour intact.

For more insights and detailed analysis, don’t forget to visit Baker Ing Global.