Sober Look and I had an online discussion regarding his post about the hidden pitfalls of Basel III. He suggested there had been some interest in my comments and could I provide a case study. I duly did this evening (finally) and sent him a simple version of a generic case which I have amended here to include the commercial objectives a typical corporate would be very keen to achieve in the current market conditions.
- European multinational with Head Office in Eurozone“periphery”
- More robust funding structures and to adapt their debt repayment profile to their expected cash flow generation.
- Minimize funding liquidity risk and improve advance rate achieved for their assets.
- Sale rather than Financing accounting treatment. (IAS 39)
- Greater certainty of trade credit insurance cover through the economic cycle.
- Achieve commercial outcomes without increasing administrative burden on treasury.
- Improve credit risk management for both trade and finance purposes.
- Operations in Europe, Africa, Latin America & Asia.
- 2010 turnover > €1,000m, ROCE 5%, EBITDA < €100m.
- Total Trade Receivables portfolio €150m.
- Working Capital needs €125m (2011) and €150m (2012).
- Concentration risk – 22 major buyers with sales > €7m p.a.
- Increasing counterparty credit risks within EU.
- Funding via Bonds, Revolving Credit and Asset Backed Commercial Paper.
- €120m ABCP program funded by UK bank through Jersey-based SPV.
- Advance rate 79% on €150m driven by Rating Agency Criteria (unrated buyers, country limits, loss history, stress)
- The daily information feed from client sales ledger to the Bank Funder however failed to:-
- offer granular detail or “static pool data.”
- offer detailed ageing profiles.
- Effectively track concentrations/customer aggregation, credit notes, dilution and disputes.
- Help reduce reporting requirements/costs for treasury resource.
- Enhance confidence in data flows and consistency.
- Support holistic Credit Risk Management
- €27m “allowance for doubtful debt” (creating “Going Concern” issues)
- Credit insurance purchased separately in each territory. No benefit to external funding cost.
- Improved risk analytics (points 1-6 above) benefits Company and Funder.
- Committed facility of €150m (additional headroom) & reduced all-in funding costs by 25 Basis Points.
- Advance rate on total trade receivables portfolio lifted from 79% to 95%. Increased cash available for investment and growth plans by €15m p.a. (additional €45m over a 3 year term).
- Reduced Bank Funder Risk Weighted Assets for transaction by approx. 50%.
- Sale treatment achieved for transaction under IAS 39.
- Cell captive established to build cash allowance for doubtful debts and support funding.
- ROCE improved by 110 Basis Points.
- Improved Enterprise Risk Management and Internal Controls supporting Corporate Governance.