TMI | ISSUE 268 1

LEADER

By Adeline de Metz,

Global Co-Head of Trade

and Working Capital

Solutions, UniCredit

W orking capital conversations between banks and corporates have typically focused on individual bank products, rather than the speci� c needs and challenges of the corporate – leaving opportunities and e� ciencies on the

table. But that’s all changing now, as Adeline de Metz, UniCredit’s Global Co-Head of Trade and Working Capital Solutions, explains.

In the face of lengthening global supply chains and economic uncertainty, corporates of all sizes are increasingly searching for eff ective, tailored working capital solutions to address their individual fi nancing needs.

In most cases, meeting this demand doesn’t start with a product or a technique – it starts with banks and corporates

refi ning the way they interact. Corporates don’t need a certain product or technique; what they need is a comprehensive solution that supports them in their unique circumstances.

While this may sound like an obvious approach, it’s not one that has been historically practised. All too often, corporates and banks focus on specifi c

Getting to Grips with Working Capital

2 TMI | ISSUE 268

products, instead of thinking holistically about the client’s objectives and specific situation. In the worst cases, different bank departments speculatively pitch their own solutions without undertaking a thorough analysis of the corporate’s financial circumstances.

However, corporates are increasingly realising the importance of moving away from this paradigm and working towards a streamlined approach.

What factors determine the solution? This first step is to answer two fundamental questions. What is the company trying to achieve with working capital management and what is its current financial situation?

Working capital objectives vary widely. Small- and medium-sized enterprises, for instance, are more likely to be looking for liquidity, whereas multinational corporations are more likely to be interested in improving their financial key performance indicators (KPIs) – such as free operating cash flows, leverage ratio, or return on capital employed (ROCE). Other businesses, meanwhile, may see working capital management as a way of managing their risks or those of their supply chain.

In addition, the size of a company, along with its credit rating, its experience with working capital management, and its existing access to liquidity, all play a part in determining how they approach these goals and what products fit best. There may also be external constraints. Existing covenants tied to outstanding loans, for instance, can limit a company’s ability to take on additional debt or to freely dispose of assets such as receivables, while the geographic footprint and favoured currency of clients and suppliers will also play into the suitability of any solution.

Finally, corporates must also factor in major events, such as large capital expenditure plans, sharp sales increases and upcoming M&A activity, which may trigger working capital needs.

The impact of different solutions

Choosing the right mix of techniques is therefore important when crafting a suitable solution. These techniques can be divided into three broad groups – factoring, securitisation, and forfaiting (or single-

name receivable finance) – each with their own effects.

Factoring, for example, has the advantage of being understood by corporates and easy to implement. However, it comes at a relatively high cost compared with other techniques. Corporates using factoring can decide whether to sell with or without recourse – and whether or not to disclose the factoring to the buyer. Selling receivables disclosed (with or without recourse) makes financing more attractive for the lender from a risk perspective, and therefore comes at a lower price. Operating with recourse, meanwhile, creates a debt position on the balance sheet, while selling without recourse does not – and removes the risk of non-payment by the client. This is, in general, the preferred approach of large clients.

Sizeable corporates may also be interested in forfaiting, which offers competitive pricing and greater flexibility than factoring. However, the process involves more manual work in terms of execution and credit assessment – making it better suited to substantial programmes with a limited number of debtors.

For those prepared to put in the work to optimise their working capital based on a large portfolio of debtors, securitisation is a compelling option. This solution typically combines attractive pricing due to lower capital consumption for the bank, with a positive balance-sheet impact. To realise this value, however, corporates need to dedicate some time to gathering data in the preliminary analysis phase, and – once the deal has been implemented – also during the funding phase, where they will also have to carry out certain operational activities similar to those of factoring. The whole process takes between two and three months to complete.

This is just a brief rundown of the most common techniques, as well as the influencing factors that are appropriate for a given company. In practice, there are many more options, each overlapping and differing in nuanced ways. The only method to ascertain what is needed for a given company is to carry out a thorough analysis of its financial situation. This includes examining its preferences, goals and the state of its balance sheet – only then can a combination of techniques be pulled together into a comprehensive programme. n

Adeline de Metz

Global Co-Head of Trade and Working Capital Solutions, UniCredit

The first step for effective

working capital optimisation is to answer two fundamental

questions. What is the company

trying to achieve and what is its

current financial situation?