Factoring Solutions for Working Capital Optimisation
by Andre Bloemen, Head of Treasury & Structured Finance, Bombardier Transportation
Working capital optimisation is an objective for corporations globally, but this may require quite different approaches in each case. For example, for many companies, optimising collections by linking payment terms to counterparty risk, and implementing more efficient collections processes is a priority. For companies such as Bombardier Transportation, which has a highly rated customer base with a strong payments record, treasury has had to find alternative working capital solutions, as Andre Bloemen, Head of Structured Finance and Treasury at Bombardier Transportation explains.
Bombardier’s Aerospace and Transportation functions have separate treasury centres: Aerospace is managed in Montreal, while we manage the Transportation treasury in Zurich. With the exception of placing deposits and loans and the actual trading of currencies and derivatives, which is handled in Montreal at the group’s head office, all other activities for Transportation, including advisory to divisional and project management and back-office processing, take place in Zurich.
The Transportation division alone has 62 production and engineering sites in 25 countries and more than 40 service centres at customer locations, so managing FX risks is a key treasury priority. In addition, however, working capital has become increasingly important, particularly as customers are pushing for extended payment terms. For example, although most customers are national railways that have very low cost of funds, the governments that fund them aim to delay major expenditure, even though the final cost may be higher if suppliers need to include the cost of extended payment terms into the contracts.
Reviewing alternative solutions
Declining days sales outstanding (DSO) has a major impact on our business, so we needed to find new ways to manage working capital without affecting our core ratios. The way we approached this was different from some other industries, in that our customers are highly rated and have a very strong payment record. Therefore optimising collections would not be beneficial for us. Instead, we engaged with our banks that were able to offer alternative financing solutions and share experiences and best practices from other customers.
Treasury co-operates with the Structured Finance team on this. This group typically creates financing schemes for customers, but the team had valuable expertise it could share. For example, we have been proactive in reviewing and implementing financing solutions such as factoring. We also consulted our Aerospace treasury to identify opportunities to cross-fertilise ideas, although their business model tends to differ from that of Transportation.
The value of factoring solutions
As a consequence of this evaluation, we implemented a variety of factoring schemes, leveraging the strong credit rating of our customer base, together with a variety of derivatives. We have therefore been able to sell receivables at a good price and without incurring debt on the balance sheet. We invited a variety of banks to quote for this business. As a company that retains a strong family interest, we are a highly relationship-oriented business that values long-term partnerships. We were therefore pleased to appoint SEB as one of our partner banks for our factoring solutions, with which we already had a relationship in both structured finance and treasury, based on the quality of the relationship, breadth of solutions and commitment to customer service.
Implementing a complex factoring programme brings some challenges, not least due to need for close co-operation between multiple stakeholders, including different business units, shared service centres and treasury. Each of these has diverse day-to-day responsibilities and objectives, and in a global business may also bring together different language and cultures. However, this collaboration proved very successful as we were able to establish common goals and expectations, and a commitment to efficient internal processes to facilitate efficient factoring, such as ensuring that the correct invoices were presented to the banks.
Innovative ways of adding value
As a result of implementing our factoring schemes, we have been successful in reducing working capital on the balance sheet. We have also been able to extend into new financing solutions. For example, and except in some cases during the build phase, we aim not to carry large amounts of inventory within Bombardier Transportation, as we order parts and components according to individual customer specifications,. However, our customers require inventories of spare parts, so we have worked with SEB and other relationship banks to offer additional value to our customers by taking over the financing, holding and management of these inventories. We then implement sophisticated monitoring systems to optimise our customers’ operations whilst minimising the number of stock parts required.