Rethinking Receivables: The Role of Adaptation in Holistic Working Capital Management
By Julien Tizorin, Head of Coverage, Energy & Chemicals Americas, UniCredit and Massimo Ortino, Head of GTB Americas, UniCredit
The working capital requirements of large corporations are often too complex and variable to be effectively addressed with a one-off financing tool. Julien Tizorin, Head of Coverage, Energy & Chemicals Americas, and Massimo Ortino, Head of GTB Americas, at UniCredit, discuss how a flexible receivables financing programme successfully met the changing cash flow requirements of National Oilwell Varco (NOV) – a leading provider of technology, equipment and services to the global oil and gas industry.
Dynamic receivables financing is an innovative and particularly useful working capital tool for corporates whose cash flow is subject to peaks and troughs over the course of the financial year. By agreeing to price the receivables financing in accordance with an expected payment date, for example – as opposed to the due date – corporates and their banks can establish a flexible and robust working capital solution, as NOV discovered.
As one of the largest providers of equipment and components used in oilfield services – operating in multiple countries and almost every oilfield around the world – NOV’s business is dependent on the energy cycle.
When oil prices are high, NOV receives an increased number of purchase orders, building up a back-log. When oil prices are low, the back-log goes down. Releasing working capital allows NOV to execute these orders faster when oil prices are up.
NOV’s working capital challenges
For the last few years, NOV has been intensely focused on improving working capital – enabling it to build significant cash reserves. This cash has been used to grow the business, be opportunistic and repay debt, ensuring the company maintained a strong financial profile. As oil prices began to drop, however, so did activities such as offshore drilling – causing a decline in large orders and putting a strain on that segment of the business.
To redress this imbalance, NOV needed a solution that could both supplement its cash flow during the down cycle, but also be seamlessly scaled back during the up cycle. In particular, the solution had to be extremely flexible in terms of time frame, since NOV did not know how frequently its cash flow would need to be supplemented.
Key performance indicators
With these challenges in mind, NOV approached UniCredit to obtain a financing tool that could manage cash flow on a dynamic basis.
To engineer the required level of flexibility, it was first necessary to look at the areas where the best arbitrage could be achieved, with a view to creating cash flow at a cost as close as possible to NOV’s commercial paper programme.
To meet these requirements, while also satisfying NOV’s preferred “pay-as-you-go” approach – UniCredit proposed a form of receivables financing.
Tackling the ‘invoice age issue’
When examining NOV’s invoice history, however, it became apparent that many of the company’s customers were paying at very different speeds. To make matters more challenging, NOV enjoys less leverage as a BBB+/Baa1 rated company, than its larger, double A-rated customers when it comes to payment terms.