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Factoring in Pharmaceuticals ANZAG, a leader in the German wholesale pharmaceuticals market, decided to address some aspects of its medium-term funding requirements by putting in place a factoring programme for its business in Germany. The selling of accounts receivable through a factoring arrangement allowed ANZAG to obtain cash for immediate needs while reducing the size of ongoing borrowing facilities. Deutsche Bank brought in two separate factors to handle the volume of receivables included in the EUR 130m revolving facility. This novel and complex approach to financing in the pharmaceuticals wholesale sector has reduced ANZAG’s reliance on the global capital markets and secured the company’s medium- to long- term financial future.

Factoring in Pharmaceuticals

by Dr Thomas Trümper, Chairman of the Executive Board, ANZAG

Driven by changing market circumstances and business needs, switching to a receivables-based method of financing has delivered a range of benefits, says Dr Thomas Trümper, Chairman of ANZAG. A leader in the German wholesale pharmaceuticals market, ANZAG has an annual turnover of around EUR 4bn and employs just under 4,000 people. We supply around 8,000 pharmacies in Germany with goods from over 2,000 suppliers, something that often takes place several times a day.

We decided to address some aspects of our medium-term funding requirements by putting in place a factoring programme for our business in Germany.

This pharmaceuticals business is, of course, highly regulated with its fortunes not always mirroring those of the broader economy. However, this does not mean that businesses such as ANZAG have been insulated from recent events in the European and global financial markets. And central to dealing with the challenges of changing market circumstances and business needs has been a strategic reappraisal of our approach to financing and liquidity management.

With a long-term goal of balance sheet optimisation and a broad distribution of borrowing volume across several banking relationships, our key funding principle has been to satisfy our needs through a balanced combination of borrowed capital and equity. These borrowing requirements have traditionally been satisfied through bilateral credit lines and the issuance of medium-term debt such as promissory notes.

While this sector usually finances itself on a short-term basis, we decided to address some aspects of our medium-term funding requirements by putting in place a factoring programme for our business in Germany. As well as securing medium-term liquidity, this has also allowed us to further broaden our funding base and minimised our dependency on international capital markets. 

Receivables management

Receivables-based financing was attractive for a number of reasons. The selling of accounts receivable to a third party – or, in this case, two separate third parties – through a factoring arrangement allows us to obtain cash to accommodate immediate needs while reducing the size of ongoing borrowing facilities, something that should yield significant benefits over the medium-term. As the receivables constitute a financial asset in their own right, the transaction is not treated as a loan and there are therefore positive balance sheet implications from financing in this way.

There is a clear trade-off here between the cost of factoring the receivables – the discount – and the cost of maintaining cash balances to cover customers’ payment periods. And, of course, entering into a new arrangement such as this brings new types of risks that must be analysed and mitigated. However, thanks to the nature of factoring, the risks are relatively low. From a financial institution perspective, trade receivables are considered a low-risk asset – thanks, in part, to their relatively short duration – and, from our perspective, non-payment risk has been passed on to one of the two factors involved in the deal.

The volume of receivables included in this EUR 130m revolving facility was such that no single factoring company would have been able to handle them alone. As a consequence, Deutsche Bank brought in two separate factors and, despite the additional complexity this added, the deal was structured in such a way that handling and administration are highly streamlined and efficient.

While factoring is a relatively common method of financing across some industry sectors, the deal structured for ANZAG is unique in a number of ways. Aside from the additional complexity of bringing in two factors, the transfer of data on thousands of debtors and individual transactions takes place over a single interface, thus greatly reducing the burden placed on our in-house accounts and administration teams. In this respect, Deutsche Bank’s technological capabilities were a crucial facet underlying the feasibility of this deal. And the two-factor aspect of the solution gives an extra element of security should one of the factors withdraw unexpectedly. 

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