- Luis Montesinos Ballesteros
- Director, Treasury & Tax, Campofrio Food Group
by Luis Montesinos, Director, Treasury & Tax, Campofrio Food Group
Like many companies, Campofrio Food Group had to reinvent its treasury activities as a result of the global financial crisis. When the crisis struck, the Group was unrated, like many other Spanish companies. Although our turnover is high – around €2bn, we have relatively narrow margins, and a comparatively large debt position to manage. Over the past few years, we have reinvented our treasury activities to allow the company both to overcome the immediate crisis, and ultimately to benefit from a virtuous cash flow cycle and responsible attitude to financing. In addition to the decisions we have made within the business, establishing and leveraging the right bank relationships has been critical in achieving this.
A sea change for corporate finance
The ability for corporations like Campofrio to finance their business changed markedly over the course of the global financial crisis. Before 2008, we were effectively in a funding paradise: the markets were awash with liquidity, costs were low, competition amongst banks to offer financing was fierce and lending criteria were loose. For our business, the lack of a credit rating was not an impediment to accessing cheap financing, and few Spanish companies had sought a credit rating. At the same time, the inconsistencies between markets became very apparent: for example, at that time, I was working for a Spanish subsidiary of a French multinational. We were able to obtain more favourable financing rates at a subsidiary level than our Paris headquarters, which seemed illogical, with international banks offering better rates in Spain than in some other countries. Companies in Spain struggled with the impact of sovereign risk, as well as banks’ funding decisions based on their own credit quality. The crisis turned the market on its head, and we moved from one extreme to another. Market liquidity dried to a trickle, banks consolidated and tightened their lending criteria and companies that were reliant on the formerly abundant lending suffered.
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Beyond bank lending
Corporations such as Campofrio and many others had taken access to credit and freely-available liquidity for granted, but now had to take a different approach. A first step was to approach each of our banks individually to understand clearly what financing would be available. While in the past, banks offered pricing on the assumption that our business was an investment-grade credit risk, our lack of credit rating became an issue post-crisis, so it took longer to agree financing terms and banks’ appetite for lending was reduced, exacerbated by additional sovereign risk.
While we could still have had a chance to refinance our debt using bank financing, we made the decision to seek a credit rating and access the bond market in order to diversify our funding sources, a ‘first’ for Campofrio and a pioneering initiative for Spanish companies overall. Although challenging, with a high financing cost, ultimately this strategy proved successful, with an oversubscribed issue.
Part of the value of a newly centralised approach to financing was the ability to eliminate debt at a subsidiary level, allowing greater visibility and control over our financing risks, and enhancing our ability to seek more favourable rates. We were also in a better position to ensure that policies were consistently applied, such as leverage ratios. We also reduced our liquidity risk substantially, with solid cash on the balance sheet and a substantial level of back-up committed bank lines available, placing the business in a better position to weather future crises.
Working capital management
Our need for financing was not simply a P&L issue, we also needed to address our working capital and operating cash flow needs. We reviewed the working capital financing options available to us, and sought to implement solutions that leveraged both receivables and payables. At the same time, we did not want to add complexity or opacity to our balance sheet, so we have used straightforward solutions without financing vehicles or derivatives.
Firstly, we put in place receivables management through non-recourse factoring. We were already leveraging this technique in Spain with three banks, but we extended it across our affiliates in seven countries with six banks.
Secondly, we implemented a confirming (reverse factoring) solution for payables as part of a supply chain financing programme. Once again, we set up the solution in Spain initially, and then expanded it more widely, generating significant group-wide working capital benefits. In addition, unlike factoring, confirming is accounted for as trade operations and does not affect the rating agencies’ adjusted ratios. We were also attracted to the wider benefits of supply chain financing, specifically the ability for our suppliers to leverage their receivables to access cost-effective financing through the programme.
As a result, we generated a €250m working capital reduction between 2009 and 2013, but also improved cash flow certainty, resulting in greater forecasting accuracy.
Our alternative working capital tools, non-recourse factoring and confirming, are now essential pillars of our treasury operations that have substantially contributed to our positive cash flow generation over the last years and we anticipate continuing to expand the use of these solutions across our business.
A virtuous cycle
In addition to optimising and centralising our financing arrangements, however, we needed to take a more centralised approach to treasury overall to ensure that we were making the best use of our financial and human resources. As part of this initiative, we set up a European zero-balancing cash pool to make better use of liquidity across the group. This was an unusual step amongst Spanish companies, who raised cash through subsidiaries outside the region instead; however, given our liquidity objectives and group cash flow dynamics, cash pooling was the right solution to us.
We invited both Spanish and international banks to tender for the cash pool and ultimately appointed BNP Paribas. The bank had considerable experience in offering liquidity management solutions, and the technology to support it, with a footprint that matched the geographic reach of our business. Following a very successful project of only four months, without the need for external consulting support, we now have all of our European affiliates across seven countries connected into the cash pool.
The value of bank relationships
Alongside the cash pool implementation, we have taken significant steps to streamline and rationalise our banking operations to increase efficiency and reduce costs, whilst continuing to build relationships with key local and global banking relationships. For example, in addition to cash management and lending banks, we needed to develop close relationships with banks, including Spanish banks, that could place bonds for non-investment grade companies in the capital markets. Consequently, we needed to extend and diversify our banking panel which now combines long-standing relationships with specialist relationships.
Throughout the crisis and beyond, we recognised the pivotal importance of the right bank relationships, and we have invested considerable time and resources to managing these relationships and communicating effectively, By doing so, we have been in a position to secure access to sustainable financing and wider services throughout a very challenging period. Given the international nature of our business, it has been important to work with banks that offer coverage across the countries in which we operate, and have the depth of services and solutions that we require in each market. However, it is essential to realise that these relationships are not ‘one-way’. Rather, we have engaged in open dialogue to ensure that the value of the relationship is balanced and that both derive value from the partnership.[[[PAGE]]]
Positioning for growth
The impact of these initiatives has been substantial, not only in improving our financing and liquidity position and reducing vulnerability to future shocks, but supporting our wider business strategy. For example, in 2011, less than three years after the crisis first struck, we were able to make a major acquisition in Italy, partly funded through bank debt. This took the form of a €100M club deal given that the underwriting market was closed at that time. We managed to complete this transaction very quickly: only four weeks from the RFP (request for proposal) launch, with nine of the ten banks originally invited. The deal was three times over-subscribed, despite the volatile, negative conditions in the financial markets, and only 20% of the initial amount has been traded in the secondary market. Whilst this type of transaction has been relatively difficult to price and implement over recent years, with considerable obstacles to overcome both for borrowers and lenders, it illustrates the value of solid banking relationships, despite adverse market conditions. In this case, we structured and arranged the deal within Campofrio and, unusually, shared a legal counsel between parties.
Embracing a new era
Effective bank relationship management is not always easy. For example, it is typically best for treasury to co-ordinate these relationships, but there are other stakeholders whose interests need to be taken into account and who will also engage directly with banking partners, such as M&A, investor relations, procurement and HR. Furthermore, the board and senior management will also have a view on these relationships, which need to be managed carefully.
Campofrio has undergone substantial organisational change over the past year. For example, we had a new CEO appointed a year ago, and Campofrio was then acquired in mid-2014 by Sigma Alimentos, a Mexican producer and distributor of refrigerated and frozen foods together with WH Group, the leading pork producer in China. The new ownership offers considerable new opportunities for the Campofrio group, and we would expect there to be some impact on treasury as a result, such as banking relationships. However, we anticipate that our treasury will continue to take a key role in the future direction of the group, having successfully managed the group’s financing and cash management operations during a challenging period. In the months ahead, we will be focused on refinancing our debt as market conditions improve, and following a recent credit rating upgrade, we expect to be able to reduce our cost of financing.
In addition to our financing role, we continue to provide valuable services group-wide, both in cash and treasury management, but also through shared services such as our payments factory project on which we are currently working. Consequently, our treasury is well-placed to take on responsibilities for the wider business and support future business strategy.
