Rethinking Receivables: The Role of Adaptation in Holistic Working Capital Management

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.

Massimo Ortino Head of GTB Americas, UniCredit

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.

Typically, corporates are obliged to buy back sold receivables if the associated payments aren’t received on time – meaning a standard programme simply wouldn’t work based on NOV’s invoice history.

First, UniCredit conducted an in-depth analysis of five years’ worth of accounts receivables ageing, encompassing the entirety of NOV’s portfolio, before mapping these payment patterns.

The findings showed that NOV’s debtors were reliable, but that the release of payments was greatly influenced by, among other factors, the quarter in which the invoice is issued, as well as the particular point in the oil cycle.

Either way, this resulted in NOV’s customers paying at varying speeds – posing a considerable working capital challenge for both the client and the bank.

To overcome this challenge, UniCredit used the historical payment data to inform an innovative solution. Rather than advise NOV to amend its invoicing pattern to align with the collection trends (which would risk jeopardising relationships with customers), UniCredit offered financing based on the expected payment date, rather than the due date, and priced the financing accordingly.

To structure this, the bank agreed grace periods on a client-by-client basis, which factored in both the findings from the bank’s in-depth invoice ageing analysis, as well as the collection and reconciliation activity across the client’s various divisions and legal entities. This grace period stipulated the number of days past the due date for which UniCredit was still happy to honour the receivables purchase without NOV having to buy it back. Crucially, this period could be dynamically adjusted in line with payment track records and due diligence updates.

Trevor Martin Vice President & Treasurer, National Oilwell Varco

As such, the bank was able to purchase the receivables and price them against historical collection patterns, on a customer-by-customer basis. Although these receivables were more than likely to be overdue, UniCredit offered competitive pricing by reason of the customers’ excellent credit ratings.

This is a unique approach. A standard process might involve a one-off analysis of five years’ worth of invoice ageing, before purchasing on that average. This approach, on the other hand, looks at quarterly collection patterns and dynamically adjusts the discounting periods of the receivables accordingly.

This kind of receivables financing programme was, until now, unprecedented in the oilfield sector.

It is a great example of holistic working capital management at work, whereby a cross-divisional team within the bank evaluates the specific issues faced by the corporate; develops a deep understanding of the financial situation of the business – as well as the idiosyncrasies of the industry in which it operates – before identifying the best possible solution for the client’s working capital needs sourced from the full range of the bank’s services.