Taking a Long-term View

by Jan-Martin Nufer, Director of Treasury & Funding, Borealis

We established our new funding and banking strategy in Borealis 2007, with the aim of creating a diverse and robust finance portfolio. This was the start of a journey on which we have been travelling ever since, with the aim of achieving the ‘ideal’ funding portfolio, which in reality, doesn’t have a final end point. Minimisation of funding costs alone is, in my view, not a strategy or long-term vision. As a result, cost reduction is only one factor amongst other, more important parameters, in building a solid funding backbone. Over the past eight years, we have concluded a suite of financing transactions exceeding EUR 5bn in value, including a series of ‘firsts’, marking a major ramp up in the sophistication and precision in our approach to funding.

Credit characteristics

Borealis is an unrated corporation in the petrochemicals, polyolefins and base chemicals, sector, with business cyclicality typical of the industry. We have two shareholders: International Petroleum Investment Company (IPIC) of Abu Dhabi (64%) with the remaining 36% held by OMV Aktiengesellschaft, one of Austria’s largest listed industrial companies, with both upstream and downstream oil and gas activities. Borealis operates various joint ventures, by far the most important being Borouge, a company co-owned together with ADNOC, the national oil company of Abu Dhabi.

Borealis has historically been a ‘story credit’. Due to our business profile and the unique characteristics of our combined European and Middle East production capacities, it is not easy to do a standard credit assessment using the traditional ratios and peer comparisons, which are already difficult in our sector. This combination of factors means that our corporate profile is not as obviously clear to investors as those of publicly-owned businesses with more regular cash flow and straightforward income statements. However, once our business profile has been explained, we achieve implied credit ratings well above the industry average. In the context of selecting of the most appropriate instruments, this also means that making direct contact with potential investors and financing institutions is key for the selection of the best funding avenue.

Jan-Martin Nufer poses with financing transaction "tombstones" and awards won by Borealis - including 2 TMI Corporate Recognition Awards!

Step 1: Defining parameters

As a first step, we needed to establish the strategic parameters that would guide the efforts. These consisted of:

• diversification, across markets, sectors and geographies;
• active maturity profile management, and
• the selection of suitable instruments.

The last point always needs to take into account the market conditions prevailing at a given time. Besides the long-term goals, market windows and comparative cost advantages between the options are the inevitable short-term parameters when defining the most appropriate funding solutions. In sum, the strategic funding activities have to meet the needs of the business, combined with best cost-reward relationship for the company.[[[PAGE]]]

Step 2: Leveraging group liquidity

Before sourcing finance externally, we aim to optimise our working capital metrics and identify potential for improvement wherever possible. We have a global cash pool to ensure visibility and control over group cash, and a global payment factory which allows us to reduce costs, increase payments security and efficiency, and optimise our payments cycle.

We operate a variety of continuous improvement initiatives, most recently in the accounts payable area. Our latest ‘Payables Excellence Programme’, which we integrated with other company-wide initiatives like the overall purchase-to-pay stream analysis, has already resulted in a number of synergies. We also focus on the collections process to improve predictability of cash flows, such as using SEPA direct debits, and an innovative method using automated ‘pre-due reminders’ via email, encouraging timely customer payments.

Both accounts payable, and credit and collections are integrated into treasury, which gives us a high level of control over working capital, and the ability to optimise end-to-end flows. However, we also need to work with our fellow departments such as procurement across functional ‘silos’ and improve processes in all respects.

Techniques and instruments such as supply-chain financing (SCF) or reverse factoring are in principle less relevant to a business like ours. The pricing and concept of these programmes is typically only attractive where a significant credit differential exists between an organisation and its suppliers and where the liquidity needs allow for the necessary discounting structure. We have, however, used trade receivables securitisation programmes for a long time and we are currently looking into a suite of innovative SCF possibilities with our banks and independent platform providers. Our aim would be to create a tailored product that supports both our liquidity objectives and those of our suppliers. If these initiatives go according to plan, we look forward to discussing them in more detail in TMI in the future.

We have come to realise that one of the criteria for an effective working capital strategy is to have full visibility and control over the cost of capital calculations. As is usual in large corporations, there are widely differing views on cost of capital, weighted average cost of capital (WACC) and other similar parameters in different areas of the organisation. In addition, they are usually not regularly updated to reflect the market situation. To overcome this, we have established an excellence initiative where treasury looks into all areas of the company where these parameters are used. Working capital optimisation is clearly not a simplistic reduction. Revenue and cost parameters have to be carefully weighted to achieve the optimal result for the company in a given business situation. This has to work when the company is short of cash as well as in times of excess liquidity. Hence our goal is to provide an up-to-date and context-sensitive calculation tool that demonstrates the value of improvements to working capital metrics, such as the value of one day earlier payment. What at first glance seem to be small change gains a different significance when looking in detail at the effect on suppliers or customers, comparing one-off solutions with longer-term structural changes that are not easy to unwind, or when looking at different parts of the portfolio. This calculation tool will use a market data feed and link into the various front end systems, including the customer and supplier pricing tools. If we achieve this, then working capital optimisation will become inherent in the metrics used by all departments, and integral to day-to-day business decisions.

Step 3. External financing

i) Bank financing
Classical bank financing, bilateral as well as syndicated, remains an important element of our financing strategy. From a cost perspective, bank funding remained the most cost-effective and flexible means of financing when looking across the economic cycle. For us, the challenge has been rather the availability overall or for certain tenors. In current markets, although pricing for corporate spreads has increased, we are still able to lock in rates at a very low level. Given our strong relationship bank group with institutions that have supported us over a very long time, we did not experience financing difficulties at any point during the financial crisis or during the various periods of constrained bank liquidity since then.

When we put together our core banking panel, we ensured that we had enough diversity across business areas and geographies, including local, regional, international and global banks, to support our global needs and maintain competitive pricing. The geographic segmentation furthermore mitigates the risk that can result from adverse events impacting on certain countries or regions and hence the banks in those areas, so we avoid concentration of banks or investors in a specific market.

ii) Tapping into a wider investment community
However, taking into account our growth ambitions and our conservative view of risk, securing access to financing in all market conditions is critical to our overall strategy. To achieve this, and build a robust and stable financing portfolio, we have moved out from a bank-centric approach and diversified our choice, tenor and range of funding instruments. In doing so, we are able to tap into a wider group of investors through the debt capital markets and increase the resilience of our funding profile.

For example, between 2012 and 2015, we obtained over EUR3.2bn in financing including US private placements (USPP), another corporate bond, a Schuldschein (German private placement) transaction, trade receivables securitisation, three rounds of export credit agency (ECA) financing, R&D loans, EIB financing, and refinanced our revolving credit facility. We also use commercial paper programmes and non-recourse project financing. We were already familiar with some of these instruments, such as commercial paper, but in other cases, we have ‘tested the water’ to gauge investor appetite and establish how beneficial an instrument might be as part of our portfolio. For example, when we issued our first USPP, we quickly found that it was a good fit for our business. Specifically, obtaining USD financing was positive given the large USD denominated assets we have with our Middle Eastern shareholding, and it was useful to gain access to long-term (10-12 year) financing. As a result, we have since accessed the USPP market again, and also overhauled our securitisation programme, building on our strategy to build up a long-term funding portfolio.

Based on the success of our USPP, we turned to the debt capital markets in Europe, which appeared a higher risk strategy given that the business is not well-known amongst retail investors in particular. We first launched a Schuldschein followed by a bond issuance in Austria, where we are headquartered. We currently have two primarily retail-oriented bonds outstanding. On the basis that private investors tend to hold investments for longer than wholesale investors, this results in less volatility and a very stable investor basis.

Furthermore, accessing the retail investment market is an important means of diversifying our investor base as funding sources are not affected. We first tried these concepts with our banks in order to determine the potential market appetite and pricing level, which proved highly successful, giving us an important foothold in the two private placement and bond markets.

One characteristic of Borealis is the fact that we are a highly research and innovation-driven organisation. This means that we can raise significant amounts of specific R&D financing across a variety of channels, including supranationals such as the EIB. This type of financing is characterised by its long tenor, specific debt classification and diverse financiers. As we have become very active in M&A, particularly in the base chemicals/fertiliser sector, this has raised the opportunity to provide specific acquisition financing to the business which we have predominantly structured on an ECA basis. This type of financing can easily be shaped to fit either the needs of an organically growing business, such as the multibillion USD investments into our joint venture Borouge, or the classic M&A funding requirements.

A balanced scorecard of benefits

This approach is not necessarily the cheapest, and in most cases, diversified (particularly capital market based) financing is more expensive than traditional bank financing, with the exception of R&D and ECA financing. There are benefits, however, in diversifying our funding sources, managing our portfolio actively, and flexing our funding model according to our growth rate and changes in the wider market. Specifically, we have been able to achieve the volumes we require, be more precise in matching the tenor with our short-, medium- and long-term funding requirements, and respond to singular events which may increase or reduce our funding needs, such as large M&A transactions.[[[PAGE]]]

Ideally, we aim to achieve long=term tenors where possible and suitable, whilst smoothing our maturity profile to avoid too pronounced spikes. In some cases, we expect to roll over long-term maturities, so that some transactions effectively become evergreen facilities. In other cases, our active approach to portfolio management has resulted in retiring some transactions. Even though replacement may potentially be feasible in some cases, we need to consider the reputational impact.

It takes a long time to develop bank and investor relationships, and we are keen to maintain these in the long term. We communicate regularly with existing and potential partners in an open dialogue, even if we do not have an immediate debt issue planned, as it creates a context for future issuance and provides the platform to talk about business opportunities together. Once every one to two years, depending on business circumstances, we invite our banks, investors and supranational institutions to join our bankers’ and investors’ day. This complements the individual, more official discussions where senior management explain our future strategic agenda to our financing partners. We usually complement the bankers’ and investors’ day with a presentation on a specific key topic such as innovation or growth plans, and round it off with a visit to a production, research or distribution site.

Factors in success

Although our arsenal of funding options is well filled, we continue to look for other opportunities. Whilst this article was being written, for example, we completed a ca. EUR 400m non-recourse hybrid project financing structure for a power plant in one of our large production sites with our joint venture partners. Combining a bank-based project financing facility with a long-term NIB facility as well as an EIB lending scheme allowed us to achieve unrivalled terms and a perfect match for our business needs. This has taken nearly two years to complete, but the structure could boost the leverage significantly upwards, enhancing the business case. The term could be optimised to an almost 18-year, respectively 20-year tenor, and we have a structurally and contractually very sound funding package.

Our maturity profile looks very different from 2007. We have taken out the spikes and both smoothed the profile and termed it out. Taking the decision to go for a suite of medium-sized transactions, (i.e., generally EUR 75m – 300m) rather than one ‘big shot’ has allowed us to avoid self-made refinancing walls and mitigates the risk of picking a potentially adverse time to finance. In the current business climate, this has proved the best size fit; however, should our financing needs increase, our approach is scalable as required.

It has been easier to use new funding instruments by harmonising our contractual provisions with one core template, even across quite different transactions such as a USPP NPA versus an ECA-backed transaction or project financing. There are a few non-negotiable terms, but overall we try to take a pragmatic approach. Although it has taken time to phase out legacy contracts, this has multiple positive effects: time to market is reduced; trust with different investors is increased based on similar treatment, and less resourcing is required to evaluate and address documentary issues.

Equipped for the future

With a highly uncertain regulatory environment, and significant questions over the likely shape of the financing market in the next twelve to twenty four months, a flexible, long-term portfolio is more important than ever. While market liquidity is currently high, which makes the financing process quicker, an unhealthy over-supply of liquidity creates risks of its own. Not only do transactions need to be well-judged by both borrowers and lenders, but there is also a risk that borrowers will be attracted to favourable borrowing conditions and opt not to pay the appropriate ‘insurance premium’ for the diversification. We have seen corporates giving up the diversification they have strived hard to achieve as plain vanilla bank loans are again too attractive to ignore. At Borealis, we maintain our conservative, risk-averse and diversified approach in anticipation of changing market conditions ahead. In addition to our core panel of around 20 banks, plus supranationals like EIB and NIB and ECAs such as OeKB, we will continue to develop relationships with a wider community of investors. This gives us greater assurance of our ability to meet future challenges in the bank and financial markets. As the last ten years have proved, velocity has increased, shocks come without warning and the only certain thing is uncertainty.