Sourcing capital in the logistics sector
01 Dec 2016
2016 has been one of the most interesting years in recent memory for treasurers of multinational logistics firms and one where the most innovative have been able to show exceptional value to their firms.
Between 2004 and 2008, with expectations of continued market growth, significant investment occurred across the logistics sector which resulted in overcapacity pressuring freight rates (including land, air and shipping), and impacting the ability of the industry to return to historic profit levels. This, along with low expectations of global growth, has resulted in a drive for consolidation within the sector with CMA CGM conducting the largest acquisition in its history with the purchase of NOL, while non asset-based 3rd party logistics provider XPO Logistics acquiring France’s Norbert. The creation of new shipping alliances such as the recently announced CMA CGM, China Cosco Shipping, Evergreen Line and OOCL partnership, along with the more established 2M, has enabled shippers to mitigate overcapacity by sharing larger vessels and reducing the number of partially filled ships being operated. Ocean Spray and Tropicana are another example of a shipping alliance that delivered a reduction in costs for both parties when working together to transport their goods by land. These alliances, along with the collapse of Hanjin shipping, speaks to the wider issues within the sector where we have seen increased volatility in rates, including the Baltic Dry Freight index increasing to an annual high, and container rates between the West and China increasing over 40%, following Hanjin’s collapse.
Companies within the industry are now carrying a substantial amount of debt and leverage on their balance sheets. Many of which having demanding amortisations schedules. Fluctuating freight rates and costs have also resulted in unexpected spikes in working capital. As a result, we are seeing corporate treasurers now having a renewed focus on working capital programmes as they seek to release cash, reduce debt and improve covenant headroom. Establishing flexible, scalable, facilities to cope with rapidly changing working capital demands has become a priority with solutions including trade receivables financing (either through traditional trade finance or through trade receivables securitisation) and supply chain finance leading our client conversations within the sector.
Successful strategies adopted by Demica's clients in the logistics sector include extending payment terms to truck drivers and subcontractor fleet operators where payables have been extended by up to 130 days for over 300 suppliers with the impact on their supply chain mitigated by financing programmes. Both large and medium size programmes have taken advantage of the flexibility of independent platforms, such as Demica where we have seen growth in funded amounts of c.200% over the last year and facilities now totalling c.$1 billion in the sector being run on our platform, to easily syndicate across multiple banks in different regions and addressing the lower credit appetite from a single investor for non-investment grade credit risk.
Multi-jurisdictional trade receivable securitisations have also been successfully established by us for a number of our clients within the sector. These facilities often offer committed financing for 3 to 5 years achieving 85% advance rates on eligible receivables. The programmes are highly attractive for treasurers with financing costs usually in the range of Libor+1%-2.5% on programmes of $50m - $500m. Use of funds have included repaying senior debt priced at more than 400bps over the securitisation funding cost as well as financing new acquisitions to take advantage of sector distress.
Those of our clients with established transactions have been looking for ways in which to increase the advance rate on their existing structured finance programmes. The inclusions of mezzanine funding, at rates still below client's other forms of high yield financing, has been one of the more successful solutions. Mezzanine tranches are often $5-10m but Demica has also been approached to structure and place notes as large as $75m. Investors, typically large institutional investors such as insurers, remain keen to play in this space as Basel III has made it prohibitively expensive for most banks.
Trade receivables securitisation also provides corporate treasurers with access to financing even in an environment where banking lines would normally be unavailable. Given the structured nature of the financing (in-line with rating agency methodology) banks typically record the risk separately and the underlying appetite the bank has for the company is not be impacted, offering great relief when banking lines are full.
Other concepts currently being explored in the sector include improving a particular client's profit margins by taking advantage of attractive early payment discounts from jet fuel & bunker oil suppliers through the structuring of short term revolving credit facilities, and using our technology to automate the early payment discount capture and resulting high volume transactions. We have recently seen a major logistics firm partner with a non-bank investor to offer inventory finance to its clients on stock held in its warehouses resulting in off-balance sheet treatment and improved working capital while adding a new revenue stream for the logistics firm.
Author: Mansour Davarian