BP Petrochemicals’ David Vermylen explains how he has transformed credit management from a back office, filling out forms role to one that provides dynamic, responsive solutions stemming from much closer integration of credit management with business and commercial lines.
Global Credit Manager
David Vermylen is Global Credit Manager for BP Petrochemicals. Under his guidance, the work of the credit department has shifted from something of a ‘back-office exercise’ to one that is ‘on the move all the time, restructuring and adapting to the changing environment’. The broader sweep of its remit has a lot to do with Vermylen’s career path. Having started his professional career in 1995 with Price Waterhouse, he moved through a progression of formative roles, from banking securities, power trading (with none other than Enron) into the largest credit analyst portfolio inside BP Chemicals. The call to his current position within the BP Petrochemicals unit came in early 2005.
BP is one of the world’s leading international oil and gas companies. It operates through subsidiaries, branches, joint ventures and associate businesses across 28 countries, employing more than 85,000 people. Turnover in 2012 exceeded $375 billion.
Its stock in trade is spread across two distinct segments. BP’s Exploration and Production segment exists to find, extract and transport oil and gas. Its Refining and Marketing (R&M) segment develops these raw commodities into a diverse range of applications such as fuel for transportation (including aviation fuel), energy for heat and light, lubricants and, through its petrochemicals division, chemicals that act as base for hundreds of industrial and consumer products. Rarely co-located with BP’s refineries, as a strategic performance unit within R&M, the petrochemicals division has three plants in the US, two in Europe and nine production units in Asia.
Much as sales people would have you believe otherwise, a sale is not a sale until it has been paid for. Supplying customers without the certainty of getting paid is a high risk venture. A vast international organisation such as BP is not going to go under if a few of its customers default, but considering the size of some of its deals, strong credit management is still a vital part of its operations. A business of this size and footprint demands something a bit special on the credit management front.
“It’s a unique and interesting set-up,” confirms David Vermylen, Global Credit Manager for BP Petrochemicals. Having shifted about six years ago from a mostly regional to a mostly centralised model of credit management, the view he has is of an advanced unit that few other businesses have. Whilst no longer working with full teams regionally, some activities – mainly collections – are retained locally to enable business hours to overlap. But most other functions such as credit analysis, reporting and vetting of letters of credit (LCs) have been brought into its global central Credit Business Service Centre located in Kuala Lumpur. With a head office team of just two (Vermylen and his deputy) maintaining global oversight and steering the course of credit management, the responsibility at the top reaches far beyond the traditional credit management remit into most other functions of the business.
“We have to understand the strategic agenda of each of the business units and get involved with projects early on because we are working almost like an internal banker, funding projects with BP’s capital,” he explains. It is, he adds, essential to understand this agenda from a credit point of view and consider how, with many of BP Petrochemicals’ products being globally traded and subject to moving between regions, the precise nature of its customers’ supply and demand shifts. “We have to understand the exact situation for each of our customers’ plants, where they sit on the supply and demand curve, and whether they are considered to be first, second or third quartile because in the medium term this determines their prospect of survival.” As an example of this, in Europe where many of BP’s customers’ plants were built between the 1960s and early 1990s, it is essential for Vermylen’s team to know and to understand that the level of competition now coming from Asian plants in terms of increased scale, new technologies and wage arbitrage, cannot always be offset by the fact that product has to be shipped into Europe. It is this understanding, he says, that helps to drive good credit management.
A broad base
Grasping the intricacies of multiple business functions married to numerical analysis is something that comes naturally to Vermylen. He started his professional career in 1995 with Price Waterhouse (before it merged in 1997 with Coopers & Lybrand). From here he moved into banking securities, affording him a close-up view of how companies are funded. An interesting opportunity came up in 2002 in the form of a power trader in the Dutch market, where Vermylen was exposed to day-ahead positioning between the Leipzig and Amsterdam power markets, scheduling positions and matching. His employer was Enron. Having turned down an offer from Moody’s, he took on the position with the BBB-rated Enron (as it was at that point). “Within a few months the company went belly-up!”
Following the excitement of the Enron-experience, Vermylen sought a more stable position. He found it as credit analyst for BP Chemicals Ltd, before the carve-out of mostly its polyolefins activity to Ineos, one of the biggest petrochemicals groups in Europe. For the next three years he had the largest credit analyst portfolio inside BP Chemicals, covering all Germanic speaking countries, Poland, the Czech Republic, Hungary and Slovakia. The call to his current position as Global Credit Manager within the BP Petrochemicals unit came in early 2005.
Although his cumulative experience and quest for stability led him to this senior financial role within one of the world’s largest companies, Vermylen confesses that whilst the company has the image of an immovable monolith, “little did I know that oil and chemicals aren’t actually by nature stable sectors. It may look from the outside quite stable – stagnant even – but inside it is on the move all the time, restructuring and adapting to the changing environment. If you like continuous progression and innovation, BP is a great place to be.”
It would be fair to assume that Vermylen’s role has changed over the years and he explains that when he arrived a decade or so ago credit management was sometimes a bit too much of a “back office exercise”, focused on filling in forms and offering advice “but often a bit too late”. Under his guidance it has taken on a new dynamism that serves to provide solutions stemming from much closer integration of credit management with business and commercial lines. In the current Eurozone turmoil, his team started proactively looking for new markets and clients, where the capital tied up in BP’s plants could be better used by moving as much volume away from the problem areas as possible.
The credit management team works with BP’s treasury operation too. An area of particular attention is in cash forecasting, with credit providing timely data on days sales outstanding (DSO) and collections activities, as well as advising on specific client credit profiles. And although it is often considered the unique authority of treasury, he says credit management also helps in terms of managing and mitigating banking risk.
The global collapse of markets has naturally impacted on BP Petrochemicals’ business, but in reality the effect has been slow moving and minimal compared to other sectors. “Looking back, I’ve noticed that the global financial crisis has had an impact on the collateral that we can accept in terms of LCs,” notes Vermylen. “We’ve clamped down on bad banks as we improved the quality of the backers of LCs. The secondary effect of the crisis for us is that as some economies have been weakened we obviously have to move on and not rely on those that show obvious signs of distress.”
Rather than run the risk of notching up bad debts, Vermylen put in place tighter credit policies – including revisiting credit terms, ceilings and ratings – back in 2008. “We set a new course, using closer monitoring of default-risk in our portfolio and so far we haven’t been forced to update that policy.”
Changing strategic course when it did, naturally had an impact on other functions within the business, treasury included. With a noted effect on DSO, the new credit regime clearly reaches directly into the cash forecasting process. But by moving away from distressed markets, product has to be shipped to new parts of the world where new payment methods may arise which, says Vermylen, “can put a lot of pressure on the lines we have with treasury from certain banks”. In this respect he adds that there has been an increased level of interaction between the two functions.
This is something that has been seen in the collections process at BP Petrochemicals too. Vermylen describes it as already being “best in class” and this was further enhanced by closer integration with the company’s commercial lines to bring a level of understanding that obviously pays dividends. With the credit team “upping its game a bit” in respect of collections, the need for rescheduling of debt has been limited.
The prudence of the credit manager is observable across many industries, notes Vermylen, adding that “everyone has been reacting in much the same way, getting more conservative”. He feels that many of his peers have done a “tremendous job” in difficult circumstances and further declares that “now is a very good period to be a credit manager”.
With a number of different elements to juggle, the aspect that takes up much of Vermylen’s time in the current environment is the definition of a clear path in terms of capturing the most value for the business. He explains, “we have a number of higher risk customers. The easiest way to deal with them would be to decline credit, but in many cases this would automatically mean declining the sale as well. The trick is to be able to establish commercial relationships with these high risk counterparties that allow you to minimise any impact from a worsening financial standing at the right moment, if necessary. Getting that moment right is rather difficult but when you do it is most rewarding.”
Allowing a couple of months more credit may mean a couple of million more in cash, or it may turn bad – judgement is everything. BP Petrochemicals will already have in place a LC where there is an established element of doubt concerning payment by the customer or about a sovereign risk. But it is the period before the credit team resorts to an LC, a guarantee or SWIFT’s Bank Payment Obligation (BPO) that is the “interesting period that you need to get right and where a lot of value is created”.
Stepping beyond tradition
The credit management department at BP Petrochemicals has travelled far. Under Vermylen’s guidance, the team has been encouraged to head up to the frontline, to interact proactively with the customers, which has been found to get quicker results. It has also consciously upped the skills levels of its credit team, particularly in terms of their full and proper integration into the due diligence process and their involvement in, and exposure to, commercial contracts. This was something that had previously been handled only by the legal department but, as Vermylen notes, in terms of credit provision it could be very difficult for legal personnel to establish “what is appropriate, what is feasible and what makes sense”. Added to this, with the benefit of Vermylen’s own banking experience, the department was also able to put in place a number of credit trigger points, in much the same way that the ratings agencies operate.
Vermylen talks of a “very happy relationship” with BP Petrochemicals’ numerous banking partners. Despite his favourable view, Vermylen does raise the issue of proprietary technologies that are often required to access bank services. Working with at least 50 banks globally he points out that this is “a lot of interaction”. One potentially useful multi-bank foil to this nuisance is SWIFT’s BPO. Working with its Oman-based client, Octal, and banking partner, Standard Chartered, BP Petrochemicals was one of the first corporates to use the BPO, adopting it in 1Q12.
Although the lack of widespread adoption of the BPO restricts its usefulness for now, Vermylen sees it as “a way forward” out of the multiple banking platform issue. He also argues for its capacity to add value to the trade risk mitigation process as its application can be delayed until the moment the bill of lading is secured from the freight forwarder; this gives an instant five to seven-day risk (and cost) advantage over an LC. Because it is an entirely electronic document, a BPO can also be set up at the point the goods are discharged at the port of arrival, affording it the functionality of a traditional ‘documents against payment’ arrangement. BP can instruct the presenting bank to hand over shipping and title documents to the customer only when that customer has paid in full.
Making IT work
The BPO sits very much in the technology space and Vermylen acknowledges that IT is one of the last remaining areas within the credit department to undergo his full overhaul and modernisation programme. Having reviewed the existing IT toolkit, he felt that it was “lagging” and that the opportunity to improve efficiency had to be taken. These matters are currently being addressed by the company and as part of the project it is working with ELCY, a solution provider for the international trade finance community. The aim is to create a solution within the Asian service centre to handle incoming LC data across BP Petrochemicals, which may even serve as a bridgehead for an exercise of how the solution might work for the whole of the R&M segment. Vermylen explains that a process of IT modernisation in a large organisation such as BP can often take time to get underway because it is necessary first to review what other solutions may already be available within the business. If there is nothing suitable then agreement needs to be sought with other parts of the organisation regarding the best way forward, ensuring that one implementation can serve as many business units as possible.
In fact, he says that it is desirable to have that same degree of co-ordination and co-operation applied to the operational activities of the different functions within the company. Other functions that need operational credit department data often ask for it and it will typically be supplied on a spreadsheet. The advent of closer systems integration will facilitate automated enquires into areas such as banking lines or cash positions, greatly enhancing treasury operations, for example. Vermylen expresses his department’s preference to be ahead of the curve when it comes to all the activities being undertaken by the business. Coming in at a late stage “when the horse has already bolted” is not ideal.
But as with most credit managers, the single aspect that most threatens to unsettle him is the potential for major loss. “Having credit losses is part of doing business; that is not the issue. But if you’re in a position where you’ve lost a serious amount of money because you haven’t properly put in place your controls and processes, that’s like an own goal and does concern me.”
But keeping ahead of the game is Vermylen’s aim and being involved in elements such as working capital, and covering specific risks such as the Eurozone crisis, is where a global credit manager should be expanding the role, Vermylen says. With that in mind, the expectations of a dynamic company are well met by the broad expanse of his experience and knowledge. A credit to the industry indeed.