Treasury Today Country Profiles in association with Citi

Votorantim Cimentos

Best Funding Solution Highly Commended: VCNA

John McCarthy, VCNA

The de-recognition of trade receivables under IFRS via a securitisation is not very common and only a handful of players in the industry have the capacity to implement and execute such a complex structure.

Photo of John McCarthy, VCNA.

John McCarthy

Chief Financial Officer

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VCNA is the North American subsidiary of Votorantim Cimentos, one of the largest global cement, concrete and mortar companies, and part of the Votorantim Group, one of Brazil’s largest industrial conglomerates with a presence in more than 20 countries.

Four tranche structure delivers US$152m account receivables securitisation programme

The challenge

The company was exploring alternative financing solutions as a way to expand its access to competitive funding sources. The AR securitisation offered competitive financing rates while also achieving IFRS off-balance sheet de-recognition of VCNA’s receivables portfolio.

Typical trade receivables securitisation do not achieve off-balance sheet de-recognition under IFRS, given that they require an important level of subordination to achieve the investment grade protection an investor seeks in such transactions. More often than not, this subordination precludes a receivables securitisation from achieving de-recognition and de-consolidation, as the originator has not substantially transferred all risk and reward under IFRS. John McCarthy, VCNA CFO explains, “The first major hurdle that required a solution to achieve de-recognition was to provide a quantitative analysis to VCNA’s auditors, which proved that a specific percentage (as determined by VCNA’s auditors) of the risk and reward variability had been transferred from VCNA to the second loss investor.” As the portfolio consists of cross-border trade receivables, VCNA’s auditors were also concerned with respect to the FX exposure and its implications for the transfer of risk and reward of the expected cash flows given that it is a multi-currency portfolio.

The second major hurdle consisted of identifying a second loss investor that could act simultaneously as the control party. The auditors requested that the control party and second loss investor were the same entity.

The solution

On 31st March 2016 Finacity facilitated the closing of a US$152m account receivables securitisation programme on behalf of VCNA, that also achieved off-balance sheet de-recognition by VCNA’s auditors using the International Financial Reporting Standards (IFRS). The de-recognition of trade receivables under IFRS via a securitisation is not very common, and only a handful of players in the industry have the capacity to implement and execute such a complex structure. In order to achieve VCNA’s off-balance sheet objectives, Finacity designed a four-tranche funding structure with a second loss tranche sized to capture sufficient variability of risk and reward.

“It is a tremendous honour for VCNA to win an Adam Smith Award, which is recognised as the premier award for achievement within the Corporate Treasury space. There was a high degree of complexity associated with this transaction and to be recognised through this award is a testament to the hard work, dedication and innovative thinking from my team, alongside our partners, to achieve a successful outcome, providing our company with alternative solutions to support our treasury goals and objectives.”

The transaction proved to comply with the de-recognition and de-consolidation requirements under IFRS 9 and IFRS 10 as a result of the second loss tranche being conveyed to an independent investor (Second Loss Investor), in conjunction with the transfer of certain control features over a specific segment of VCNA’s receivables portfolio to a qualified third party (control party).

Best practice and innovation

The structure was designed in such a way that it could meet VCNA’s objectives of finding cost effective financing, financing diversity and off-balance considerations; while still providing potential investors the investment grade risk mitigation. Finacity leveraged its diverse funding network to identify a multinational bank that was interested in participating in the four note structure as the senior lender while allowing the control features assigned to the control party.

McCarthy concludes, “Finacity’s quantitative analysis also solved for the potential FX risk to the transfer of the risks and rewards variability associated with the expected collections of the receivables portfolio. These were denominated in US dollars and Canadian dollars whereas the notes were denominated in US dollars.”

Key benefits

  • Senior note

    Represents the investment grade financing received by VCNA.

  • Senior subordinated note

    Provides the majority of the ‘A’ subordination required by the senior note lender for the securitisation.

  • Intermediate subordinated note

    Captures variability of the risks and rewards associated with the receivables portfolio, held by FCM.

  • Junior note

    Captures the actual expected losses of the receivables portfolio, held by VCNA.

Key learning points

  • High degree of complexity related to structuring and implementing in order to achieve IFRS derecognition, which required working very closely with our partners.

  • Additional benefits accrued from the transaction related to the strengthening of back office functions around Accounts Receivables collections and reporting.

  • Transaction enhanced flexibility and helped achieve our strategy of exploring alternative forms of financing to access funds to support our working capital and other needs.

Portrait of John McCarthy

John McCarthy

Chief Financial Officer

John McCarthy is CFO at Votorantim Cement in North America, overseeing finance, tax, treasury, risk management, shared services and IT. Prior to VCNA, John held senior Finance and Strategy roles at Xstrata Plc (Copper), Bombardier Aerospace and General Motors in the US, Canada, Switzerland and Australia. He is a CPA (CMA) and holds an MBA.

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