Off-balance sheet funding solution delivers working capital benefits for EGA
Emirates Global Aluminium (EGA) sought an off-balance sheet funding solution to meet its working capital requirements, driven by investments in new assets and a commitment to deliver returns to shareholders.
EGA’s objectives were:
- To optimise working capital in order to accelerate free cash flow, ultimately improving the return on invested capital (ROIC).
- To maximise liquidity, on an off-balance sheet basis, from a receivable portfolio comprising a few large customers (in terms of receivable concentration) as well as 400+ clients in more than 40 countries across the globe.
- To minimise “haircuts” taken on large concentrations, typically taken in traditional securitisation facilities, whilst maintaining a portfolio approach versus an individual risk underwriting approach to maximise the cost benefits of the solution.
- To find a solution which would provide maximum flexibility.
- To identify a tailor-made, off-balance sheet structure including innovative technology and host-to-host (H2H) connectivity.
- To realise quantitative improvements in efficiency.
EGA worked closely with its accounting advisors and Citi and adopted a receivables purchase facility of USD 460 MM, comprising two tranches (under a single master receivable purchase agreement) that also addressed larger receivable concentrations, as follows:
- Tranche A: a non-recourse bilateral receivable purchasing programme (individual underwriting of large credits) – 100% advance rate.
- Tranche B: non-recourse distribution purchasing programme – portfolio underwriting of a pool of 400 debtors, leveraging risk sharing with EGA and a bank guarantee covering the mezzanine portion with the final senior tranche covered by Citi – 100% advance rate.
Given the significant facility size as well as to ensure scalability of the programme and within the spirit of managing partnerships for mutual success, working with EGA, other relationship banks were invited to participate.
The H2H solution enables EGA to upload receivables for funding in an automated fashion. Additional reconciliation capabilities are also transmitted via H2H to enable EGA to close out the open accounts receivables and to send automatic non-compliance notifications and monitoring alerts. Digital front-end with full reporting capabilities, Citi’s digital distribution finance technology structure can also be harnessed for other working capital finance solutions such as supply chain finance (SCF).
This customised solution has also provided EGA with an option to offer longer payment terms to its clients.
The implementation was achieved within a very aggressive timeline:
The facility went live and was funded within five months with the implementation process as follows; initial discussion took place at the end of May 2018 on the receivable portfolio from EGA; programme structuring took place in June/July 2018; documentation/legal agreements negotiation/on-site due diligence and system testing in August/September 2018; facility went live in October 2018, meeting EGA’s timing requirements.
Time was of the essence in delivering the programme which required providing a receivable solution across a portfolio of 400+ customers across 40+ countries.
Best practice and innovation
This off-balance sheet receivables purchase solution is a unique structure in the Middle East market whilst providing EGA the option to leverage the same digital structure for SCF.
- Improves ROIC.
- Provides a solution across majority of its customers in 40+ countries.
- Accelerates cash flow and improves working capital management.
- Generates additional free cash flow creating additional shareholder value.
- Increases visibility and control through the IT system solution which focuses on STP.