The Treasurer’s Guide to Trade Finance

Chapter 4 Integrating cash and trade

Case study

Supporting Kingspan’s growth in Australia

Kingspan Group Plc is a global leader in low-energy building solutions and in

recent years has expanded across its four key areas of activity: insulation panels,

insulation boards, access floors and environment. Australia has seen some of

the biggest growth, with insulation board sales alone rising 32% in the first six

months of 2012, helping to push group half-year revenues to GBP 757 million.

Such strong growth has a significant

impact on financing arrangements, with

Kingspan’s Australian business unit having

an increasing requirement to issue bank

guarantees in support of their contracts.

The guarantees needed to be arranged

customers got into difficulties as a result of

a contraction or withdrawal of facilities by

their respective banks.

The problems were not just related to

bank finance. Larger companies that relied

on commercial paper programmes to fund

working capital found these could not be

rolled over. Equity financing was equally

difficult, with the number of IPOs dropping

significantly compared with previous

years. (The number of global IPOs in 2011

remained below the pre-2008 peak.) Smaller

companies saw banks withdraw overdraft

facilities completely, or at least to a much

reduced limit. In short, external financing of

working capital was much harder to obtain.

Mitigating risk

The second objective for companies involved

in trade is to mitigate the associated risks.

For domestic transactions, in addition to the

liquidity risk highlighted above, there is the

risk for the buyer that the goods delivered

will not be as expected (performance risk);

for the supplier there is the risk that the

buyer does not pay on time or, at worst, at all

(counterparty risk).

For international transactions there

is the additional risk of payment or the

goods themselves being captured by

changing regulations (country risk), or

that the economics of the transaction will

be adversely affected by changes in the

exchange rate (foreign exchange risk).

Enhancing sales

The third objective for companies is to

enhance sales. There are two main focuses

here: demonstrating creditworthiness

and providing support to existing and

prospective customers.

First, companies may have to demonstrate

their creditworthiness when bidding to become

a supplier to another company. This primarily

affects companies in two different types of

situation: when tendering for participation in

large-scale contracts with long lead times

and, in the case of small and medium-sized

enterprises, when seeking to become a

supplier to larger companies. However, it is

likely that any company seeking to be listed

on a counterparty’s approved supplier list will

need to demonstrate a degree of financial

strength before such status is awarded.

Second, stronger companies may

want to offer finance to their existing and

prospective customers, to support sales. This

is particularly the case where the supplier

has significantly stronger credit than its

target customers. In these circumstances the

stronger company will typically have access

to more funds at, critically, much lower rates

than its customers. Where the company is

simply viewing its own actions in isolation, it

can extend payment terms to its customers to

reduce or eliminate the working capital finance

they need to arrange. Where a wider supply

chain view is taken, more sophisticated supply

chain financing techniques are available.