The Value of Long-Term Financing
Four financial leaders give their take on long-term financing.
Frank Davis, Chief Financial Officer of Total Produce, Alexis Wattinne, Financing & Treasury Director of Bonduelle, Tomi Suojansalo, Head of Treasury of Oriflame, and Carolyn Maloney, Treasurer at Hypertherm, have substantial careers managing the financial needs of their organizations. In this Q&A, they discuss the role long-term financing plays in addressing those needs.
" As our Company grows, long-term financing allows us the capacity to expand our core business globally, participate in M&A activity, attract great talent and participate in technology expansion/research & development."
1. What does ‘long-term financing’ mean to you?
Frank Davis: For Total Produce, ‘long-term financing’ is the financing, from a strategic perspective, with a tenor and maturity profile greater than facilities available with shorter duration (bank loans/revolving credit facilities/overdraft facilities), which are generally required to fund the normal day-to-day recurring operational requirements. Long-term financing is necessary to provide more stable financing for long-term funding, more likely with a fixed-interest rate/coupon and the ability to repay both either in bullet or amortized, which are smoother structured repayment arrangements.
Alexis Wattinne: As Bonduelle is both listed on the stock exchange and a family-owned company, long-term financing is a key tool in our refinancing strategy with regards to independence. Moreover, long-term financing is provided by investors who have a very different point of view than banks; banks will provide financing on a shorter basis, hoping to be involved in the daily business (cash management, payments, etc.), usually getting some fees out of it, whereas long-term financing investors will be much more on a ‘invest-and-hold’ basis for 8-15 years. They also have two primary targets: being paid for interest on a yearly basis, and finally being repaid from their investment at the end. Long-term financing investors are not involved in the daily business, but their feedback and regular review are a healthy monitoring of the borrower's business and strategy.
Tomi Suojansalo: For Oriflame, ‘long-term financing’ means to secure funding for the business operations for the next 10 years. Especially with today’s current low level of interest rates, we prefer the longer maturities of up to 12 years. We also strive to spread the repayment of the long-term financing to avoid having a year with a significant refinancing hurdle. Thus, we reduce the refinancing risk in case of a business downturn.
Carolyn Maloney: As our Company grows, long-term financing allows us the capacity to expand our core business globally, participate in M&A activity, attract great talent and participate in technology expansion/R&D. One of the core measures for Hypertherm is overall cost of debt – long-term financing allows a portion to be at a fixed rate and predictable.
" Long-term financing brings stability for our business in that we do not have to plan major refinancing activities from time to time, which would be the case if we rely only on bank loans or similar products with shorter maturities."
2. What is the value of long-term financing to your business?
FD: Total Produce uses a combination of private placement financing, term loans, revolving credit facilities and overdraft facilities in its portfolio of financing to fund its operations. Each category is used to match specific needs. Long-term financing (such as a private placement) can provide a more diversified source of funding for our business requirements, which allows for more flexibility in determining how different sources of funding may be best utilized within our Group’s capital structure, and is more strategic in nature. Private placement financing can provide access to longer tenor with a more custom-tailored repayment structure. Short-term financing is typically required for recurring business needs such as financing working capital.
AW: Being able to raise long-term financing helps give us some perspective on both our operating strategy and financing policy. Regarding operations, it makes sense when it comes to CAPEX strategy, investing in new factories or improving them. Concerning financing strategy, long-term financing fits with our long-term needs, and allows us to have some native fixed rate in our interest rate hedging strategy.
TS: Long-term financing brings stability for our business in that we do not have to plan major refinancing activities from time to time, which would be the case if we rely only on bank loans or similar products with shorter maturities. We mainly use our banking credit facility for managing the seasonality of our cash flow; the main business needs are then financed with long-term financing. With long-term financing, we are also able to decrease our bank dependency for the financing of the business.
CM: As an ESOP Company, enhanced stock value is a key measure by the Company and the associate owners. Long-term financing provides the long-term capacity for growth in strategic areas that are beyond our core business. These strategic areas are in our products, R&D expansion, after sales and the sustainable community.
" Long-term financing facilities can be structured in such a way to provide a foreign currency hedge on the Company's balance sheet by borrowing the funds for acquisitions in the relevant foreign currency of the assets acquired."
3. How does long-term financing compare to/fit different needs than short-term financing?
FD: Total Produce’s strategy for growth has been to make complementary acquisitions, and we would avail of our long-term financing facilities (particularly private placements) to fund our acquisitions. Long-term financing facilities can be structured in such a way to provide a foreign currency hedge on the Company's balance sheet by borrowing the funds for acquisitions in the relevant foreign currency of the assets acquired. Therefore, this form of financing would be utilized where we intend to retain the funding in place rather than seek to repay in the shorter term. Whereas, short-term financing would be utilized to provide funding for the day-to-day working capital draws on the business for operational purposes, and term loans for routine and development capital expenditure. Short-term financing would not be used for long-term financing needs.
AW: We have roughly 50% of our needs covered by long-term financing. This covers the permanent basis of our indebtedness. On the other hand, we have an important working capital seasonality, requiring ‘revolving-type’ financing and overdraft facilities provided by our bank pool. The mix between long term and short term (through bank lines) allows us to efficiently manage both our long- and short-term needs without having any ‘trapped’ cash.
TS: Our view is that by leveraging the business with external debt, the management team can increase value creation to its shareholders. Long-term financing is more suitable than short-term financing, when the business needs to finance long-term capital investments, M&A or similar. Short-term financing is more suitable for managing the cash flow fluctuations of a seasonal business like ours.
CM: Short-term financing provides the capacity to run the business on a day-to-day basis. Long-term financing allows a 5-8-year look outward for the strategic business – this is at a fixed cost.
" I believe long-term financing is the cornerstone of the financing policy, allowing long-term vision, visibility on the interest-rate mix, and permitting the CEO/CFO to focus on the business and the operations, making sure they will be able to refinance their growth."
4. Would you recommend long-term financing to other financial leaders?
FD: Yes, we would recommend having a mix of both short- and long-term financing facilities available to provide maximum flexibility to the Company in determining the best source of financing for specific needs. Our experience to date of the private placement market (and in particular, with our long-term relationship with Prudential Private Capital) has been very positive. This flexibility of funding available in the portfolio has been invaluable to us in supporting the continued growth in our Group and increasing shareholder value. This form of funding is available to our size of Group without the requirement of a credit rating, and where a mid-cap business may not have the same access to the public markets. Private placements provide a more robust and stable funding base. Through a private placement, we have access to accredited investors, and with Prudential, can transact directly without the need for intermediaries. The availability of an uncommitted shelf facility also allows the Group to execute transactions effectively and efficiently, with access to funds when required.
AW: Definitely! I believe long-term financing is the cornerstone of the financing policy, allowing long-term vision, visibility on the interest-rate mix, and permitting the CEO/CFO to focus on the business and the operations, making sure they will be able to refinance their growth.
TS: Yes, we would. The answers provided above describe the advantages of long-term financing, which brings value to the business and its shareholders.
CM: Yes, long-term financing helps to smooth out cash flow needs, both short term and long term, for the strategy of the business. It provides a more predictable leverage ratio of debt to performance. Additionally, long-term financing eliminates the constant distraction of refinancing for the Company.
The value of long-term financing is that it is both stable and strategic. Long-term financing adds stability to a company’s balance sheet with its long tenor and typically-fixed interest rate; companies can rest at ease knowing the funding they need to support their long-term strategy has been secured for 5+ years, with a repayment structure that works for them. Long-term financing is also provided by investors that have a more long-term, patient point of view than many banks, giving companies the space and independence they need to thrive.