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New funding structure

Rethinking its approach to medium-term financing has delivered significant benefits to German pharmaceuticals wholesaler, ANZAG

One of Germany's largest pharmaceutical wholesalers, ANZAG employs around 4,000 staff and enjoys an annual turnover of €4bn. It supplies over 8,000 pharmacies across Germany with goods from several thousand suppliers, sometimes several times a day.

ANZAG headquarters in
Frankfurt am Main, Germany

Though the pharmaceuticals industry is highly regulated, with the nature of demand being somewhat unusual, this does not mean that the sector is immune to the troubles being faced in the broader national and global economies and the events of the past several years have had a noticeable impact on it. ANZAG decided to deploy some new strategies to deal with these challenges, particularly with regard to financing and cash management.

With a long-term goal of balance sheet optimisation and a broad distribution across several relationships, ANZAG's key funding principle was to satisfy funding needs through a balance of borrowed capital and equity. The requirements of the former were largely covered by established bilateral credit lines and the issuance of promissory notes and other forms of medium-term debt.

However, in order to address some ongoing aspects of borrowing requirements, ANZAG decided to put in place a factoring programme in order to secure greater medium-term liquidity and further broaden the company's funding base. The aim of this was to make it less reliant on international capital markets and provide a greater degree of insulation should the problems of the past few years return.

A receivables-based source of financing such as this could provide several benefits to a business like ANZAG. By selling its accounts receivable to a third party – a factor – at a discount, in exchange for immediate payment, enabled the company to obtain cash to service its immediate needs while reducing ongoing borrowing balances, thus saving money in the medium- to long-term.

Unlike securing traditional bilateral borrowing arrangements with banks, factoring involves the sale of an asset – the receivable – rather than an actual lending relationship, something that offers significant balance sheet advantages. However, it is not the bank that purchases the asset, but a third-party factoring company. Indeed, in this case, two factoring companies were used as no single provider would have been able to handle the volume of invoices involved. In addition, this arrangement provided a degree of security in the event of one factor withdrawing from the agreement.

Of course, as the cost of factoring the receivables is the discount given to the factor, there is a trade-off between this and cost of maintaining cash balances in order effectively to finance customers throughout their payment period. The value of this trade-off, along with the levels of risk presented by the deal, must be quantified and analysed before such a structure can be put in place.

However, thanks to the nature of factoring structures, the level of risk is relatively low. From a banking perspective, trade-related assets such as receivables represent a very low risk, largely due to their short duration. From ANZAG's perspective another positive aspect of the deal was the passing on of its non-payment risk to one of the factors.

The revolving facility, which was worth €130m and put in place for ANZAG by Deutsche Bank, was given an additional layer of complexity by the need to include two separate factors in the same deal. However, despite this additional complexity, it was still structured in such a way that handling and administration were straightforward and efficient.

Indeed, the transfer of data on several thousand debtors took place using a single interface, greatly reducing the potential burden on ANZAG's in-house accounts and administration teams. In this respect, its technological capabilities, and those of its partners, were crucial to the deal's success.

The structuring and implementation of the factoring arrangement took place towards the end of a period of severe financial turbulence when the lending environment was particularly difficult for companies of the size of ANZAG. The ability to generate additional liquidity that this deal offered should be invaluable if such conditions return, while the diversification of the company's funding base should assist it in maintaining a favourable position regardless of broader market conditions.

Furthermore, while the solution's success has been acknowledged by positive coverage in the financial press, the real testament to its efficacy is likely to be in the replication of it structure in a growing number of deals in the future.

The move towards trade-based sources of funding in order to minimise reliance on the fortunes of the global capital markets is a reflection of changing market circumstances and something which is likely to become increasingly common.

Indeed, this particular integrated approach to cash and supply chain management is growing in popularity across a number of industry sectors, especially those like pharmaceuticals where there is a strong emphasis on warehousing, distribution and supply chain efficiency.

The Author
Dr Thomas Trümper
is the chairman of ANZAG

To comment on this article, email

2nd June 2011


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