The Big Squeeze

With debt and equity markets closing for business, it's now time for CFOs to look closer to home for capital.

Cash on Demand

Kaeser isn’t the only CFO in corporate Europe whose attention is fixed on working capital. Finance chiefs are honing their working capital management skills for a number of reasons. For some, it’s a form of fresh funding as bank lending dries up and the capital markets become increasingly difficult to tap. “Going out and borrowing more money often just isn’t feasible in this environment — there’s been an incredible tightening of belts,” says Ann Cairns, head of the working capital business management practice at ABN Amro in Amsterdam. Other CFOs need to free up working capital in order to please rating agencies and meet banking covenants, or to plump up dwindling pensions reserves.

CFOs are finding plenty of cash locked away in their own books thanks in large part to overdue accounts receivable, rising inventory levels, and haphazard accounts payable processes. According to REL, a working capital consultancy, western European companies have more than €600 billion trapped in inefficient cash-flow management. (CFO magazine’s annual survey of working capital, prepared in cooperation with REL, will appear in the September 2003 issue.)

In some cases, releasing this trapped cash is a matter of real urgency. “It’s a shortage of cash, not a lack of orders, that’s at the root of most [corporate downfalls],” says Peter Ingenlath, an analyst at Gerling NCM, a Cologne-based credit management company.

Indeed, there’s nothing like the prospect of a business failure to focus the mind. “The companies that learn fastest are the ones that have come closest to the flames — those that have had a brush with a liquidity crisis or a covenant breach,” observes Philip Davidson, London-based head of restructuring at KPMG.

Maarten Henderson has certainly been feeling the heat. As CFO of KPN, the €13 billion Dutch telecoms provider, he had to deal with a nasty liquidity crunch in the autumn of 2001. Struggling to contain a debt mountain of around €20 billion — largely a consequence of the frenzied 3G mobile license auctions in the Netherlands and Germany — the firm sustained huge first-half losses in 2001, an 85 percent fall in its share price from January to June that year, and was picking up the pieces after a failed merger attempt with Belgacom of Belgium. Fears of a liquidity crisis were mounting as analysts drew attention to the fact that the firm had €3.6 billion of debt falling due the following year. Even with access to funds from a project finance facility and a receivables securitization program, KPN would need to find around €800 million from other sources.

The Crackdown

Two days before the September 11th attacks plunged markets into deeper turmoil than they already were, Henderson managed to secure a €2.5 billion revolving credit facility, providing KPN with a liquidity backstop for the next three years.

Once that facility was in place, Ad Scheepbouwer, former chairman of TPG, the €12 billion Dutch postal and logistics group, stepped in as the firm’s new CEO and immediately set to work on a turnaround plan. As Henderson explains, a key element of that plan was to lift cash flow by squeezing working capital, and to use the freed-up cash to pay down debt. But that was clearly easier said than done. “KPN is a very old, former state monopoly, made up of many business units,” he says. “Coherence between them had traditionally not been that strong.”


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