Room for Manoeuvre – Optimising Working Capital with Receivables Finance

With an eye on working capital efficiency, Meliá Hotels’ treasury team was looking to access faster and more flexible liquidity as a means of speeding up the cash conversion cycle. After careful consideration, treasury decided to implement a receivables finance programme with HSBC that would respond to the company’s current and future needs. Since then, the programme has gone from strength to strength, with the facility being extended to EUR 100m in 2017.

Turn the clock back to 2010: the year that a volcanic ash cloud halted European air traffic, 33 Chilean miners survived 69 days trapped underground, and Spain won the FIFA World Cup. It was also the year that Spanish-headquartered Meliá Hotels International (Meliá Hotels) decided to flip the script on its approach to working capital efficiency.

Operating more than 370 hotels in 43 countries across four continents, Meliá Hotels is one of the world’s largest hotel companies – and the market-leading hotel chain in Spain. Like any multinational corporation, working capital efficiency is a high priority for Meliá Hotels’ treasury team. Not only does treasury need to support the day-to-day running of the business, it must also help to position the company for ongoing growth – whilst responding to the growing needs of shareholders. This means demonstrating effective balance sheet management through key metrics such as Free Cash Flow (FCF), Days Sales Outstanding (DSO) and gearing.

Thinking outside the box

Up until 2010, Meliá Hotels had been addressing typical working capital challenges through various securitisation transactions carried out on commercial assets. As Gaspar Llabrés Credit & Insurance Senior Director, Meliá Hotels explains, however, “This type of operation is complex from a structural and legal perspective and incurs high administrative costs. Appropriate vehicles have to be set up and maintained and the bank has to operate with a conduit, specifically one that can operate in different currencies. We wanted a more user-friendly and cost-effective solution that would deliver greater control of commercial credits and improved monitoring of client solvency, in order to improve the average collection term.”

Having worked with Meliá Hotels since 2004, HSBC understood that the company was looking for ‘something different’ and therefore suggested a EUR 12m Limited Recourse Receivables Discounting facility instead, which was later extended to EUR 100m.

This solution supports working capital optimisation and balance sheet efficiency by enabling Meliá Hotels to monetise their receivables. The cash released can be used for investment and paying suppliers promptly, which can be useful for negotiating discounts or more favourable terms. Of course, the solution also helps to mitigate buyer credit risk. 

A pilot began in May 2010, with a few buyers testing the set-up. Over the following months and years, further testing took place, the set-up went live, and more buyers were added. Then, in 2016, Meliá Hotels decided to expand the receivables finance programme, recognising the solution’s capacity to grow with the business as more customers were acquired and as the company moved into new markets.”

Expanding and optimising

Once again, HSBC was selected as the partner for this programme. “We had already received great service from HSBC. We were confident that extending the receivables finance solution would deliver all of the efficiencies we were looking for, without the cost or disruption of alternative solutions.”

Juan Francisco Amoraga   Global Sales Manager, Global Trade and Receivables Finance, HSBC

Although a handful of other banks also offered receivables financing to Meliá Hotels at this time, “What ultimately made us choose HSBC for this programme extension was the flexibility of the bank’s solution, as well as the bank’s ability to adapt to the type of clients in our portfolio. After all, we work with a large number of buyers, including small buyers where credit information is difficult to obtain.

“Other factors influencing our decision to award the mandate to HSBC were the bank’s willingness to adapt to Meliá Hotels’ administrative processes – and the fact that the financial terms of HSBC’s receivables financing programme were better than those offered by competitors.”

Having been awarded the mandate, HSBC structured a tailor-made, pan-European bulk discounting programme for the company, facilitating the addition of new buyers and the increase of the facility size up to EUR 100m. The programme was implemented in just 60 days from the point of signing on the dotted line, going live in early 2017. “This is impressive considering the size of the programme, and the fact that the buyers involved are completely different from those who joined in 2010,” says Llabrés.

Moreover, the extended programme is specifically adapted to the company’s high volume of invoices and buyers, since there is no need to report on individual invoices – it can be done in bulk. The receivables finance solution is simple to use, says Llabrés. “Each month a series of predetermined files are updated with information on new operations, new invoices and details of the collections received over the past month.” 

Once this information has been extracted, a monthly report is completed and sent to the bank via HSBCnet, reflecting the status of the receivables and the movement in each of them since the last report.” The bank then pays any new receivables as agreed and Meliá Hotels’ credit control team collects buyer payments that are due, transferring them to HSBC. 

A collaborative effort

Naturally, as with any project of this scale, there were a few challenges along the way. But HSBC worked closely with the team at Meliá Hotels to iron out any creases. Juan Francisco Amoraga, Global Sales Manager, Global Trade and Receivables Finance HSBC notes: “As alluded to, given the size and diversity of Meliá Hotels’ receivables portfolio, classification and credit scoring of certain buyers was difficult. To overcome this hurdle, HSBC partnered with an insurer to mitigate buyer credit risk in the whole portfolio.” 

The portfolio was segmented between the small number of buyers with high exposures and the large number of buyers with smaller exposures, Amoraga explains. “The large exposures are individually assessed on a rolling basis and the smaller exposures have ‘discretionary limits’ with specific criteria for Meliá Hotels to follow.”

According to Llabrés, “HSBC’s help in overcoming challenges such as the credit scoring of the buyers is testament to the strength of our relationship. They always approach any issues with flexibility, teaming up with us to find the right solution, and demonstrating dedication by truly understanding the business.”

This hard work on both sides has resulted in a receivables finance programme – in EUR, USD and GBP – that has allowed the treasury team at Meliá Hotels to demonstrate their efficiency through strong FCF, low DSO and, since the solution is not a form of borrowing, reduced gearing. 

“By looking beyond the obvious solution of securitisation, this programme has delivered lower costs, lower resource-burden, greater agility and an improvement in the average collection period – in addition to the strategic financing it represents. That has been hugely beneficial in enabling treasury to support the business as it grows and we fully intend to partner with HSBC on new innovative projects in the future,” Llabrés concludes.