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Implementation of an off-balance sheet factoring programme as part of a multi-entity industrial carve-out in Europe & the United States
A Private Equity fund acquires subsidiaries of an industrial group based in France, Germany, Italy, Spain and the United States. As part of a buy & build strategy (external growth), AU Group structures and places an IFRS-compliant off-balance sheet factoring programme, combined with trade credit insurance, effective from the day of the acquisition.
The AU Group team
Marc Delerue
Director - AU Group Finance, in charge of Private Equity
Challenge addressed
The acquiring fund is faced with an initially high “Net Debt / EBITDA” ratio and structurally high working capital requirements (90 days of DSO export clients), as well as LBO covenants leaving little room for the planned acquisitions. In addition, the post carve-out legal structure (four European entities and one US subsidiary with no receivables history under the new structure) makes a standard factoring programme impossible. It therefore becomes necessary to combine factoring and trade credit insurance programmes in order to protect both the Private Equity fund and the factor in providing financing from the moment of acquisition.
Key challenge: How can an IFRS-compliant off-balance sheet factoring programme be structured from the closing of a multi-entity carve-out, ensuring immediate off-balance sheet treatment?
Duration
Structuring phase: 8 weeks between the audit and implementation, effective from signature
Programme extension within 30 days for each newly acquired company
- Role
- Structuring broker, single point of contact between the acquiring fund, its target, the factors and the trade credit insurers.
- Sector
- Manufacturing industry under LBO
The proposed solution
AU Group designed and placed a scalable off-balance sheet factoring programme, structured from the due diligence phase to be operational on the day of signature. The programme is based on a contract extendable through a simple amendment, covering all European entities (France, Germany, Italy, Spain) and the US subsidiary. The key to IFRS off-balance sheet treatment relies on a framework co- insurance policy negotiated by AU Group between the factor and a global trade credit insurer, covering the debtors of each acquired entity. This continuity provides non-recourse financing for the factor which is an essential condition for the validation of receivables derecognition on the balance sheet.
From implementation, the 95% advance rate generated a volume of cash used for the partial repayment of the senior LBO debt. The Net Debt / EBITDA ratio was significantly improved, allowing the addition of the planned acquisitions. Under the buy & build approach, each new acquisition is integrated into the programme within 30 days, with a review of the consolidated advance rate and recalibration against the semi-annual covenant tests.
Our expert's view
As part of a carve-out, receivable payment histories do not yet exist under the new legal entity. AU Group’s added value lies in solving this using the target’s data, even before the ink on the contract is dry.
Marc Delerue, Director - AU Group Finance, in charge of Private Equity
Our role and contribution
- Preliminary audit of the receivables portfolio
Analysis of DSO by entity, Europe / USA geographical breakdown, debtor quality, dilution rate, concentration… Eligibility memo produced during the due diligence phase - Tender process and factor selection
Tender process with factors capable of covering the entire multi-entity scope perimeter, including the US subsidiary, negotiation of the extendable master agreement - Insurance structuring
Negotiation of the framework policy, validation of the wordings in compliance with statutory auditors’ requirements - LBO financial modelling
Projection of utilisations against the senior debt schedule, calibration of the advance rate to maximise the Net Debt / EBITDA impact before the first covenant test, projection of future additions - Management of buy & build extensions
Integration of each acquisition within 30 days, review of the consolidated advance rate, coordination with the fund’s teams ahead of each signing
Results
1,42
improvement in the “Net Debt / EBITDA” ratio at closing (from 3.78 to 2.36)
34M€
of cash mobilised from the moment control was taken and applied to the partial repayment of the senior LBO debt
Non-dilutive financing
for shareholders
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