Doha Cables: A flexible approach to financing

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Bruce Lloyd
6 years ago
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1 Doha Cables: A flexible approach to financing

2 As one of the dominant providers of cable products to the large and rapidly growing Qatari infrastructure market, Doha Cables needed to expand its financing capacity, but without overburdening its balance sheet. However, most banking providers were more intent on simply selling their existing products rather than fulfilling the company s needs. Fortunately, HSBC s holistic approach proved the exception and resulted in the design and delivery of a solution that met all Doha Cables requirements. Infrastructure Vision As part of Qatar National Vision 2030, Qatar s leadership has embarked upon an ambitious program of attracting major global events, such as the ten World Cup sporting events due to be hosted over the next seven years. The corollary to this is a major program of infrastructure development necessary to support these and numerous other forthcoming high profile events. However, while the scale of Qatari infrastructure investment associated with these high profile events is extremely large, it is only part of an even larger infrastructure investment that encapsulates the vision of Qatar s transition into a truly diverse global economy. For instance, in 2015 alone, it is estimated that Qatar will award USD30bn of infrastructure projects 1 including the Doha Metro. These projects will build on earlier investment of similar magnitude in projects such as Ashghal s expressway and the New Port project. The broader picture is even more impressive. According to figures released in February the total value of Qatar s current construction projects is estimated at USD280.20bn, with infrastructure and energy development accounting for USD103.42bn and USD40.29bn respectively. Crucial cable Inevitably infrastructure and energy development on this scale involves substantial electrical supply and therefore also cabling. Doha Cables is uniquely positioned to satisfy this need because in addition to being one of just two approved manufacturers of low and medium voltage cable, it is also the only approved supplier of high voltage cable in the country. The company also has the necessary production capacity - some three times that of its nearest rival - as well as having an excellent reputation for performance with the Qatari government. As a result, Doha Cables is used as the primary electrical cable supplier by the government ministry responsible for electricity and water infrastructure. The company has been established to help achieve the goals of Qatar National Vision 2030, which aims to transform Qatar from a country dependent on hydrocarbon industries to a sustainable economy, says Ahmed El Sewedy, Vice President, Doha Cables. The company has built a strong international reputation for the quality of its products and its delivery capabilities. It is highly unusual in being one of just a very few manufacturers with a physical presence in Qatar, and is also a highly successful exporter, with customers in 110 countries worldwide including most of the GCC states. In total, the company operates 23 production facilities across 12 countries globally in which it produces a large and diverse range of cable products including overhead conductors, power cables, telecoms cables and specialty products, such as fire resistant and low smoke halogen free cables. 1 CONS_ html 2

Balance sheet debt... While this combination of qualities means that Doha Cables is experiencing unprecedented demand for its products, it inevitably also increases its demand for copper.

3 Balance sheet debt... While this combination of qualities means that Doha Cables is experiencing unprecedented demand for its products, it inevitably also increases its demand for copper. Particularly in view of the sheer volume of raw copper it requires (which represents some 85% of the materials in the cables the company produces) the way in which Doha Cables was previously paying these suppliers was having an adverse impact on its balance sheet. The root of the problem was that the company s former trade finance bankers were not addressing the company s balance sheet needs but simply providing Doha Cables with standard sight letters of credit (LCs) as a supplier payment instrument. The banks would settle the LCs with the copper suppliers, but the 180 day financing period of the LCs was funded as a conventional on balance sheet loan. In view of the company s scale of operations, this could result in very large debit entries appearing on its balance sheet with negative consequences for its leverage ratios....and its intelligent reduction Previously, Doha Cables banking providers were simply competing on price rather than the relevance of their solutions. When HSBC first met with the company it took a very different approach. It was immediately apparent that some form of a bespoke trade financing solution was required to improve Doha Cables external debt position. This challenge was ideally suited to HSBC s holistic approach to infrastructure finance, which leverages its international reach and connectivity to draw on expertise from within the bank anywhere in the world. With HSBC we found a completely new approach, in that they have the flavour of being local, in addition to huge success and experience globally, says Ahmed El Sewedy. HSBC was the first bank to adopt this innovative approach to Doha Cables situation and its recommendation was that the company switch to using a usance payable at sight (UPAS) LC. This is effectively the combination of a usance LC payable at sight to the supplier but with payment settlement from the buyer being made at the end of the usance term (in this case 180 days). While UPAS LCs have an established role in bridging the gap between the needs of buyers and sellers as regards credit tenors, they were at the time relatively unfamiliar in the Qatari market. They were also unfamiliar to Doha Cables suppliers, so HSBC undertook to explain the advantages of a UPAS LC to them. After HSBC s intermediation, all Doha Cables suppliers were happy to accept the new arrangement. The key difference is that because it is now a UPAS LC, Doha Cables treats the liability as account payables rather than short term debts.

4 The effectiveness of this tailored solution is witnessed by the trade financing volumes now being processed on the company s behalf by HSBC. Since the initial transaction, HSBC s facilities to Doha Cables have risen by several orders of magnitude in less than a year, while at the same time radically deleveraging the company s balance sheet. Further indications of the value of this arrangement are, firstly that other banks in the market are attempting to replicate it and, secondly that Doha Cables was willing to relax its original requirement that it be linked with a hedging facility for copper. Performance bond As the premier - or in the case of high voltage, the only - provider of cables in Qatar, Doha Cables is highly active in bidding for numerous large infrastructure contracts in the region. This makes the efficient and timely provision of performance bonds critical to its success. If the company wins a contract but cannot deliver an acceptable performance bond by the client s deadline, then it forfeits the business. An important example of this was a contract that Doha Cables won in December The contract was issued by Qatar General Electricity & Water Corporation (Kahramaa) for the provision of low and medium voltage power cables. Valued at QAR901.1mn over an initial two-year period, the contract was part of Kahramaa s ongoing program to meet growing power demand in Qatar. In order to be able to fulfil this contract, Doha Cables would need the additional working capital provided by HSBC s suggested UPAS LC solution, but it would also need to post a suitable performance bond to guarantee the company s satisfactory completion of the project to Kahramaa. As a major global bank, HSBC was clearly well-qualified to issue such a performance bond. However, at the time the need arose, the bank had only recently made contact with Doha Cables, and therefore still had limited knowledge of the company and its risk profile. Therefore, satisfying this requirement would be particularly demanding - especially in view of the tight deadline for the contract. Appreciating the urgency of the matter, HSBC personnel in Qatar worked nonstop for 48 hours over a weekend collaborating with other bank departments around the globe in order to meet the performance bond deadline successfully. Receivables and the future Doha Cables sales are split approximately 40/60, with 40% of its output going to the Qatari government and the remainder to non-government customers both locally and internationally. The business is structured so that Doha Cables deals directly with government clients, but all its other business is conducted via Elsewedy Cables (see Client Profile below), which deals on its behalf with end customers. HSBC supports the company s sales to Elsewedy with export LC financing, which means that both companies benefit from off balance sheet financing. The relationship HSBC has developed with Doha Cables means that the bank has developed a strong understanding of the client s business both immediately and into the future. As a result, the bank has also started to gain an insight into (and contact with) the company s subcontract end customers. In due course, this will facilitate efficient and Key points In 2015 alone, it is estimated that Qatar will award US $30bn of infrastructure projects As a primary electrical cable supplier for the government Doha Cables will play a major part in Qatar s infrastructure development By examining Doha Cables entire financial position HSBC provided a holistic solution that addressed its most pressing requirements

cost effective sales financing solutions, because the bank has good visibility along Doha Cables entire supply and sales chain from copper suppliers to subcontract buyers of cable.

5 cost effective sales financing solutions, because the bank has good visibility along Doha Cables entire supply and sales chain from copper suppliers to subcontract buyers of cable. We have spent a lot of time understanding Doha Cables business model and its aspirations in Qatar, says Sherif El Banna, Global Relationship Manager, HSBC Qatar. We have worked very closely with other HSBC teams in UAE, UK and Egypt to understand the company s business better and to structure the right solutions to match its needs. By taking this holistic approach we have come to be considered by Doha Cables as their business partner, rather than just a bank. Conclusion HSBC s relationship with Doha Cables highlights the ever increasing importance of holistic thinking in trade finance. Rather than just continuing to provide the same financing products that did not address the client s core needs, HSBC approached the situation very differently. By examining Doha Cables entire financial position the bank was able to recommend a solution that directly addressed its most pressing requirements: a bespoke trade financing solution at competitive cost and without prejudice to its supplier relationships. Client Profile Doha Cables is a subsidiary of Senyar Industries, which is in turn a joint venture between Elsewedy Cables and the diversified conglomerate Aamal. Elsewedy Cables has become one of the most successful industrial and trading businesses in MENA since its foundation in Aamal s operations consist of some 16 business units that have established a market leading presence in sectors that include property management and development, industrial manufacturing, trading and distribution, and managed services. Doha Cables owns a state of the art 70,000 square meter manufacturing facility in the Mesaieed Industrial City that has a production capacity of 40,000 tonnes of copper per year. The company s aim is to provide its customers with the highest quality products in the shortest possible time frame. The factory in Mesaieed Industrial City combines professional project management, interdisciplinary teams, state-of-the-art manufacturing facilities and the highest safety standards. This communication is issued by HSBC Holdings plc. While all reasonable care has been taken in preparing this communication, no responsibility or liability is accepted for any errors of fact, omission or for any opinion expressed herein. You are advised to exercise your own independent judgment (with the advice of your professional advisers as necessary) with respect to the risks and consequences of any matter contained herein. HSBC expressly disclaims any liability and responsibility for any losses arising from any uses to which this communication is put and for any errors or omissions in this communication. HSBC means The Hongkong Shanghai Banking Corporation Limited and each of its holding companies, subsidiaries, related corporations, affiliates, and representative and branch offices inany jurisdiction.

Revenues Gross Profit EBITDA Net Profit after Minority

Revenues Gross Profit EBITDA Net Profit after Minority ELSEWEDY ELECTRIC Reports solid H1 2017 performance with a two-fold increase in revenues to EGP 20.7 billion and double-digit growth of net profit to EGP 3.0 billion; proposed dividend of EGP 8 per share