CASE STUDY

EXECUTIVE SUMMARY

Oil producers face a number of inherent challenges that can make

accurate cash flow forecasting extremely difficult. In addition to

market swings and commodity volatility, competition for crude is

heating up as producers race to meet rising demands in emerging

markets worldwide. Further, accessing new sources of crude

typically requires a substantial upfront investment that may — or

may not—be recouped according to schedule. These issues make

it essential for energy companies to find new ways to boost working

capital. Streamlining operations and improving productivity can

help, but only goes so far in compensating for the volatility of crude

and fluctuating cash requirements. Recently, a longtime South

American client at Bank of America Merrill Lynch implemented

an innovative supply chain solution to finance its large crude oil

purchases from a recently acquired Asian subsidiary. The result is

a substantial increase in working capital, greater cash flow and a

cleaner balance sheet.

TAblE of ConTEnTS

Increased access to crude. . . . . . . . . . . . . . 2

Enhanced cash flow . . . . . 2

Importance of discounting . . . . . . . . . . . 3

Simplified solutions, focused attention . . . . . . . 4

Increasing Cash flow with Global Supply Chain financing in latin America

SEPTEMBER 2012

Global Petroleum Company

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InCREASED ACCESS To CRUDE

The client, a large South American oil producer, has experienced rapid growth in

recent years that mirrors the continent’s increasing prosperity. having solidified

its position domestically, it set ambitious goals for international expansion.

One of the first steps was acquiring the Asian refining operations of a competitor

to improve its access to crude. Along with the common challenges inherent to

integrating an acquired company, the client sought alternative ways to fund the

new subsidiary that would not require a substantial direct investment from the

parent entity.

In addition to questions of integration and funding, the company faced additional

pressures that are commonly felt by other operators in the downstream

petroleum industry. These included unpredictable margins, a short cycle of

collections and the significant amount of capital required for ongoing purchases

of raw materials. The client’s purchases are enormous and the associated

costs can be unpredictably high. On top of that, the payment terms for crude

traditionally have been very short, amplifying the near-term cash flow strains that

can also translate into higher borrowing costs and other problems.

EnHAnCED CASH floW

“what our client really needed was a way to smooth out its short-term cash flow

needs and improve its overall cash position,” says Marcelo Moussalli, managing

director of global Treasury Solutions in Latin America at Bank of America

Merrill Lynch. “To address these issues, we implemented a supply chain

financing solution that improved terms and extended days payables

outstanding (DPOs), leading to a lower cost of capital throughout the

supply chain,” Moussalli adds. The solution centers around trade payables

discounting that uses trade drafts, or trade acceptance instruments. The crude

supplier — the new subsidiary, in this case — draws these bills-of-exchange on

the buyer — the client’s parent entity — and the buyer details the amount, tenor,

date and holder. These negotiable instruments bear the buyer’s signature agreeing

to make the payment at maturity.

Traditionally, the client’s contractual terms for procuring crude were payable

within 30 days from the date of the purchase order issuance. however,

Bank of America Merrill Lynch worked to arrange a discounted payment for the

crude oil sales, which includes a credit facility to allow the new subsidiary to

discount the receivables. The subsidiary was incentivized by a Bank of America

Merrill Lynch guarantee to pay up front on day one and extend the term from

“ What our client really needed

was a way to smooth out its

short-term cash flow needs

and improve its overall cash

position. To address these

issues, we implemented

a supply chain financing

solution that improved terms

and extended days payables

outstanding (DPOs), leading

to a lower cost of capital

throughout the supply chain.”

Marcelo Moussalli Managing Director Global Treasury Solutions Latin America Bank of America Merrill Lynch

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30 to 180 days. These advances, or discounts, accelerate the cash flow of the

subsidiary, which now gets paid at sight or once the shipments are found to be in

order. This results in a substantial cash flow gain to the oil buyer by eliminating

the need to pay cash up front.

In addition to increased cash flow and working capital, our client has also

benefitted from a cleaner balance sheet. This translates to increased bargaining

power when negotiating with external suppliers, which ultimately can lower the

cost of goods and improve margins. Furthermore, local accounting rules under

this scenario are favorable, since the client’s jurisdiction views this type of facility

as supplier credit rather than bank debt. The importance of this cannot be

underestimated, since it helps improve liquidity and debt-to-asset ratios — which

are crucial factors in accessing public capital markets at favorable rates.

Although the supplier in this case is a subsidiary of the client, the benefits of

this financing solution can be meaningful for companies who buy from third-party

suppliers as well. “Trade payables discounting can strengthen the business

relationship between a buyer and a supplier since it offers suppliers access

to affordable liquidity and minimizes the cash flow hardships associated with

extending terms,” says hernan Mayol, Latin America trade portfolio optimization

manager at Bank of America Merrill Lynch. In a typical transaction, a third-party

supplier may be saddled with a 30-day receivable. But under our program,

Bank of America Merrill Lynch purchases the receivables due from the buyer

immediately after it has reconciled the invoices. This is accounting-neutral

(in most jurisdictions) since the accounts receivable are considered fully paid.

At the same time, the supplier eliminates much of its foreign currency risk by

collecting on day one of its receivables cycle. Instead of operating under the

financial burden imposed when a buyer requests extended terms, the crude

supplier is immediately able to use the available cash to increase sales or for

other business purposes while moving the debt off-balance-sheet.

Bank of America Merrill Lynch is now working to roll out a much larger program

that includes other oil suppliers. The ramifications of simply reducing the period in

which it collects on its refined product, while extending the tenor on the payables

for its raw material, should have a significant positive impact on overall operations.

IMPoRTAnCE of DISCoUnTInG

For a crude supplier, financing a receivable entails giving a foreign buyer ample

time to pay and covering the buyer’s position by purchasing some form of credit

insurance. This type of credit insurance is difficult to find in the current credit

environment. nevertheless, this is typically the cost of doing business in many

parts of the world, including Latin America.

The Bank of America

Merrill Lynch solution results

in a substantial cash flow gain

to the oil buyer by eliminating

the need to pay cash up front.

“ Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed. ©2012 Bank of America Corporation

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Previously, covering the seller’s position added an additional financing cost of

2 – 3%. But trade drafts are typically discounted at an agreed-upon interest rate

or fee basis reflecting the crude buyer’s credit rating. In this case, our solution

enables this amount to be rolled into the invoice at a lower rate — given the high

credit rating of the client. These benefits are also applicable to companies that

buy from external suppliers. As long as there is an advantage for the supplier in

discounting receivables at a rate that is lower than the cost of capital, there is a

strong likelihood that such a trade payables discounting solution will be applicable.

SIMPlIfIED SolUTIonS, foCUSED ATTEnTIon

Our close working relationship with the company was the key to successfully

implementing our trade payables discounting solution. “As a longtime client,

the company trusted us to come up with a solution to their unique needs,” says

Mayol. The Energy & Power group’s ability to address complex issues on a global

scale also proved essential. “what our client appreciates most is the simplicity.

Large companies with global operations don’t want complexity, and this solution

is ultimately a very simple way to achieve meaningful results,” Mayol adds.

In today’s world of extreme commodity volatility, the ability to manage

cash flow has become a significant challenge for oil companies worldwide.

Fortunately, innovative supply chain financing solutions are emerging to help

these companies improve cash management. given the size and scope of raw

materials purchases, the potential benefits to the balance sheet are simply too

great to ignore.

“ What our client appreciates

most is the simplicity. Large

companies with global

operations don’t want

complexity, and this solution is

ultimately a very simple way to

achieve meaningful results.”

Hernan Mayol Director Trade Portfolio Optimization Manager Bank of America Merrill Lynch