25 August 2014

Medanito: a three dimensional banking relationship

Argentine oil and gas company Medanito first worked with HSBC in 1999. Since then, the relationship has become increasingly three dimensional in terms of length, breadth and depth. Mario Santarelli, Medanito's CFO, outlines its evolution and benefits

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From a relatively modest leasing transaction conducted fifteen years ago, our relationship with HSBC has expanded considerably. Among other areas, it now encompasses trade, cash management, advances in local currency and dollars, loan syndication and bond issuance. This expansion is no accident: both Medanito and HSBC have a long term mindset when it comes to doing business, so there is an inherent synergy to our relationship.

Cash management

A good example of how this has worked well in practice has been cash management. On the payment side, Medanito deals with a substantial number of suppliers and so streamlining the settlement of their invoices would reduce costs and improve efficiency.

Our long term objective is therefore to use exclusively electronic payments (our current level is around 70 per cent), but we needed an effective interim solution that we could use while our accounts department migrated away from the manual issuance and mailing of cheques to suppliers. As a result we decided to outsource the process to HSBC, which offers an automated cheque issuance service via its payment processing centre in Buenos Aires, in addition to 139 HSBC branches located all over the country that can also provide this service.

The automation of these payments has several advantages for both Medanito and its suppliers. We will no longer need to sign cheques manually. Instead, we will be able to upload a payment file (the format of which we are currently designing in conjunction with HSBC's implementation team) through HSBC’s electronic platform. The payments in the file will be released after authorisation by Medanito’s signatories. HSBC will then print the cheques on our behalf and suppliers will be able to collect them in their specified branch or in HSBC’s payment centre. This represents a secure and reliable alternative to our suppliers having their cheques mailed to them. Furthermore, HSBC will print the tax receipts associated with our payments and attach them when delivering the cheques.

As we use several banks, a potential issue for us is obtaining a single consistent view of all our balances, which needs to include Medanito’s payroll requirements. HSBC has delivered this by integrating over 140 accounts, representing approximately 40 per cent of our total employees. Medanito has a relatively small number of customers, so our primary concern when performing invoice reconciliation is to be able to see all incoming credits via one interface, rather than having to log on to and switch between multiple bank systems. In order to avoid this situation, HSBC has provided us with Datanet, a service provided by Interbanking (where HSBC is a shareholder). This makes it possible to see all our balances across all our bank relationships via a single web page, which appreciably streamlines our accounts receivable reconciliation.

Trade

An important aspect of Medanito's relationship with HSBC is trade. However, our needs here are more concerned with trade regulation than conventional trade financing. Medanito exports LPG to Chile and other South American countries, to well-established and long-standing customers on an open account basis. However, in Argentina there is a great deal of regulation associated with exporting. Therefore HSBC effectively has to fulfil three roles. One is advising Medanito about the correct documentation we must present in order to be able to export, such as the inclusion of the correct commercial codes on all invoices. The second is its own regulatory obligation of ensuring that all documentation presented is compliant with Argentina's central bank (Banco Central de la República Argentina - BCRA )regulations. Finally, HSBC is the bank appointed by Medanito to act as our reporting and monitoring agent as regards BCRA and the tax office, in relation with the collection of export proceeds. This last point is critical to Medanito because a failure in this obligation could trigger a range of sanctions that could seriously affect our export business.

While this regulatory service is probably the most important trade-related service that HSBC provides for Medanito, another significant service is in support of Flargent, a company we acquired and control that provides equipment engineering and manufacturing solutions to the hydrocarbon industry in Argentina, Latin America and Europe. Flargent transacts substantial business in countries such as Spain and Bolivia, where its contract tenders typically need to be supported by a performance guarantee. This is usually provided by HSBC opening a letter of credit in favour of the entity soliciting the tender as a performance bond.

Financing: bonds

The breadth of HSBC's support for our cash management and trade activities has given it an important insight into our incoming and outgoing flows, which it has been able to use in order to provide us with intelligent suggestions regarding our financing needs, which are significant. The oil and gas industry is capital-intensive in terms of both exploration and production, so in addition to our ongoing growth plans there is a constant need to maintain sufficient funding to cover the period between project start ups and the resulting revenue flows.

In addition to understanding our business and flows, HSBC's expertise in local debt markets and its strong relationships with local investors particularly benefited our first bond issue in March 2013. By undertaking discussions with potential investors in advance, HSBC was able to provide valuable guidance regarding appropriate pricing and tenor. HSBC also helped to organise a road show in support of the bond issue, which meant that Medanito's management team was able to meet portfolio managers and explain our business and future plans in detail. As this was our first bond issue, this process was integral to a successful launch. A further factor in the launch's favour was HSBC's reputation in the local market for only supporting issues it considers robust.

The end result was extremely gratifying and ensured that Medanito acquired the funding it required on very attractive terms. We successfully placed Class 1 and Class 2 corporate bonds for USD40 million under a USD150 million programme, which was oversubscribed (with bids received for USD84 million). The final outcome was a USD34 million tranche, for up to 36 months, bearing an annual interest rate of 2.25% and a second tranche, for up to 18 months, of USD6 million with an annual interest rate of 1.74%, with interest being paid quarterly on both tranches. The bonds received an A- risk rating issued by Fitch Argentina S.A. and are USD linked, although repayment will be made in local currency at the equivalent of the current exchange rate at time of repayment.

The success of our first bond issue, was one of the key factors in choosing HSBC for our subsequent bond issues in February and July 2014, which resulted in a successful placement of Class 3 and Class 4 corporate bonds, for USD40 million (50 per cent issued in local currency and 50 per cent dollar linked), this time with an A+ rating issued by Fitch Argentina S.A. The Class 3 tranche was placed at a 4 per cent spread over the BADLAR index, (a daily index published by BCRA which reflects banks cost of funds) with an 18 month tenor and the Class 4 tranche at an annual interest rate of 1.43%, for up to 36 months, for USD20 million, thereby improving both interest rate and duration.

Financing: syndication and IPO

In June 2014, Medanito acquired 52 per cent of Chañares Herrados, an oil and gas company with annual sales of USD20 million. The acquisition is strategically important because Chañares Herrados has substantial reserves that Medanito will be able to use efficiently. HSBC is currently leading the syndication of a USD40 million loan that is expected to close shortly, which will finance the stake in the longer term. The new four year syndicated funding will replace the shorter term debt originally used to fund the acquisition.

Medanito's corporate bond issuances have allowed it to reinforce its market position in the Argentine petroleum sector, as well as positioning it advantageously for an expected IPO in 2016. The IPO will fund future development and acquisitions while also diversifying the company's funding sources and reducing its leverage.

Conclusion: long term thinking

Both Medanito and HSBC had the original intention of developing a long-term working relationship and in practice this is precisely what has evolved. The range of contact points across both organisations and the disciplines involved are also extremely varied and include cash management, debt capital markets, equity capital markets, sales and distribution, leasing, and trade. The depth of the relationship has also expanded, which has enabled valuable exchanges of ideas, a bilateral multidisciplinary perspective and the identification of new opportunities. As a result, Medanito has been able to rely on HSBC's support as it has grown.

Client profile

Medanito is an Argentine oil and gas company founded in 1992 by the Grimaldi and Carosio families, and in 2011 IFC (International Finance Corporation) became a minority shareholder via a capital injection of USD50 million. The company has 420 employees and as of December 2013, had sales of USD194 million.

Its core businesses include up-stream oil and natural gas exploration and production, plus non-conventional oil development, such as shale oil and shale gas. Other activities include gas mid-stream activity such as gas separation (LPG and gasoline), gas-fired power generation and the provision of comprehensive equipment engineering and manufacturing solutions for the hydrocarbon industry.

Its principal assets are Aguada del Chivato in the Neuquén province, and the Catriel gas complex in the province of Rio Negro. The company also has sixteen exploration and production concessions in the Neuquén and Cuyana basin. Although Medanito is mainly located in Argentina, 90 per cent of its LPG production is exported to Chile and Paraguay.

Medanito's business strategy is to be a relevant local player in the development of new energy opportunities, while sustaining profitability through substantial investment, strategic alliances with world-class companies, and a high level of integration - whilst simultaneously maintaining a robust financial position and credit rating.

Medanito is growing rapidly both organically and through acquisitions. In June 2014, the company acquired 52 per cent of Chañares Herrados, an oil and gas company, which is likely to push Medanito's sales for its 2014 financial year to USD230 million. The company is also planning to raise approximately USD300 million via an IPO at some point during 2016 or 2017.

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