Trade finance survey 2010: Corporate perspective – Office Depot

Timing is everything and Boca Raton, Florida-headquartered Office Depot, one of the world’s largest providers of office products and services, executed a new $1.25 billion asset-based credit facility just as conditions in the trade finance market began to deteriorate at the end of September 2008. “We have seen no changes in our trade finance costs or availability as a result,” says Scott Craig, assistant treasurer at the company. The asset-based facility replaced a $1 billion standard revolving credit facility and was arranged with 15 banks. It enables Office Depot to borrow by pledging certain accounts receivables and inventory as security – though not to the full value of the security. In addition, the facility has a carve-out that allows the issuance of LCs. “For the last three quarters we haven’t needed to borrow on the facility,” says Craig. “We have issued LCs, so to that extent it has isolated Office Depot from any changes in the market.”

Craig says that LCs are a small part of the company’s trade with suppliers. “We work with a number of small suppliers in China, Vietnam, Korea and elsewhere which supply private brand goods for Office Depot and typically these suppliers require LCs,” he notes. “We also use LCs to support our bids for government contracts.” Office Depot has not seen increasing demand for LCs from other suppliers despite the financial crisis – in contrast to anecdotal evidence from other multinationals.

Although Office Depot’s suppliers have not demanded LCs, many of them have been affected by the dramatic scaling back of coverage of retailers such as Office Depot by credit insurers such as Coface, Euler-Hermes and Atradius. “From January 2009 onwards, our suppliers began approaching us to talk about the difficulty in obtaining credit insurance,” says Craig. “Before this situation, we hadn’t really considered credit insurance but it turned out lots of our suppliers used it.”

Faced with a tricky situation, Office Depot contacted its top 50 global suppliers and – having asked them to sign a non-disclosure agreement – explained in detail its financial and business situation, its asset-based lending facility and the scale of its unused capacity. “Between January and May, there were a lot of vendor meetings,” says Craig. “The outcome in most cases was that vendors accepted that they could safely go with reduced coverage – although in a handful of cases management at the firms involved were very conservative and unwilling to accept change and consequently we had to switch to other vendors.”

Craig says that suppliers’ concerns were largely allayed by a series of liquidity-enhancing measures that culminated in a $350 million preferential stock investment by private equity firm BC Partners. “After that the nervousness dried up,” he says. “Nevertheless, we look forward to credit insurers providing full coverage again to retailers.”