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Bread and butter treasury function serves Glanbia well Back  
Debt reduction gives food for thought writes John Sherlock in this profile of Glanbia’s treasury department.
Glanbia plc is an international food company based primarily in Ireland, the UK and the USA, serving markets for dairy and meat products across the world. The Group is one of Europe’s leading dairy companies and ranks as one of the world’s largest cheese manufacturers.
Glanbia holds strategic positions in the US ‘American style’ cheese sector and the European pizza cheese market and is a key player in consumer dairy and meat products in Ireland and the UK.
Employing 6,000 people worldwide and with an annual turnover of €2.3 billion, Glanbia is Ireland’s leading processor of milk (1.3 billion litres processed annually), and Ireland’s leading producer of branded consumer foods under the flagship Avonmore brand name.

Even by the standards of a rapidly changing world, Glanbia has encountered much change and many challenges in recent years.

Similarly, Glanbia’s treasury department has been significantly affected by the financial and systems implications of completion of the Avonmore & Waterford merger, which commenced in September 1997 and projects such as Y2K changeover and e currency implementation, to recall just a few. In terms of size, complexity and duration, it is the former of these experiences, which has left an indelible impact on the development of our treasury function within the merged Glanbia Group.

General approach and responsibilities
Today, a highly centralised Group treasury function oversees all aspects of Glanbia’s diverse financial services needs. This is facilitated by a dedicated team of 4 people, aided by a bespoke treasury reporting package (Salmon Software), which is integrated into the Group’s enterprise wide IT systems (SAP).

The principal responsibilities of Treasury are:
• Formulation of liquidity management and interest & currency exchange rate management policies for Board approval;
• Devising and implementing of appropriate strategies giving effect to agreed policies;
• Monitoring and reporting on implemented strategy and
• Day-to-day responsibility for the multitudinous transactions implicit in conducting these cash, debt, banking and exposure management matters.
Glanbia principally looks to a core panel of nine relationship banks to service its financial product needs. These nine have continuously, competently and competitively banked the Group through good and difficult times, over many years now. Based on this experience, we obviously believe that they stand in the vanguard of banks operating in the Irish market - ABN Amro, AIB, Bank of Ireland, Barclays, BNP Paribas, Citibank, IIB Bank, Rabobank and Ulster Bank.

Capital markets
Glanbia commenced 1997 relatively unleveraged and by following year-end had arranged financing facilities totalling €1,200 million with debt outstanding of €700 million, to facilitate the merger between the then Avonmore and Waterford groups. These facilities were arranged on an unsecured and bilateral basis with the minimum of fanfare over only a one-month period. In addition to its core bankers, the final line-up was completed by one private debt placement (PDP) facility for STG?65 million and two subordinated debt facilities totalling €140 million.

Effectively a total of thirteen financial institutions had provided the full €1,200 million with no sell down option to sub underwriters permitted.

No ‘tombstones’ exist to adorn the corporate lending desks and showcases of the respective participants in acknowledgement of this achievement and some have mischievously vouched that other tombstones will be the order of the day before a replication of such approach is easily achieved again.

Glanbia has to-date preferred the bilateral rather than syndicated approach in its relationships with financial institutions. The Glanbia model could best be described as a syndicate where the borrower is the sole lead arranger, manager & agent.

Each banker to the Group is met individually on a formalised basis twice a year, following interim and year-end results and contracts to lend on terms and conditions common to all our Group bankers.

Some of our bankers, aspiring to convince us of the alternative benefits of a formalised banking syndicate approach, have engaged us in lively debate over the years but for the time being we remain unconvinced.

Whilst the promise of thirteen review meetings becoming one appeals, the more realistic prospect of thirteen becoming fourteen, to accommodate one more joint meeting with all, appals. Someone memorably noted, ‘put thirteen bankers in a room and you’ll end up with fourteen different agendas and none your own!’

Happily, based on the evidence that there has only been one change in the current line-up of the Group’s bankers over the past decade, the syndicate manager must be doing something right. We are also pleased to relate that over these past five years, the aforementioned €1,200 million of facilities have been relentlessly reduced to €550 million and debt outstanding to €176 million at our most recent financial year-end.

The duration of our senior bank facilities typically carries a minimum 1-year and maximum 3-year profile, which we believe, maintains a reasonable compromise between the conflicting goals of debt cost, minimisation and debt duration, maximisation.

The senior PDP facility and junior subordinated debt facilities provide additional duration to our debt book, carrying 10-year maturity profiles at inception. To preserve continuity of funding, the Group’s principal liquidity strategy is that committed facilities must always be available to meet the full extent of our anticipated, ordinary course of business, finance requirements during the succeeding 12-month period.

Incorporating time taken to complete a review process, this strategy compels treasury to engage its bankers for appropriate extension of their facilities no later than 15 months from their stated maturity date. This approach ensures that in practice Glanbia will receive at least 12 months notice of any lender’s intention to seek repayment of facilities and affords ample time to arrange replacement.

Glanbia’s principal economic, balance sheet, interest & exchange rate exposures are USA/US$ and UK/Stg?. We have both significant direct presences in these trading areas and indirect exposures via export businesses out of Ireland. The Group typically takes a maximum 5-year view in conducting its interest rate policy objectives and a maximum 1-year profile for exchange rate management issues.

As a Plc we are particularly keen to strike a balance between opportunity and certainty in conducting our exposure management policies.

Therefore, our interest rate exposures over any succeeding 12-month period will largely be fixed and with the interest rate cover reducing progressively thereafter over the succeeding 4-year time frame.

Experience has shown us that implementing exchange rate cover beyond a 12-month time frame is unwise, as it can no longer be safely assumed that revenues or costs will remain independent of currency fluctuations for our key markets and products.

As I reflect on the evolution of our hedging approach in implementing exposure management strategies it is apparent that, almost unnoticed, we now largely support the interest and exchange rate views incorporated in these strategies with option-based derivative products and solutions, rather than a ‘plain vanilla’ (spots and forwards) market approach we previously favoured. We believe that adopting strong interest and exchange rate views protected by option cover, allows significant value-added to be derived from the treasury function in exposure management. Group policy absolutely prohibits the holding or issuing of financial instruments, derivatives or positions in relation to speculative interest or exchange rate transactions.

I am sure that Glanbia is no different than any other corporate in our aspiration to transact the nitty-gritty of all treasury functions as efficiently and cost effectively as possible. We have come a long way and still have more to go.

Since 1997, 300 bank accounts have been closed but some 150 more still ‘breath quietly’ for the time being. SAP promises the prospect that at least 140 of these can suffer a similar closure fate.
Any money lodged into a banking system worldwide will hit a Glanbia account the same day. Allowing for even the worst time zone differential, these monies can make their way to High St., Kilkenny by the second working day after lodgement. E-payments for the most part are the order of the day aided by our Group Shared Services Centre, which commenced operation from Dungarvan in 2000. Gross movement of funds, external and internal, throughout the Group’s bank accounts we estimate at e20 billion in 2002.

We still however, do not carry an eco-friendly stamp of approval. Over 250,000 paper cheques make their way along the highways and bye-ways of Ireland annually, principally representing payments to farmers and others, for inputs.

We have promised ourselves that 2003 will finally see the tropical rainforests of the Amazon saved from ending up in Waterford / Kilkenny.

Challenged to highlight some publicly available measure to encapsulate all these efforts of recent years, maybe it can best be cited as the reduction in the Group’s interest charge from e45 million in 1998 to e19 million in the 2002 financial year just ended and the commensurate ‘fatwah’ on debt reduction and improved cash management implied.

Never can such arid measures though, relate the tales of blood, sweat and dare we whisper it, even beers along the way.

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