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The importance of diversification of funding in times of economic uncertainty

November 21, 2022

Maris Kreics, the CFO of Eleving Group for Forbes Latvia

Investors are becoming increasingly cautious today, and for a good reason. There is general political instability in Europe, and central banks worldwide are raising interest rates to curb inflation. Economic activity is expected to fall as a result. These factors hurt investors’ sentiment because they have concerns about their investment prospects – whether it is the right time, whether the investment value will not decrease shortly, whether there will be better investment opportunities, etc.

Currently, almost all funding sources have become more expensive and harder to obtain, so linear investment diversification will not help much. However, it is helpful in the long run. In the case of Eleving Group, the decision to participate in the capital markets by placing public and private debt securities (bonds) and the subsequent work in 2021 on the issue of new bonds to attract funding and refinance the previous bonds is of decisive importance today. As a result, we have a solid funding base with more favorable costs.

The backbone of our financing structure is the bonds issued in 2021 (three different bond issues) for a total amount of EUR 205 mln. From a term perspective, this is a mid to long-term capital, with EUR 30 mln of those maturing in 2024, EUR 150 mln maturing in 2026, and EUR 25 mln maturing in 2031. 

In addition to these funding sources, we also work intensively with the largest pan-European lending platform, Mintos, through which we have attracted approximately EUR 70 mln. This source of capital has a slightly higher cost than bonds, as it is more exposed to the most current market conditions; however, it allows us the flexibility to raise capital as the actual need arises.

And finally, we also cooperate with banks. In several of our markets, we are a trusted partner to local banks willing to provide us with relatively cheap capital due to our ongoing presence in these markets and our solid financial performance.

We believe in prudent risk management following three principles. First, companies must avoid refinancing barriers — large amounts of debt that must be repaid on a specific date. More focus should be placed on such investments, the refinancing of which is divided into short-term, medium-term, and long-term.

Second, we understand that from an investor’s perspective, the cost is an inverse function of risk. Therefore, we strive to offer investors greater security in the form of pledges, usually for lower-cost financing, while also maintaining the optionality to have low or no pledges for specific funding sources where investors and creditors are ready to accept theoretically higher risk.

Third, companies often underestimate the commitment required to be present in international capital markets, whether in bonds or other forms of leveraged capital. All this requires regular and high-quality reports, an investor relations strategy, the company’s desire to increase transparency, and the ability to articulate and explain business decisions and future strategy. These requirements are always easier to meet for companies with a global mindset.

From an observer’s perspective, it is clear that central banks worldwide are currently driving the process. Their goal is to curb inflation by reducing economic activity. It is wise for every business to accept this as the new reality and that central banks will not stop until this goal is achieved.

Our approach has been so far to prepare for worse while keeping our heads cool and clear focus on improving the operations and our balance sheet so that when we spot a reversal in the capital markets, we are among the first out of the gate to capture good business opportunities in the field of our expertise – mobility and financing solutions in previously neglected or underserved markets.

In the current environment, investors are looking for high-quality investments (high quality correlates with low risk) and high quality in all aspects of the business – businesses with profitable and positive cash flow, experienced management with international experience, companies that are not under refinancing stress, and whose revenue structure is not seasonal or cyclical and not dependent on one customer or strategic partner.