Greek tobacco continues to attract international bank financing, despite the negative headlines surrounding the deteriorating Greek economy, writes Rebecca Spong.

In early September the Greek tobacco processing company, Leaf Tobacco A. Michailides SA (LTAM) secured a four-year €70mn revolving full recourse committed secured borrowing base facility from FBN Bank UK. It is an extension of previous borrowing base facilities, with the bank having worked with the company since 2009.

It is a deal that demonstrates FBN’s confidence in the resilience of the Greek company’s business model and its leading position in the oriental tobacco market.

The company is the largest tobacco processor in Europe, the fourth largest tobacco processing company in the world and a major supplier of oriental tobacco to all the large cigarette manufacturers in the world. It has a presence across the Balkans, including Bulgaria, the Former Yugoslav Republic of Macedonia (FYROM), Moldova and Albania, as well as India
and Algeria.

The company itself has an attractive set of credentials for most lenders; but mention the word Greece in conjunction with any deal and most banks are likely to beat a hasty retreat.

Yet there are some such as FBN Bank, as well as Deutsche Bank, ING and a handful of other European banks, that remain committed to Michailides, recognising that although the company is based in Greece, it is untainted by the acute economic problems facing the Greek government, the public sector and the domestic economy.

“We understand their supply chain and this particular company is not prone to the risks other corporates in Greece face, such as importers,” explains John Vowell, head of structured trade and commodity finance at FBN UK.

Maintaining a good image

LTAM is a family owned and run business that has been active since 1886. It is based in Northern Greece, with its headquarters in the city of Thessaloniki and one of its five largest processing facilities just a short drive away in Polykastro.

LTAM is far away from the protests and petrol bombs seen in Athens, and superficially the town’s shop windows and expensive restaurants betray nothing of the serious undercurrent of economic malaise afflicting the country.

Yet there is no doubt that the Greek economy is rapidly worsening. In mid-October the Troika; the group of lenders to Greece comprising the IMF, European Commission and the European Central Bank; revealed that the second bailout plan for Greece, agreed just a few months before, is no longer adequate. The report added that Greece should get its next €8bn tranche of international aid as soon as possible.

Closely following this announcement the Greek government pushed through parliament a series of austerity measures, including wage cuts and job losses in the public sector. This was a move that sparked a two-day national strike and protests.

Speaking to GTR, Alexander Michailides, the president and managing director of LTAM, admits that the Greek government has “made more than its fair share of mistakes”, but he believes that perceptions of Greece have been misinterpreted to
a certain extent.

“People see on TV all kinds of characters around Constitution Square in Athens – demonstrating and pretending, playacting – but this is an orderly country. It is in trouble because it made mistakes due to an overgrown public sector which employed a lot of people at disproportionately high salaries,” he tells GTR.

“The easy thing is to come to Greece and take pictures of Constitution Square in front of the parliament where the guys are demonstrating – unions from the public sector – and form the impression this is a country in anarchy. But do you think this
is a country in anarchy? No.”

Low risk business

Being a privately-owned company, LTAM is well-positioned to weather the crisis and not be directly affected by the austerity cuts. For a start, it is 100% export-orientated and therefore it is not reliant on the strength of the domestic Greek economy.
Furthermore, around 80% of the company’s exports go to triple A-rated international cigarette companies such as Phillip Morris, BAT, Japan Tobacco, Imperial KT&G (former Korean monopoly).

“So where’s the risk?” asks Alexander Michailides.

“The risk is the risk of our customers. We never sell to third parties, to dealers. This is company policy. We only sell to cigarette manufacturers.”

To further stress the point he reflects on FBN’s confidence in his company. “They are dealing with Africa – and they see the problems here are a fraction of what they see in Africa.”

Alexander Michailides adds that the company has a good track record regarding the treatment of its staff.

“There has never been even one day of strikes during the 125 years of this company’s existence. This is because the company has taken care of its people.

“We have also not cut one salary during this crisis, in a country where salaries are being cut right, left and centre”.
LTAM also aims to look after its farmers, providing them with fertilisers and other materials required to grow tobacco
ahead of each season. In some cases, LTAM will advance loans to farmers to finance the crop.

Yet to provide extra comfort to some lenders, the LTAM has decided to change the domicile of the company into a holding company based in Cyprus, with exactly the same shareholders.The structure of the company is going to be what is called a Societas Europaea (SE) which is a legal structure created by the European Commission that allows a company to register in any member state of the EU and then be able to transfer to another state within 30 days.

FBN UK is however already very comfortable with the risk of the company.

“We are very particular about the corporate that we have identified in Greece. LTAM is a purely export-related customer and the underlying commodity being tobacco is reasonably stable and not too volatile. The commodity also has a fantastic supply chain that we understand quite well from our dealings with African-based tobacco producers,” explains Vowell.

The bank also conducted a lot of analysis before signing off on deals, taking into consideration various possible scenarios such as if Greece ended up leaving the European Union, if they did ultimately default or if they went back to the drachma.

“But we believe that as a predominantly export-driven company, it would still be in a strong position,” Vowell concludes.
He adds that the Greek crisis has opened up opportunities for banks such as FBN UK. Before the crisis hit, LTAM had a different banking group.

“But some of the banks there before aren’t there now, which left an opening for FBN UK. We do this business in Africa and we are comfortable with the supply chain. And once you get around the storage risks in Greece and see those locations, we can be fairly comfortable with the rest of it. We are confident about their ability to process, their ability to fall in accordance with buyers’ specifications, and we are happy with who the offtakers are.”

Securing lenders

The fact that LTAM is still managing to secure financing lines from banks in the current economic climate owed much to a decision in the mid-1990s to move away from the Greek banks and get more international banks on board, starting off with ABN Amro in 1994.

“We would be in dire trouble right now, if all our banks were the Greek banks,” notes Alexander Michailides.

Aristedes Hatzistefanou, CFO of LTAM, explains the reason they moved is due to the big banks that specialise in commodity financing offering a far better service than Greek banks, which he believes to continue to be “highly bureaucratic”.

“Greek banks focused on mortgage loans, corporate loans and credit cards. Moving to FBN and to other banks was a wise decision, not just on service but also on rates.”

The latest €70mn facility secured from FBN UK ensures that the company can sustain orders from their main buyers over the next three to four years.

The purpose of the facility is to support the purchase, storage and processing of the green tobacco, the storage of packed tobacco and the receivables derived from the sale of the processed tobacco.

From the planting of the seeds, purchasing the tobacco, storage of processed tobacco, sale of processed tobacco and receipt of sales proceeds for each crop can take up to 36 months at different source locations. But, given that the sourcing of the tobacco starts at different dates and months at different source locations, according to FBN UK, the business cycle was extended to 48 months.

The main source of repayment to FBN UK is the receivables proceeds from the sales of processed tobacco to approved offtakers. These receivables are assigned to FBN UK.

The bank enjoys the additional security that up to 80% of the tobacco purchased by LTAM is already committed for a specific future delivery to approved offtakers, and the remaining amount is kept to meet requirements of customers, who are government monopolies, and who purchase by tender.

The borrowing base is secured in a similar manner to most structured commodity pre-export finance facilities, with pledges over the financed assets.

Buyer risk is mitigated by only allowing open account payable terms to buyers with a high credit rating.

Such companies contribute 75% – 80% to the company’s annual turnover. Any new buyers are usually asked to open letters of credit or offer some other method of payment security. The current buyer non-payment rate is zero.

Growth plans

Despite the stagnation of the domestic Greek economy, LTAM has ambitious plans for growth in the coming years; plans that FBN UK hope to help support.

The company is aiming to have significant presence in every oriental tobacco exporting country in the world, as well as develop new sources of supply. It also purchases other types of tobacco such as Burley and Virginia. It is one of the major exporters in Greece, as well as a key exporter in Albania, Moldova, Bulgaria and FYROM.

The latest project is to build up a presence in India, and LTAM has established a processing facility in Karnataka in South-West India, around 200 miles from Goa.

The tobacco processor is also looking to make its business more efficient. For instance, around two years ago it changed the material used to wrap the tobacco leaves in. Originally leaves would be wrapped in hessian bales but now they have switched to packing the leaves in corrugated cartons.

“This is expensive, but improves leaf yields by 3-4% and cuts down processing costs by 15%,” notes Alexander Michailides.
Although a development two years in the making, this year 100% of the Greek and Albanian farmers are using the cartons,
as well as some farmers in Bulgaria and Macedonia.

The tobacco industry

LTAM does face a few hurdles that are challenging the tobacco industry as a whole. One is the declining demand for cigarettes in the West and the growing awareness of the detrimental impact smoking can have on your health.

However, this decline is mitigated in part by the huge and growing demand in Asia, particularly in India and China.
The other challenge is the increasing regulation surrounding the manufacture of cigarettes.

More and more of LTAM’s buyers are demanding lower levels of crop protection agents (CPAs) to be used in the farming
of tobacco.

Ioannis Michailides, sales manager at LTAM and Alexander’s son, explains to GTR: “The biggest challenge is supplying a product that conforms to CPA regulations. As we move into a more regulated environment regarding agricultural products, we need to make sure the product is a clean as possible regarding the use of pesticides.

“This is a very important requirement from our customers and will become an even more stringent requirement as tobacco and cigarettes become even more regulated.”

Alexander Michailides adds: “Without bragging, our record is impeccable. We took Greek tobacco which was heavy on CPAs, and now it is virtually free of them; it is the same with the Albanian, Macedonian and Bulgarian tobacco.”

Despite such challenges; LTAM’s future looks positive. Its expansion plans tend to be focused on the developing world where tobacco is a legal cash crop and an important source of hard currency for such countries as well as a generator of local jobs in the private sector – something most governments will be keen to promote in today’s economic environment. GTR