From the November 2007 issue of Treasury & Risk magazine

Gold AHA Award Winner in Liquidity

Sometimes greatness has less to do with one sensational flash, and more to do with a sustained illuminating glow. That is certainly the case with Honeywell's winning approach to liquidity management, which relies less on showy projects than on determined blocking and tackling. For Honeywell, the key has been to keep it global, transparent and fungible, with a goal of always having the asset or liability at the right place, at the right time and at the right rate to ensure the highest return.

The result is a laundry list of accomplishments that become even more impressive when one realizes they were achieved in less than three years. The highlights: attaining over 90% daily visibility to its global cash and investment balances; implementing cash pools in countries where it has material business operations, establishing commercial paper (CP) programs in the U.S., Europe and Canada to provide global financing flexibility; proactively renegotiating credit agreements that lowered the cost of Honeywell's credit by $1.7 million annually; issuing notes with a present value benefit, relative to the cost of issuing at current market rates, exceeding $100 million; creating $3 billion in shareholder value and a 30% annualized return through a 2007 stock repurchase program; and funding $4.5 billion in acquisitions.

"Liquidity management starts with good cash management--a system that tracks worldwide cash balances daily and concentrates those balances so that cash can be directed to where it generates the highest returns," notes James Colby, assistant treasurer. "Investment policies are balanced to maximize returns while meeting anticipated liquidity requirements globally."

Effective geographic cash forecasting also minimizes the cost of mobilizing. "For this, our global finance organization and businesses are critical partners," Colby adds. "Our primary function is to enable Honeywell's businesses to be successful, and we can't lose sight of that mission."
Efficient debt management also lies at the core of Honeywell's liquidity management strategy. "Honeywell proactively negotiates committed multi-year credit facilities to backstop CP issuance," Colby says. Honeywell has extended the term of its primary credit facility from 364 days to five years, increased it from $2.0 billion to $2.8 billion, included sub-limits for letters of credit (L/Cs) and negotiated improved pricing.

Honeywell uses the CP markets to finance investments quickly and cost-effectively and terms it out when the cost of liquidity is attractive. Honeywell defines the cost of liquidity as the difference between the spread over Libor at which the company issues long-term debt, and the spread at which it issues CP. The cost of liquidity is sometimes cheap when interest rates are high. By using interest rate swaps, Honeywell can separate the financing decision from the interest rate decision.

"We manage our long-term debt by targeting a weighted average maturity of approximately 10 years, with no more than 20% of it maturing in any single year. We also pay attention to covenants. The best time to negotiate debt covenants is when you don't need them," Colby adds.
Perhaps the least appreciated element of liquidity management is relationship management, according to Colby. "We focus a lot of attention on managing our bank group. We carefully tier our credit facility and diversify credit providers by product capability and geographic location. We track business activity by bank and strategically award discretionary business to our credit providers. Our success also depends upon forging strong working relationships with our businesses and other corporate functions."

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