From the November 2009 issue of Treasury & Risk magazine

Gold AHA Winner in Green Strategy

Honeywell's traditional method of providing financing to government buyers of its energy-saving products was threatened by last year's financial crisis, but the company managed to make adjustments that kept the financing tool viable.

When Honeywell Building Solutions recommends energy-saving products to a government customer, it offers to provide financing via energy performance contracts (EPCs), in which the monetary savings resulting from the energy efficiencies produced are used to pay for the equipment Honeywell installs over the life of that equipment. Honeywell guarantees that the customer will realize those savings, and a third party provides the financing, paying Honeywell up front. EPCs have helped Honeywell make several hundred million dollars worth of sales a year. "We've got a business that's been profitable, a customer base that's built up, a stable of financing suppliers, and then the credit crisis hits and many of the banks start pulling out of extending credit," says Michael Suriano, Honeywell's director of corporate and structured finance. "They're looking to save capital, so they're not looking to lend anymore. How do we maintain this level of business that we're committed to our shareholders for in the midst of this credit crisis?" Honeywell's multi-pronged approach started with maintaining its credit rating. The company's long-term debt is rated A2 by Moody's and A by Standard & Poor's. Suriano points out that the company's credit rating is important to the third parties providing the financing because they are relying on Honeywell's commitment that it will make up the shortfall if customers don't realize the energy savings projected. Honeywell is comfortable with that commitment in part because it has a servicing contract with EPC customers. "It's how we assure ourselves that we will get these savings," Suriano says. "If someone doesn't maintain the boiler, the boiler is not going to be efficient and the savings are not going to materialize." In line with financing suppliers' new caution, Honeywell shortened the time frame of the transactions. While the EPCs used to range from 25 to 30 years, "now most of the transactions have to be 20 years or less," Suriano says. "The sweet spot is that 10- to 20-year period." Shortening the tenors of the loans had implications for engineers' decisions on what equipment to use, he notes, since engineers have to either to avoid equipment that takes too long to pay for itself or else bundle it with other equipment with shorter savings periods. Amid growing skepticism about credit ratings in general, Honeywell worked with customers interested in using EPCs to provide all the information about their finances that a potential financing partner might require. It also looked at obtaining funds from the federal stimulus program that customers could put toward projects. And rather than relying solely on the financing suppliers it had been using for EPCs, it asked customers to identify financial institutions that they did business with that might interested in doing an EPC. Those financial institutions would already be familiar with the customer's finances, Suriano notes, but not necessarily with EPCs, so this approach meant that Honeywell sometimes had to do a certain amount of education. As a result of its efforts, Suriano says, Honeywell was able to maintain its revenues from selling energy-savings products to government customers. "There's going to be more and more demand for energy products," he notes. "It is really critical to keep a growing bench of financing sources available."
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