From the November 2010 issue of Treasury & Risk magazine

Gold AHA Winner in Liquidity Management

Building a Better Model: Toyota


When the economic crisis and vicious credit crunch of 2008 hit, Toyota Financial Services (TFS) moved adroitly to tap the friendliest funding sources, reassure lenders and investors, and win an Alexander Hamilton bronze award in 2009 for its success in liquidity management. So why is TFS back in the winners' circle again, this time for a gold award for liquidity management? Because the crisis exposed weaknesses in its liquidity risk models, and TFS went to work to build a better mousetrap, explains Amit Shroff, head of financial planning and analysis and market risk for the Torrance, Calif., auto finance company.

The tool was under development but already useful when Toyota was rocked by a series of automobile recalls in 2010 that shook investor confidence and temporarily shut TFS out of the term funding markets. Armed with more sophisticated metrics that embraced the whole balance sheet and used scenario analysis and dynamic risk management metrics in addition to static ones, TFS liquidity managers were able to move quickly to diversify funding sources. TFS launched its first asset-backed commercial paper program, re-entered the market for longer maturity asset-backed securities, and increased and extended (but did not use) bilateral lines of credit to maintain adequate liquidity to support car sales.

Moreover, the clarity and comprehensiveness of the new model helped to assure nervous executives at the parent company, as well as investors and credit rating agencies, that TFS could assess precisely its liquidity risk and take appropriate measures to mitigate it, Shroff explains. "We developed a panoramic liquidity risk view that enabled comprehensive risk assessment, optimal decision-making, and served as a communication platform with internal and external stakeholders," he says.

"Having liquidity was a huge advantage in the crisis, but it was only the beginning," notes Chris Ballinger, group vice president, CFO and global treasurer of Toyota Motor Credit Corp. "Having the right liquidity framework to communicate our position and instill confidence at our parent allowed us to fully capitalize on that advantage."

The successful 2008 liquidity risk management methodology relied on simple static metrics and cash flow modeling. The 2010 enhanced methodology substitutes robust liquidity risk scenarios, flexible assumptions and rapid critical analysis. In 2008, liquidity risk management was delegated to market-facing front-office teams. In 2010, that responsibility has shifted to a new middle-office function within a reorganized treasury risk management group, linked into treasury front-, middle- and back-office teams, FP&A and sales, Shroff reports.

Nine key metrics are used to get a more comprehensive view of exposures and to support more dynamic scenario modeling. Front-office experts provide potential market scenarios and how they might impact TFS' access to unsecured and secured debt markets, while sales and asset origination teams come up with financing volume projections. The results are displayed on dashboards that present the liquidity metrics and historical trends graphically, in one color-coded page for quick reading.

The new model uses what Shroff calls guard rails to alert funding strategists when they approach risk tolerance levels with a particular funding source in light of particular scenarios that the system is using. It's all based on complex multi-scenario stress analyses and forecasted contingency needs. Recognition of liquidity stress points triggers a contingency plan built to shift funding and relieve stress, he says.

The tool is used by TFS treasury, by the TFS and Toyota corporate asset-liability committees, and in discussions with Toyota corporate executives, investors and rating agencies.

The new tool has resulted in funding decisions that TFS probably would have made differently under its 2008 system, Shroff says, declining to discuss specific cases.

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