The treasury team at Toyota Financial Services (TFS) in Torrance, Calif., is getting a lot of practice at crisis management. They didn’t have much time to relax after their response to the financial meltdown of 2008, which won an Alexander Hamilton gold for liquidity management in 2010, before the largest motor vehicle recall in the company’s history hit in 2009. For TFS, a captive finance company that provides credit for the purchase and leasing of Toyota cars, access to credit at low rates is essential, and the bad publicity and mounting costs of the recall were causing the company’s borrowing costs to increase quickly.
The solution, the project management team decided, was to monetize a good portion of TFS’ balance sheet and use its significant earning asset base to decouple borrowing costs and access to credit from Toyota-specific events and market turbulence. Analysis indicated that unsecured lines of credit wouldn’t truly add liquidity because unsecured credit was finite and adding it for one purpose could limit it for other purposes. And unsecured credit wouldn’t achieve de-linkage from the Toyota name. The solution had to be asset-based.
The next question was whether to seek committed or uncommitted lines. Because TFS wanted its lenders to be obliged to provide funding on demand, subject to eligible collateral, the company picked committed. “This would serve as an additional layer of security, supplementing our existing unsecured lines,” says Wei Shi, vice president of treasury and financial planning and analysis at TFS.
But should the arrangement be revolving or amortizing? Again, the answer was clear. Revolving was more flexible and would ensure access up to the full facility limit over the life of the agreement. “We wanted to be able to efficiently match incremental sources and needs closely in size and time with minimal incremental effort—features not available in an amortizing structure,” explains Krupa Srinivas, manager of treasury capital markets. An amortizing structure ties funding to a specific pool of receivables, while revolvers allow the seller to add new receivables, she explains.
With an eye to size, TFS decided syndicated credit would be preferable to bilateral borrowings. “Given our desire to ‘super-size’ the transaction, a syndicated transaction helps us limit counterparty risk, negotiate fair and consistent terms to optimize economics, and spread fixed costs over a larger transaction,” says Stephen Howard, head of capital markets and derivatives. A syndicate would tap multiple lenders but provide one consolidated monthly bank statement, simplify covenant tracking, make annual renewal easier and provide a single investor report.
To protect the company’s total access to credit, the new syndicate would exclude lenders whose participation might limit their willingness to lend through other facilities. Instead, the strategy was to build stronger ties with other asset-based lenders, Srinivas explains.
The result was TORC, the Toyota Owners Revolving Conduit, a $4 billion transaction and the company’s largest funded transaction ever. “We will still be able to renegotiate collateral composition, the number of lenders, facility size and other key transaction terms at each annual renewal,” explains Chris Ballinger, CFO and group vice president of financial management sciences and global treasury. As receivables are collected and existing debt paid down, there’s capacity to add new receivables, Ballinger notes. Having a large committed revolving syndicated facility allows TFS to draw additional funding in days, not weeks, he adds.
TORC expands the company’s growing asset-backed borrowing strategy. After a six-year absence, Toyota re-entered the asset-backed space with private amortizing conduits in 2010. Next it issued public ABS transactions through the Toyota Auto Receivables Owner Trust shelf. Then came TORC. Each product securitizes assets in a different way and strengthens funding options, Srinivas says.