As the global business environment becomes riskier and riskier, the job of the corporate treasurer grows ever more complex. As companies nurture relationships with customers, suppliers, and employees in far-flung parts of the world, hedging currency risks becomes increasingly complicated. When volatility appears in global financial systems, mitigating interest rate risks and ensuring uninterrupted access to funding become more challenging. And as regulations on financial services and other industries continue to evolve around the globe, treasurers are tasked with staying abreast of a wide range of geopolitical developments that might affect their organization’s cash flow.
For these reasons—and many more—successful treasurers are no longer content to do their jobs in the same way they did in the past. Winners of the 18th annual Alexander Hamilton Awards in the category Cash Management & Liquidity Optimization illustrated this point. And this year’s winners in the category FX & Financial Risk Management, sponsored by Strategic Treasurer and Kyriba, take management of complex financial risks even further.
The treasury team at Honeywell International also understands the importance of working closely with other functions—and with other companies. Jim Colby, assistant treasurer at Honeywell, encourages his staff to regularly venture outside their comfort zone. “There are a lot of projects in the company that involve different areas of finance that need someone to step up and take the lead,” he says. “I always encourage my staff to take responsibility and become the go-to person.”
That mind-set is one reason why Colby stepped up when he saw the prospective effects of the Dodd-Frank Act on derivatives end users. “There were unintended consequences of Dodd-Frank that needed to be addressed,” he says. “Somebody had to do it, and it might as well be us.” Colby collaborated with his company’s government relations and legal staff. Although he wasn’t initially comfortable with playing a high-profile role in national politics, he took his argument to Washington, D.C. He thinks the role he played in the Dodd-Frank debate reflects the evolving nature of the treasury function.
Continuous Innovation in Funding Tools
As the North American economy climbed out of recession over the past few years, the auto industry experienced a dramatic rebound. One major automaker, Toyota, saw its U.S. sales volume increase by 47.1 percent in fiscal 2013 over fiscal 2012. This has increased the company’s need for access to funding—a challenge that falls to Toyota Financial Services, the captive finance arm of Toyota Motor Company. “Since the early 2000s, Toyota Financial Services has more than doubled in size,” says Ted Zarrabi, director of balance sheet strategy for Toyota Financial Services. “As a growing company we look to address our funding needs across a variety of diverse markets and investors.”
Toyota Financial Services issues a good deal of commercial paper and floating-rate bonds tied to the three-month LIBOR, but the combination of ongoing growth and incoming regulations led the captive to look for alternative sources of funding. “To ensure that we’ll have continuous access to funds, we want to diversify across multiple sectors and across a broad array of different kinds of investors,” Zarrabi says. “The diversification strategy must be a two-pronged approach: financial instruments and investors. Both are equally important and provide benefits to both the company and the investors.”
Because the company was already successfully using daily collateral exchanges in the derivatives trades it uses for risk management, the treasury team knew it would be able to leverage the same capabilities if it rolled out structured notes to fund its parent’s growth. Nevertheless, the team faced a number of challenges. They evaluated their banking relationships, their distribution channels, and market demand, looking for structure types that would simultaneously meet internal funding needs and prove suitable for retail and institutional investors.
The treasury team formed working groups with representatives from all the different functions that the structured notes would impact. Legal teams from both Toyota Financial Services and its prospective banking partners reviewed prospectuses and underwriting agreements. Accounting managers helped figure out the impact the notes would have on the balance sheet, and the operating team was involved because they have to be comfortable with booking and reviewing the trades. The risk management team participated, determining the potential interest-rate and counterparty risks. And front-office groups were involved because their knowledge and contacts are crucial to building relationships with the banks that issue structured notes.
In fact, as Colby cited in his testimony to the House and Senate Committees, a survey by the Coalition for Derivatives End Users estimates that a 3 percent margin requirement could reduce capital spending among S&P 500 companies alone by up to $6.7 billion and could cost 100,000 to 130,000 jobs. “Cash deposited in a margin account cannot be productively deployed in our businesses and therefore detracts from Honeywell’s financial performance and ability to promote economic growth and protect American jobs,” Colby told the Senators and House members.
The debate on margin requirements has yet to be settled, but decision-makers are listening to Colby and the other treasurers who stepped up to represent corporate end users of derivatives. “Because we understood how the laws were going to impact what we do on a daily basis much better than a lobbyist or government relations specialist, we were in a position to influence the debate in Washington,” Colby says.
Ford treasury also established a process for escalating any problems that the model indicates with a specific institution. Every day at 5 o’clock, senior representatives from the treasury leadership team, treasury operations, risk management, and trading meet to jointly review a matrix of issues that the model has highlighted. “We look at the number of sigma, or standard deviations, that an indicator has moved from its statistical mean, and we look at the number of consecutive days in which it’s moved,” Tosh says. “If all of a sudden we have a move that’s five sigma or more, that’s a pretty clear indication that something is going on with that counterparty, and we will escalate that issue to the corporate treasurer on the same day. If we have a smaller move, such as a two-sigma move, we’d have to see that for several days in a row before we would escalate it to the treasurer. But there are other levels of movement that result in an issue being escalated to a lower level of management.”
Even when there’s an issue with a metric, Ford might not stop working with the counterparty. “We are a very relationship-oriented company,” Tosh says. “The relationships we have with our credit-line banks are extremely important. What this tool is intended to do is to drive a conversation through which we evaluate our options for reacting to the information. We have a predefined playbook that drives the conversation, and then that conversation is conducted in the context of the overall relationship with the institution, as well as a more senior assessment of how large we think the near-term clear and present danger is.”