Donna Miskin: Joining us to present the awards and moderate the panel on Liquidity Management is John Konstantos. John has more than 15 years’ experience in financial services and is senior relationship manager of the Business Balance Sheet and Operating Asset Group, which is the part of Northern Trust Asset Management Business focused on corporate and institutional clients. John is responsible for the overall sales and servicing strategy in the East region. John joined Northern Trust in 2001 as a senior portfolio manager in the bank’s corporate and institutional group from Corus Bank in Chicago. John earned his bachelor’s in finance from DePaul University in Chicago and has Series 7 and 63 certifications.
John Konstantos: Thanks, Donna. I think we have a great line-up and they certainly have some great stories to tell. Northern Trust has been a proud sponsor of AHA for years, and we’re happy to continue to support this organization. We certainly feel it’s a great endeavor.
We do not have any direct linkage to Alexander Hamilton like some of our previous moderators do, but we have been around for 120 years. Northern Trust has grown to be a global provider, very focused on our three business segments: wealth management, which has our personal financial services business in it, and, of course, our custody and banking business, which is part of our corporate and institutional business, and then, of course, our asset management business, which I’m a part of right now, and is growing to be an important part of the bank, as well as one of the top 10 asset managers globally, with a real focus on short duration too.
This topic, Liquidity Management, happens to be close to home for me as I did start my career on the banking side. I will note, too, that during this crisis, Northern Trust was one of the banks whose balance sheet was still open for business, so we did support a lot of our clients during this rigorous time.
We’ve learned a lot of lessons during this crisis or maybe re-learned some lessons. One is that liquidity is certainly the lifeline of any company and the question is, will you have liquidity when you need it most? The ones that do can take challenging times and turn them into good opportunities to move ahead of competitors, but you must be well-prepared.
Our panelists here have shown what can happen if you are well-prepared. Does it help to have a strong balance sheet? Does it help to have a great reputation where markets are looking to buy your paper? Of course, that’s great, but that’s not the whole story here. These three great companies were able to differentiate themselves and get access to liquidity markets and what’s really amazing is that they were able to break their own record for access to liquidity during this time.
There are three common threads in their cases. They were open to thinking outside of the box, and not going for the natural sources of liquidity. Second is foresight. Foresight is a lot about preparing for worst-case scenarios. Are you prepared if something like 9/11 happens? And commitment—commitment about executing a business plan, which these three companies certainly showed they were able to do.
Leading up to Lehman and certainly right after Lehman, we were teetering—not the best time to go out into the markets and raise billions for expansion and new products. Credit markets were frozen. There was a breakdown of trust among counterparties. Nobody trusted anybody. Traditional sources of liquidity basically dried up, whether they were banks shutting their doors or having problems, or the commercial paper market, wherever it was.
So, with that set-up, I’m going to turn it over so we can hear exactly how they coped and what they did to succeed. First up will be our bronze winner from Toyota Financial Services, part of Toyota Motor Credit Corp. Presenting for Toyota will be Karen Papazian, director of capital markets, who currently manages the term funding projects at Toyota. Of course, that’s when she’s not gigging with her new Partridge Family band.
Liquidity Management 2010 Transcript
Karen Papazian, director of capital markets, Toyota Financial Services (TFS):
Thank you, John, and good afternoon. It’s apparently obvious by now that I’m not very good at the game of straws. I drew not only one but two short straws, so I’m back here again and, again, I’m representing a broad team within our treasury group, a team from our credit risk, treasury risk management, commercial paper, treasury operation and capital market groups. This entry is representative of their successful work during the last year.
Even in stable times, our liquidity strategy encompasses an intense focus on contingency planning and also on diversification. During the financial crisis, we were able to successfully execute our liquidity strategy by empowering individuals and by connecting our global team. As the financial crisis worsened, we intensified our efforts around contingency planning and focused on our best asset—our people. We empowered them with the transparency of information. In order to do this, we held daily meetings where we distributed updated comprehensive analytics so that each team member had access to, and a clear understanding of, the challenges and options that TFS faced on any given day. This allowed us to tap into the collective wisdom of the team and made each individual a liquidity manager.
In our daily meetings, we looked at three things: Updated liquidity metrics, updated market data and the results of detailed scenario planning, and based on these, developed and/or executed within a portfolio of contingent-funding options as shown on this slide. For example, our structured notes platform: Since 2004, via our structured notes issuance, we had sourced over $11 billion in liquidity options, a strategic reserve.
During the crisis, we exercised the right to extend rather than call $2 billion of term funding. We continued with our strategy that I mentioned earlier today of diversified funding sources. The earlier work we had done in this area paid off in that we were able to maintain access in less impacted markets.
Again, relying on our empowered team of liquidity managers, we tapped into each member’s knowledge and were able to avoid missteps that might spook investors. For example, we relied in part on the Japanese retail market, where we were able to leverage our brand name, and TFS grew to become the largest issuer in 2008 by executing $5.2 billion equivalent and leading the market with a 15.8% share.
Cross-border connectivity magnifies the impact of contingency planning and of diversification. Prior to 2008, we operated with three regional heads in North America, Europe and Japan. As our capital market activities increased, our regional sales finance companies were beginning to compete amongst ourselves. We had different views toward capital markets and were sometimes paying different cost of funds. In response, we expanded our existing Netherlands office in order to improve TFS’ global coordination.
We streamlined our profile and during the crisis, this allowed us to move cash around the world from where it was cheapest to fund to where it was needed and access was too expensive or completely closed. We did this while maintaining a unified face to the capital markets. For example, our European treasury team was a frequent issuer in the European commercial paper (ECP) market. In September 2008, when the Lehman crisis occurred, the ECP market closed. The only local funding option then available for the team in Europe was to pay significantly higher spreads, 200 basis points premium to secondaries, and access the term market. This was so expensive that, in fact, for all intents and purposes, the markets were essentially closed for them.
As a result of our global treasury structure, TFS was able to increase issuance in the U.S. CP market and then lend intercompany to Europe. This improved centralization of global funding operations enabled us to recognize millions of dollars in funding cost savings and to emerge with more flexibility and alternative funding sources available.
In summary, as a result of the skilled execution of our liquidity strategy, we were able to issue $30 billion in term funding while CP balances averaged about $22.5 billion. We executed 20% more year-over-year during the worst financial crisis of the last 80 years.
Our combination of preparedness, teamwork and solid credit quality meant that we survived the crisis without direct government support, without parent company capital and without a fire sale of assets and in doing so, demonstrated our continuous access to funding and liquidity, a core strength of Toyota. Thank you.
John Konstantos: Thanks, Karen. Moving on to our silver winner. You may have heard of this company before. It went to the capital markets for the first time recently. Microsoft. Presenting for Microsoft today will be Anita Prasad. She’s the general manager of treasury and capital management, and is responsible for a host of duties, including corporate finance, capital structure, as well as global cash and liquidity, and recently was focused on Microsoft’s inaugural $6 billion authorization. Anita Prasad, Microsoft.
Liquidity Management 2010 Transcript
Anita Prasad, general manager of treasury and capital management, Microsoft:
I’m delighted to accept this award on behalf of the corporate finance team at Microsoft. We’ve Chad [Becker] and Christy [Barwick] here from our team and without their tireless efforts, this would not have been possible. We also have George [Zinn], our treasurer, and he has been a tremendous leader with great vision and has enabled the several submissions winning from Microsoft treasury today and tomorrow. It’s the vision that the leader sets for the team and then empowers the team to go execute on it, so thank you, George. And we have Lori Jorgensen here also, representing our risk team. So, this is on behalf of all of treasury—I’m delighted to speak for them and try and give you a little bit of insight into what the collective team achieved here.
I’m very happy to be here at a time when there is so much excitement around the company related to the launch of Bing and our success in search and also with the Windows 7 launch, which occurred last week, along with our earnings results that were shared with the market, and as you know, the cost-cutting efforts were tremendous. And so, we think about what the treasury team does to really support Microsoft and how this is a strategic initiative within the company. Everything that we are going to share with you on this specific liquidity project goes directly to support the company and the brand, whether it is investments internally for organic or inorganic growth but more so, really how we help our customers and partners and vendors.
I think you saw an example this morning from our FX team where they were able to go execute on FX hedges for our partners, enabling whatever we accomplished on the capital structure side, the ratings, the ability to execute that really helps us to monetize that credit rating in leveraging our strength in supporting our customers and partners so when we come to another crisis, we will be a much stronger company.
So to showcase the collaborative effort that occurred within treasury and across different teams in Microsoft to make this happen, we are going to borrow a concept that all of us in treasury have been very much engaged in. George put this together a few years ago to build up team spirit and to talk about what we can accomplish together as a team.
This is the view of a dollar and the entire life cycle of that dollar within the Microsoft treasury ecosystem. So we talk about if there is a revenue dollar collected and we book a dollar in revenue, how does it flow in treasury and how does treasury touch the dollar at different points.
The objective is increasing the velocity, how quickly the dollar flows through the system and is in a place where it can be used, and also minimizing the leakage in that flow. So if you collect a dollar in revenue, how do we make sure that we lose nothing through bad debt, bad investment, etc. And this will help highlight all the different teams within treasury.
Credit and collections is the first team that receives the dollar and they are engaged not only in actual collections work, but their contribution really is in terms of understanding customer credit, understanding the local markets that they sit in, because that’s the only function within treasury that is located across the globe and not just based in Redmond.
And as we were working through the crisis and thinking about our capital structure, the credit team was the one that was the proverbial feet on the ground for us, giving us information about each market, what they were seeing, not necessarily the headlines and the press.
And so this team performs a great analysis, gets the dollar, and then we have this entire process of collecting pretty much around the globe from every country in various 120-plus different bank relationships, close to 900-plus bank accounts. And how do we really quickly get all of those currencies in these different bank accounts into a central location where the money can then be utilized for investments, so that’s the function of the corporate finance and treasury operations team.
We then quickly hand it off to the global cash management team that takes care of financial forecasting for the subsidiary needs and is able to predict the amount of money that they will need to keep on handling funding subs.
The rest goes to our capital markets team that makes portfolio investment decisions for the company, risk-hedging decisions, and the idea is that if we do our jobs well, the money will move quickly and we won’t lose too much in the process and the capital market team is able to also grow the money, so that not only do we not lose something through the risk process here, but we’re able to deliver more than a dollar after the return on that investment.
And at the very top, you see the treasury risk group that’s managed by Lori [Jorgensen], who’s here with us today. Their function really touches every single aspect of what treasury does and what the company does. So unlike most treasuries, Lori’s team is responsible not just for your typical risk measurements and insurance policies, but they are also focused on both business risks and financial risks, so full support for the portfolio team and understanding day-to-day financial risks, daily mark-to-market, policy compliance and so on, and also really working with every single business partner to help them understand where they have risks in their business process and delivering goods and services to our customers.
The journey that took us from a 100% equity-funded company to now first-time debt issuers was not just supported by the treasury team. There was a collaborative effort to be ready for the market and for the right opportunity when it arose across the board from [the investor relations group], our PR team, legal, tax, the controllership and business leaders who were really involved in helping us understand their business and then telling the story to the rating agencies.
Liquidity Management 2010 Transcript
We were asked by some of the other presenters here today, “You have $40 billion in cash. Why did you go borrow, and why $6 billion? How does that really make sense?” And I’ve heard some folks say, “Oh yeah, for you, it was super easy. Of course, you would be triple-A rated, and, of course, you can issue at best prices.” Believe me, it wasn’t “of course” at all.
There were a lot of challenges, and the first and foremost was just really explaining that to our executive team, “Why should we borrow? If we have so much cash, why add debt at a time when the markets are in turmoil? How does it make sense?”
And we have an extremely conservative financial policy in the company and to help the executive team understand that it’s not just about cost of capital, because you may reduce your overall cost of capital by adding debt. That’s Finance 101, but does it really move the dial for a company our size and with our balance sheet? Six billion does not move the dial at all. But it really was the exercise of going through that whole process and being prepared for when we actually need to raise capital. We would have done it before. We know exactly how to execute it now. We’ve got all the processes in place. The ratings are taken care of.
And I think it’s an internal joke within our treasury team where, I think, George talks about, you know, we finally are a true treasury team because we are not just investing cash. We actually now know how to go borrow money. We wanted to be a true treasury team. And so we got that done—we got the internal approval done. The process to convince the executive team and do this the right way started way before I joined in 2005, and if you were not thrown out of the exec offices for using the word debt, you were safe. And I think from there to where we are today was a great journey.
On the credit rating side, so this is another example that it wasn’t a slam dunk and it did take a lot of effort from various people within the company to make this happen. A technology company, as most of you know, has never received a triple-A rating and if you talk to any of the rating agencies, there is always a discount if you are in the tech sector. So you may be the best of the best but here’s a discount because you are in the tech sector.
So for us, we truly believed in the fundamentals of our company and everything that we do reflects the highest credit rating, so why shouldn’t we be there? And yet, when we spoke to some of our banking friends and spoke to the rating agencies, the initial discussions were always around, oh yes, we can definitely be a strong AA or a middle AA, and some of them were even at a single A. “You are a tech company; there is risk.” It really was about believing in ourselves, having the conviction and being able to tell that story convincingly to the rating agencies to end up with that result. [Microsoft’s long-term ratings are AAA/Aaa; short-term ratings A1+/P1.]
The benefit of that is not just in the pricing we got and executing our debt, it really is in how we can leverage that now to help our ecosystem of customers, partners and vendors, not just the company itself. So with that, the next step in our journey was really getting debt issued once we had the ratings in place and we started with the CP [commercial paper] program last September, so the end of September was when we got the approval.
This was the other interesting piece because this was right after the Lehman crisis, and what gave us the conviction to still go ahead and test the markets was that we believed in ourselves. We knew where our credit should trade and when the ratings were finally issued and confirmed our conviction in ourselves, it was very helpful then to say, “Hey, this is actually the best time, when there is just so much fear and risk aversion in the market, that this should be the best timing for Microsoft to be out there and everybody will want to own that paper.” And that’s what happened. And so we were able to issue CP at or below Treasuries.
Christy manages our CP program and she’s been pushing the bankers from day one. The other interesting part there was really the bank lines because, as you are all aware, CP requires a back-up bank line. We never had a bank group because we never had debt and so now we had to go talk to the bankers and say, “We need to put a credit line in place.” They said, “We would love to help you. You are our best customer. Anything for Microsoft, except my balance sheet,” because none of them had a balance sheet available at that time.
This was right after the Lehman crisis in September, so it was a very challenging experience to get all of these bankers who really wanted to support us, but they just couldn’t step up to the levels they normally would in good times, and yet we were able to put that facility in place at very competitive rates, with just three basis points all in. We were thrilled to get that done.
It did take a lot of effort—it was not like every banker was saying, “Here, take a check for $5 billion,” which they did in the past. Any time there was a rumor of an acquisition, they would be knocking on our doors and coming in with commitment letters for $5 billion, $10 billion—“I’ll take it all.” And when we really wanted it, they were in a tough place themselves.
Since then, of course, things have started to improve. But it was not a slam dunk, but it made it interesting and more challenging and fun for us to execute. And all through it, we had put in place the discipline of monitoring the credit markets. We have the benefit of having a brilliant capital markets team that monitors $40 billion-plus for treasury. So they are the best of the best, and they knew what they were doing in the fixed-income markets. When we are thinking about issuing debt, instead of calling the big asset managers, the biggest asset manager was just down the hall from us and so asking them about really understanding the buy-side psychology—what are you guys looking for when you are buying short-term or long-term debt today? As a Microsoft fixed-income person, when you look for that investment, what is driving you? What price would you pay for a marquee name but knowing that there is risk in the markets? How much money is on the sidelines?
I think that was a differentiating factor when we finally went to market. We filed our papers in November and declared our intent to issue long-term bonds, but we didn’t issue at that time because that specific day, the markets were terribly dislocated. We just waited for the right time, and the right time happened to be in May, where we were able to get a highly over-subscribed transaction. Most of the good deals were being over-subscribed. I think the good thing was the pricing.
As we went to issue, for about a year and especially in the last few months, every bank we spoke to gave us a pricing. “This is where Microsoft bonds will price.” And if you looked at the prices, the range was about 200 to 300 basis points on any given day and on the best days, it was still 150 to 200 basis points, between the different estimates we were getting. So we knew that although Microsoft is a marquee name and everybody will want it, there was no consensus on where we should price and what our risks were, or if there were any risks in there. And so, we kind of followed the principal of issuing the debt when we could and we could walk away with a billion or the full $3.5 to $4 billion that we wanted and be able to test the market and push the market and, finally, have a visible price out there. This is the price that Microsoft trades at, rather than a range of estimates, so that’s what we did when we issued the bonds in May.
Liquidity Management 2010 Transcript
We wanted to have a transaction where we felt good and we didn’t leave any money on the table in terms of spreads and, at the same time, the investors were able to make some money, too, so they didn’t feel totally squeezed out, and that’s what we were able to achieve. And since then, I think the ratings and the whole process has proven itself by where the bonds are trading today, and the triple-A, of course. We are now one of the four companies worldwide—industrial firms so non-financials—that have triple-A ratings from both the agencies. And the fact that our CDS—there is still no CDS trading in our name, but whenever it’s quoted, it’s at or below Treasuries, so that makes us believe that it was the right time to get out there and have the debt outstanding.
I really want to close with the key lessons for us: Challenging assumptions—and that’s extremely critical, and this is actually the theme within finance this year—to challenge assumptions and challenge the status quo, that’s what helped us to perform in this journey to a better capital structure. Collaborative spirit —this is evident not just in every single activity within treasury, but across finance and across the company. That was really the key driver because it helped us be ready, when we had to execute very quickly without any missteps, so the collaborative efforts across finance and across the business were key to success here.
And, lastly, the opportunistic approach. Now if there is a need to do any large financing—you hear rumors about all kinds of things every single day with our name—but if there was a need to raise $10 billion, $15 billion, $20 billion ever, we would not be testing the market when the market feels, “Hey, they really do need this much capital so now we can extract the price we want.” We have a benchmark in our own name. We don’t need to look at any other benchmarks so with our own paper trailing????, it helps but it’s taken the ground ??????on where we should trade, so I think that was really key for us. Thank you.
John Konstantos: Last, but not least, our gold winner, McDonald’s Corp., from my home town of Chicago. Robert Donovan is going to be presenting the case for McDonald’s. Robert is the vice president of McDonald’s Corporate and he is also the treasurer of McDonald’s USA. His responsibilities include corporate finance, franchisee and supplier business, corporate M&A, cash management and a bunch of other duties as well, which we’ll let him talk about. Congratulations, Robert. Come on up.
Robert Donovan, vice president of McDonald’s Corporate and treasurer of McDonald’s USA:
It’s a pleasure to accept this on behalf of our great brand. It’s a little easier to do something like this than with a Toyota car or Microsoft product. Let me start by telling you a few things about McDonald’s that you may not know. We are one of the largest real estate holders in the world. They are small parcels, but there’s a lot of them. Many of them are undervalued on our balance sheet.
If you visit the Peninsula Hotel in Chicago on North Michigan Avenue, we were paid $50 million for the air rights over that restaurant. If you find yourself in Waikiki Beach and decide to buy a Louis Vuitton suitcase right by the Royal Hawaiian Hotel, we were paid $43 million by LVMH for that site.
Unlike that large U.S. retailer, the U.S. Post Office, we not only close on profitable sites—we close countries, which we did yesterday. We announced we are closing down Iceland with its three stores. We still primarily sell for local coin and currency and we have 5,000 franchisees around the world.
What makes us different than every other restaurant company in the world is the real estate holdings. They pay us not only a percentage of gross sales as a royalty or service fee, they pay us a rent. And so in the three months ended June of 2009, we earned $1.1 billion. Yum Brands earned $300 million. The combined Wendy’s/Arby’s net income was $15 million, and Burger King earned $50 million. So a little bit—that’s the key to McDonald’s balance sheet and P&L.
We call ourselves the McDonald’s System. It is a very unique relationship between the corporation, its franchisees and its suppliers. Those suppliers range from people like Coca-Cola and Cargill all the way down to privately owned independent distribution centers, bakeries, liquid products, protein manufacturers, etc. We are not vertically integrated. We make no money from selling a patty or a bun or a fry to the franchisees. Our franchisees are full-time best efforts. They are not bankers, lawyers or hedge fund operators.
So two announcements in September 2007 led to us, I think, winning this award. The first major announcement was the start of a $15 billion to $17 billion return to shareholders, which will end at the end of this year. We will come in at the upper end of that range. The second major announcement in that month was that our testing of an entity called McCafé was successful. We would begin rolling out around the world, particularly the United States, what we called the combined beverage business. That was going to take an enormous amount of capital.
The 2009 share buyback number, now that we released our third-quarter earnings at $2.4 billion, is now $3.1 billion. In the lead up to the announcement on the return to the shareholders of capital, we did have major discussions with the rating agencies.
Two significant changes took place. One of the agencies downgraded us to A-minus stable. That, therefore, led to our CP being downgraded to A1/P2 and in response to that, we decided that we would also change our dividend from an annual dividend back to a quarterly dividend.
We had a normal business to run. As I mentioned, it’s very capital intensive, not only for ourselves, but for our suppliers and our franchisees. We also had a significant debt portfolio that had maturities coming up over the course of the next few years and we were in the midst—as John said, I was responsible for M&A and was also responsible for divestitures, and so we continued to divest non-core assets. Some of it you may have known in the past—we owned Chipotle, which we took public in 2004; Donatos Pizza; Fazoli’s; from London, Pret A Manger; and Cafe Aroma, which we jettisoned in order to concentrate on McCafés. Latin America—our former CFO did not like the volatility that came with operations in Latin America, so we sold that to our long-time partner in Argentina. To tell you the power of McDonald’s, he just refinanced his debt associated with that purchase. He was split-rated, stand-alone Latin American exposure, BBB-minus/BB. He achieved 10-year fixed rate financing in September of this year at an all-in cost of 7 5/8%.
So, what did we do over the course of the crisis? This chart, I know, is very wordy so above the line are the infamous announcements that took place in the financial community starting in January of 2008, with Bank of America buying Countrywide, and then ending in January of 2009, with the second round of TARP investment into Bank of America. In the course of this, we had three public offerings on the chart, plus one private syndicated loan. And then in the summer of 2009, we did another public offering. The first offering in February 2008, right before Bear Stearns, was the single largest offering in the history of McDonald’s. We did $2.25 billion in fives, tens and thirties. It was eight to nine times over-subscribed. We followed that up in March, the week before the infamous Bear Stearns takeover.
We had wanted to do a deal in Europe but we were stymied by Kraft having entered the market led by Goldman Sachs and other factors. The market was very volatile that week, as you might expect, but we had a reverse inquiry for 200 million euros. We gave that underwriter 48 hours to see if he could bump that up to 500 million. They were able to do that and so we did launch very successfully a European placement in the fall following Lehman and everything else. We all lived through and survived.
We came up with a very creative structure in Japan, raised $400 million equivalent in yen. Half of it was placed with the large money center banks in Tokyo. The remaining half was syndicated out to the small prefecture banks in Japan. And then we came back in January of 2009 and launched another U.S. dollar issue that was oversubscribed eight to nine times. And, finally, the euro in June of 2009, small issuance, $300 million—it was 22 times oversubscribed. One underwriter—when the price came in from 140 over to 110 over—said to us in the middle of the night, “But no one in Scotland will buy this bond.” And we said, “Well, it’s 22 times oversubscribed. We can live without Edinburgh.”
So, again, we are a three-legged stool and so in addition to corporate funding, we had four major privately owned suppliers. They are all U.S.-based but they operate around the world for us in 25 to 30 countries. All of them had their revolvers coming due. This happened in the second half of 2008. Working together with them, we were able to achieve the typical club deal of banks that deal with McDonald’s System around the world. The first two deals here were renewed for five years each. Each of those companies, if they had a rating, would be about a BB. The third one achieved a four-year revolver instead of a five-year revolver. That company would be split-rated B+/B. And the fourth one this spring achieved a three-year revolver instead of a five-year revolver, but again that company is a BB-minus/BB entity.
Liquidity Management 2010 Transcript
And I’ll remind you, we’re not vertically integrated. Where the corporate financing totaled in excess of $4.4 billion on the previous slide, our suppliers accessed in excess of $2 billion during this time.
So, we are heavily franchised in the United States: 87% of the 14,000 restaurants are franchised, while we had, as I said, in September of 2007, announced the roll-out of the CBB, which is the combined beverage business under the brand McCafé.
We had normal operating business of new restaurants, rebuilding old restaurants, slimming down our company-operated restaurants, and then the bottom one, SBOs, are sales between operators. There is a secondary market: approved McDonald’s franchisees around the world are bought and sold almost on a daily basis. The operators in the U.S. last year borrowed in excess of $1.5 billion in order to achieve these transactions. Yesterday if you were a McDonald’s U.S. franchisee, you could borrow seven-years fixed at 7% and if you wanted to go floating, you could borrow all in at 4.7%. There is no guarantee from McDonald’s Corp. There is no first loss from McDonald’s Corp.
So, I hope you have enjoyed McCafés. This is what they look like in the United States. There are 12,000 of them. The initial date internally for launching national advertising was May 1st and we actually launched it on May 6th, so we lost five days to financial turmoil. If you went to McCafés in Australia or in Europe, you would also be able to get breakfast, lunch and dinner pastries, in addition to the espresso-based drinks. Since we started our coffee rejuvenation in the United States, we tripled our market share in the coffee business.
And so finally I’ll end up—you know, we try to convey—we have a working team like all corporations—a SWAT team that includes treasury, legal, tax, accounting, investor relations and others. But we need to convey to the broader array of professional departments in our company how we are all interrelated and independent, and so we’ve come up with this slide that we use internally showing what we call the McDonald’s System Financing Continuum. And so with that, I thank you again for the honor. We have a great brand. It’s one of the world’s most valuable brands. We trade in the capital markets closer to AA, whether that’s in euros, yen or even in U.S. dollars, where we trade on top of Wal-Mart. Thank you very much.
John Konstantos: Okay. I’m sure there are plenty of questions so why don’t we open it up to the audience for questions. I’ll kick-start off one here while everybody is thinking about their question. I’m kind of curious in terms of your bank relationships. How has this credit crisis impacted your relationships with your bank? And then if you could talk about it a little bit—was your bank’s credit rating important to you as you sat on the other side of the table after everything that was going on? Was that important and because, obviously, they are a counterparty in different areas, whether it’s FX or derivatives or whatever it is. Can you comment a little bit about that?
Papazian, Toyota Financial Services: I guess we look at it from two points of view. One, we have credit facilities in place with our banks and, obviously, that’s pretty important from a relationship point of view. We went through a renewal last year that was a little bit different than the ones we had seen in the past. Negotiations were a little more difficult but we were successful so, obviously, we do have a strong network of banks that support us. And specifically focusing on your question, I believe, about credit ratings of our banks, we are out in global capital markets issuing in different currencies, different structures. We’re swapping back to floating dollars so we have a lot of derivatives on our books. We actually, I believe, we’re an early adopter and have reciprocal collateral agreements through our ISDAs with our banks, so we do monitor credit ratings but are well-positioned so that we wouldn’t be hopefully surprised by anything in a negative way.
Donovan, McDonald’s: The credit ratings have always been important. I don’t think the crisis really changed it. It certainly was—I was fascinated by Adobe’s presentation this morning. It clearly brought the monitoring aspect of it to a new level of review. I would tell you that the ratings are a point in time. Often I’ll date it and, therefore, probably the credit default swap market is probably something that we look at a lot more but, John, if you’re going to be relationship-oriented, if you’re going to demand that the banks are relationship-oriented, you know, it’s a very fine line between overreacting or maintaining your fiduciary responsibility to your shareholders, and we take that very seriously. And, you know, it’s a lot easier in the U.S. to monitor bank credits than it is in 107 countries around the world.
Prasad, Microsoft: So, I think for us when you’re talking about credit ratings with the banks—there is just one data point—you’ll hear some presentations from the rest of our team tomorrow where we have put together this whole 360-degree review of risk and they’re taking into account not just the credit rating of the bank but the CDS spreads for these banks every single day, looking at various internal metrics that we assign to these banks, looking at every single data point that we can find out there to assess the risk of the bank. So it’s not just ratings because we all know the issues we have with rating agencies and the timeliness of their updates. And we had this 360-degree monitoring process in place prior to the crisis and it was very helpful in managing through the risks, and those reports are updated every week, and every single month, there’s a deep dive. It looks at counterparty risks not just in a single dimension. We look at every single relationship we may have with that bank, whether they are our customers too, so any receivables we have with them; any deposits we have in place; investments we may have made in the bank and so it is every single aspect of that relationship. In addition to that, of course, along the lines of ISDAs, we have very strong ISDAs and we have one big collateral, which is in our favor and we are able to manage our risk, in addition to risk monitoring, which is great, also looking at the ISDAs.
Konstantos: Thank you.