Honeywell has a significant—and expanding—presence in China. Butmanaging a treasury function there requires creative thinking.“China is a very unique market,” says Lawrence Chang, Chinatreasury manager for Honeywell. “Its banking system is differentfrom those of other countries. We have to understand the banks'mind-set and find a mutually beneficial way to enlist theircooperation, while at the same time controlling risk.”

These were top-of-mind considerations when the globalconglomerate looked at revamping its credit facilities in thecountry. Its Chinese businesses are cash-rich, but many requirebank guaranties—such as warranty bonds, prepayment bonds, andperformance bonds—as well as bank acceptance drafts, which are astandard method of payment within the Chinese auto industry.Historically, each of Honeywell's four legal entities in Chinamaintained a separate line of credit with a local bank branch toissue these agreements.

Maintaining four separate lines of credit was inefficient, Changexplains: “From an operations perspective, we had four individualentities going through the same process with four different Bank ofChina branches. They would each negotiate bank fees individuallyand then go through the same internal approval and legal reviewprocesses.” There was a lot of duplication of activities in thisenvironment.

Moreover, Chang and hiscolleagues perceived that Honeywell was missing an opportunity toleverage its bargaining power at the corporate level. “In Chinesebanks, each branch operates very autonomously,” he says.“Individual Honeywell legal entities were negotiating with theirlocal Bank of China branches. By the time they notified us of anagreement, the contract would already be signed. In addition,without the presence of a country relationship manager, ourcommunication with respective Bank of China branches wasinefficient and time-consuming. We felt that Honeywell treasury, asa whole, could be getting a better deal by negotiating with asingle Bank of China relationship manager.”

Thus, Honeywell's treasury group set out to develop an umbrellacredit facility that all the company's legal entities in Chinacould benefit from. Chang started the project by evaluating whichChinese banks could provide a facility structured in a way thatwould comply with Honeywell's credit policy and be managed by thecompany's regional center in Shanghai, while centralizingnationwide relationship management.

In addition, the treasury team needed to understand how theprospective umbrella facility would be reflected in the creditreference system for the People's Bank of China (PBOC). China'scentral bank requires all commercial banks to report theircustomers' credit events, then banks can log into the system tosearch companies' credit records. “Honeywell is unlikely to have adefault,” Chang says. “Still, we needed to structure the umbrellafacility so that if there was a default, it would go on the PBOCrecord for the participant rather than the holding company thatsigned the bank facility agreement.”

The Bank of China Shanghai branch met all of Honeywell'scriteria. The bank had some prior experience establishing this typeof umbrella line of credit with its multinational corporate andmajor state-owned customers, although the practice is rare withinBank of China. Structuring the Honeywell facility requiredcustomization and extensive negotiations to ensure that all aspectscomplied with the company's treasury policy and Bank of China'scredit policy. Moreover, the Shanghai branch had to work with otherBank of China branches to integrate the existing lines of creditheld by Honeywell's four business groups into the single umbrellafacility.

Perhaps even more challenging was the internal communicationneeded to convince Honeywell business units to participate. Eachparticipating group was required to sign a commitment that itwouldn't apply for a separate, individual banking facility.

“We put a lot of effort into persuading our internalstakeholders to support this idea,” Chang says. “We explained tothem that although they were losing some control of their line ofcredit, the umbrella facility would be mutually beneficial. Theindividual entities would no longer have to go through the hassleof legal reviews and negotiations. We would be able to reduce bankfees by negotiating at the corporate level. And we would reducetheir security deposits with the banks. Before this project, ourbusiness groups would sometimes have to put 100 percent cash of abank guaranty into security deposit. That money would be stuck withthe bank for the lifetime of the guaranty. Another advantage wasthat we would be able to leverage upon the country relationshipmanager to influence respective Bank of China branches.”

These extensive and deliberate communications were key to theproject's success. “Through our internal and externalcommunications, we were able to build up trust,” Chang reports.“Without trust between Honeywell and the Bank of China, or withoutthe trust between treasury and all the stakeholders withinHoneywell's finance staff across China, the umbrella creditfacility wouldn't have happened.”

By explaining the projected benefits, and enrolling the supportof senior leadership within Honeywell, Chang's group convinced 20business units to participate in an umbrella facility worth CNY1billion. “This amount provides us comfortable headroom toaccommodate our expansion in China,” Chang says. The treasury groupallocates portions of the facility to participants based on theannual forecast of each business unit's finance leader, and Bank ofChina Shanghai distributes the credit limits to other Bank of Chinabranches based on treasury's allocations.

“Sometimes Company A may have stronger business growth, and wecan easily adjust the facility to accommodate that,” Chang says.“Each entity maintains a local Bank of China account. Bank of ChinaShanghai can charge the bank guaranty fee to our centralizedholding company, which is the entity signing the bank facilityagreement. Then Bank of China Shanghai can allocate the facility tothe appropriate branch for each participating Honeywell entity.Upon the implementation of the umbrella credit facility, we wereable to release our security deposits with Bank of China andcontributed around US$630,000 incremental interest income peryear.”

Not only has the umbrellafacility improved the company's operational efficiency, but it hasalso reduced risk. “Before, it was possible that an entity mightsign up for a product or service that corporate treasury was notaware of,” Chang says. “Business units that may not have had asmuch specialized expertise in these areas were reviewing commercialterms and legal terms, and negotiating with banks. This incurred arisk to Honeywell as a group, even up to the parent company in theUnited States. This project mitigated that risk by centralizingnegotiations and approvals with corporate treasury and releasingour business finance teams to focus on delivering on their P&Lcommitments.”

Ultimately, Chang sees this project as exemplifying the thoughtleadership role the treasury team can play within an organization.“Treasury is a field that requires continuous challenge of thestatus quo,” Chang says. “We need to always be identifyingpotential risks and opportunities, influencing stakeholders to makenecessary changes. The umbrella credit facility has provided suchgreat benefit that our finance organization places more trust incorporate treasury. When treasury-related issues come up now, theyconsult with us instead of just going forward on their own.”

2017 Alexander Hamilton Awards — Best Practices inRestricted/Emerging Markets

• Silver:  Pfizer | Transition to the CNY
• Bronze: World Vision International | A Treasury with Global Vision