Divestitures are never easy. Standing up a separate companywithout disrupting ongoing operations, in either the new entity orthe parent, is a major challenge in any circumstance. It's evenmore complex to accomplish when the newly formed company will havemore than $1 billion in revenue and nearly 5,000 employees. Thatwas exactly the challenge the management team undertook when HercRentals spun off from The Hertz Corporation in 2016.

With 270 locations across the United States and Canada, HercRentals is one of the leading equipment-rental businesses in NorthAmerica. Its divestiture from the Hertz car rental company wasannounced in 2014. A new senior management build began in 2015,with planning for the new treasury team starting in March 2016, fora separation that July.

“None of the treasury staff or management team transitioned fromHertz to Herc,” explains Mustally Hussain, vice president andtreasurer of Herc Rentals. “I started in May 2016, and HercHoldings went public on the New York Stock Exchange on July 1,2016. We had a TSA [transition services agreement] with our formerparent for six months, so we had until the end of the year to builda treasury function from the ground up.”

Once Hussain was on board, he began to hire key treasury staffincluding Eric Kim, senior director of planning and capitalmarkets, and Chet Stefanski, director of banking and treasuryservices. Their fledgling department needed to build out processesand operating models for every facet of treasury, as well as a newanalytics infrastructure. Strategically, they needed to develop anunderstanding of the business's capital and liquidity needs anddevelop a financial strategy to meet those needs. All within sixmonths.

“We had some knowledge of how treasury operations worked at theformer parent,” Hussain says, “but they were managing treasury forthe combined business, and much of what they were doing didn'tapply to the new business. One key example is that some of Hertz'streasury operations were decentralized, but we decided it madesense for Herc to centralize all of treasury. We faced somedifferent challenges, which meant aligning the solutions to meetthe business needs. It also meant we were drinking from a firehosefor the first six months.”

Hussain defined three pillars of treasury that needed to bebuilt out: banking and treasury operations, corporate finance andstrategic planning, and capital markets and exposure riskmanagement. In the treasury operations arena, Stefanski started byre-evaluating the company's existing banking relationships anddesigning a banking platform to handle the demands of thecash-driven business.

“As part of the former parent, we utilized nine depositorybanks,” he says. “We gave business to banks near each of our keylocations, so our cash was scattered all over the place. We decidedto consolidate all our cash with two banks.” Disentangling thosebanking relationships was a challenge. “The plumbing on Hertz'sbank accounts was completely intertwined with Herc's own plumbingfor banking portals,” Hussain says. “Getting those separated forthe separate businesses took some time.”

Herc Rentals' treasury team planned a technology infrastructurethat would reduce the amount of time store employees throughoutNorth America spent managing their cash and bank accounts. Theycarefully considered which employees needed access to each bankingservice, limiting access to those with a demonstrable businessneed. This process reduced bank fees by several hundred thousanddollars a year.

Then Stefanski invited the new company's partner banks to comeinto the Herc Rentals back office and make suggestions on how tostreamline treasury processes. “We wanted to create an environmentwhere store employees could use apps to deposit and manage cash,rather than having to drive to bank branches,” Stefanski says. “Wealso wanted to eliminate manual activities for staff. Thisstreamlining enabled employees to be reassigned to other profitableactivities.”

At the same time, Herc Rentalsdeveloped a strong cash forecasting culture. Stefanski had used a13-week forecast in previous jobs and introduced the same conceptin the newly formed treasury function. “We brought in A/P [accountspayable], A/R [accounts receivable], and various otherdepartments,” he says. “We educated them on where they fit in ourcash-setting process and how essential it was for us to haveaccurate information in cash forecasts so we could reduce theamount of cash we carry on hand. In the last two years, since westarted working on this, we've reduced our cash carry by more than50 percent.”

The spinoff's management team also developed a financialstrategy to de-risk its portfolio through capital marketstransactions and strategic investment allocation. “We were startingfrom scratch in this area as well, and we saw a lot of room forredesign suitable to Herc's needs,” Kim reports. “We looked at ourcapital structure, our investment management, and our interest raterisk with a Herc-specific eye.” One key change was taking advantageof the redemption feature in Herc Rentals' more than $1.2 billionof corporate bonds. “We looked at how we could reduce the cost ofdebt over time,” Hussain says. “We were able to redeem some of ouroutstanding notes and replace them at a lower cost using our ABL[asset-based lending] facility. The reduction in the cost of debt—3percent vs. 7.5 percent—has made our P&L stronger.”

The flip side of the funding management improvements wereinvestment management changes. “By the time we were separated fromour former parent, we had better visibility into the benefit planassets,” Kim says. “We recalibrated our investment lineup toachieve significant returns.”

Finally, Herc Rentals centralized financial risk management,most notably management of the interest rate risks inherent in thecorporate debt. Compliance with bond covenants is also a crucialfinancial risk management responsibility, and that too iscentralized.

Hussain says the keys to success in building out Herc Rentals'treasury function were careful planning, flexibility, and hiringthe right team. “Without that team, you just don't get there,” hesays. “There's a tendency for people to reach a certainaccomplishment and then become static. They look at what they'veachieved, and they settle for continuing to do things that way. Butif you want to become best-in-class, you have to continueevaluating yourself. Everyone on the team has to be committed to aniterative process for continuous monitoring and improvement.”

That commitment to continuous improvement enabled Herc Rentalstreasury to end its TSA with Hertz a month early. “Because we werestarting from ground zero, everyone in the treasury function neededto demonstrate an unwavering desire to get things done,” Kimsays.

“Mustally has built a treasury culture where we're neversatisfied with our current status,” Stefanski concludes. “We'realways looking at how we can make processes better. We've come avery long way in the past two years, but there are still things wecan improve. And we have the will to keep moving forward. We'dprobably get bored if we didn't have a new challenge.”