Honeywell made it a priority to de-leverage its balance sheet during the recession and, between 30th September 2008 and 31st March 2010, paid down $1.6 billion of debt, while reducing short-term debt and current maturities of long-term debt by $1.9 billion. Despite these efforts, a decline in the value of Honeywell’s pension plan assets, coupled with a reduction in the discount rate used to determine the present value of Honeywell’s pension liabilities, led to a $4.5 billion increase in Honeywell’s unfunded pension liability during 2008 and 2009 and a large increase in the company’s ’adjusted’ debt balance.
As Jim Colby, Assistant Treasurer, Honeywell, points out, “The company also faced a looming $1 billion debt maturity on 1st March 2010. The capital markets financing window was wide open and very receptive to high-quality corporate issuers at historically attractive long-term rates (4.50% on ten-year financing for Honeywell).”
Honeywell decided that the first priority for its 2010 financing plan was to deliver on its commitment to show continued improvement in its credit metrics by paying down debt, rather than terming it out. The challenge was to do this while mitigating the risks of carrying short-term debt balances.
In late 2009, Honeywell began investigating the possibility of issuing commercial paper (CP) in the nine to 12 month maturity bracket. Honeywell asked its CP dealers to send out some feelers to gauge investor interest. At the same time, Honeywell amended its CP documentation to permit an extension of eligible CP maturities from 270 to 365 days. Honeywell was ultimately able to ladder CP maturities in the three, six, nine and 12-month brackets, at an average yield of approximately 43 basis points.
“Honeywell has been able to refinance debt maturities while lowering interest expense and mitigating refinancing risk.”
Honeywell also began looking for ways to find additional CP backstop capacity from non-traditional sources. Quite surprisingly, the preferred solution turned out to be the trade accounts receivable (TAR) securitisation market. Honeywell was able to not only extend the maturity of its securitisation facility to two years, with an annual extension option, but also improve pricing. This provided a credible alternative to traditional term bank financing.
As Colby explains, “The reason that this was surprising was that the asset-backed securities (ABS) market was hit very hard by the financial crisis and it was extremely difficult for corporations to roll-over securitisation facilities in 2009.” The primary benefits of Honeywell’s debt strategy were:
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Maintaining credit ratings in a fragile credit environment by refinancing $1 billion bond maturity, while preserving the ability to further de-leverage in 2010 and reducing CP roll-over risk.
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Increased credit capacity by strengthening ties with core relationship banks and increasing advance rate of the TAR facility. Strengthened banking ties and credit relationships will serve Honeywell well when it renews its $2.8 billion CP-backstop credit.
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Lowered 2010 interest expense by $46m by improving pricing on the TAR facility and refinancing term debt in the CP market.
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Development of new markets for term-CP and multi-year TAR facilities to provide new sources of liquidity in the future.
Royal Bank of Canada became Honeywell’s new agent on the TAR securitisation programme. Goldman Sachs and Bank of America Merrill Lynch were instrumental in opening up the long-dated CP market for Honeywell.
Colby reflects, “Honeywell has been able to refinance debt maturities while lowering interest expense and mitigating refinancing risk.”
