Considering worst-case scenarios has long been part of Honeywell’s philosophy when it comes to bank relationship management. “We have always prepared for the worst in our credit negotiations,” comments Jim Colby, Assistant Treasurer. This approach has proved its worth in the current challenging market and has led to substantial benefits for Honeywell.
In developing a bank relationship management strategy to weather all eventualities, Honeywell has focused on two key areas: diversifying its pool of banking relationships and achieving the highest possible visibility over cash balances.
The focus on diversification has led Honeywell to build a pool of 23 core credit banks. Of these, J.P. Morgan and Bank of America are the primary cash management banks in the US, and Deutsche Bank and Citi are the primary international cash management banks. The 23 banks are divided into four different credit tiers.
The top tier credit banks are the joint lead arrangers of the global credit facility; the second tier banks are agents in the global credit facility; the third tier banks have strong relationships with Honeywell in a particular region or product category and the fourth tier banks have strong local relationships with Honeywell in certain parts of the world. In order to adapt to changing market conditions, Honeywell reviews these tiers on an ongoing basis.
“We work with banks that are not earning returns commensurate with the credit provided to try to find ways to do more business together.”
“We work with banks that are not earning returns commensurate with the credit provided to try to find ways to do more business together,” says Colby. “Sometimes this is successful, but from time to time we either exit the relationship or the bank steps down to a lower tier of credit support. Conversely, if a bank is earning an extremely high rate of return, we will ask for a higher degree of credit support.”
Meanwhile, cash visibility has been achieved using a combination of SunGard’s treasury workstation and internally developed solutions. These have enabled Honeywell to achieve daily visibility over more than 95% of its cash balances worldwide.
Another important aspect of Honeywell’s strategy is the aggressive negotiation of covenants. “We took great pains to avoid financial covenants and change-of-control covenants, even though they were in vogue and many of our peers agreed to them,” comments Colby. “It is hard to put a value on good loan covenants, but they are certainly quite valuable during a credit downturn.”
As a result of its overall bank relationship management strategy, Honeywell has reported significant benefits. These include securing a five-year $2.8 billion credit facility, on which J.P. Morgan and Citi are lead bankers and 23 banks participate in total.
The facility expires in 2012 and has annual extension options and a $700m sub-limit for letters of credit. Meanwhile, Honeywell has avoided making any losses on its investment products during the credit crisis and has realised interest cost savings of $36m on $8 billion of total debt as a result of securing advantageous financing terms.
“By having a consistently strong, supportive bank group, Honeywell has had the luxury of negotiating financing on favourable terms and waiting until market conditions are favourable to issue long-term debt,” concludes Colby. “This downturn has been particularly rough, but thanks to rigorous planning during better times and careful managing of our bank group, we have the credit support that we need to get us through these difficult times.”
