As David Johnson, Region Manager, Sales and Trading, states, “in recent years the size of this multi-year credit facility had grown to $13 billion, one of the largest in the US.”

In 2012 the initial implementation of Basel III was on the horizon and the market had yet to fully understand the ramifications of these changes. While additional guidance was provided from the Basel Committee in January 2013, banks continued to have drastically different views on the actual impact, but it was assumed Basel III’s liquidity coverage ratio (LCR) would influence the amount of credit banks would be willing to commit to corporations such as TFS.

The LCR requirement from Basel III has two components: firstly, banks would be required to hold excess top quality capital, triple the historical amount; and secondly, these high quality liquidity assets would have to meet a stressed liquidity scenario. Basel III shifted its ideology from assuming 100% of committed lines would be drawn upon, to 30% in its January revision, yet the impact from extended credit was clearly evident.

With some of its credit-providing banks facing uncertain regulatory pressure from Basel III, TFS developed a strategy that included individual discussions with each bank to fully understand its situation. This allowed TFS to negotiate pre-committed bilateral credit agreements prior to a full re-syndication of its existing credit facility.

As Johnson points out, “these unique pre-committed agreements allowed some banks that were not able to participate in the full re-syndication to maintain their credit relationship with TFS and continue to have access to the treasury wallet. Additionally, we benefitted by maintaining a broad banking group while diversifying and growing our overall credit commitments.”

Upon receiving pre-committed credit agreements from most of the previously non-extending banks, TFS understood who was making a declaration that they supported Toyota through varying market and regulatory cycles. Furthermore, these and other private bilateral agreements allowed TFS’s total credit amount to increase while at the same time decreasing the syndicated credit facility from $13 billion to $11.5 billion. The cost savings of this re-syndication are approximately $6.5m annually.

The redesigned strategy of actively managing credit relationships in both a public syndication and private bilateral agreements proved to be a ‘win-win’ on many fronts:

• TFS was able to grow its total credit commitments at lower undrawn costs.
• Provided non-extending banks an opportunity to declare their commitment to TFS in the form of bilateral agreements, thus continuing to have access to the treasury wallet.
• Allowed TFS to maintain credit with banks that would have left the relationship upon a full re-syndication.
• Allowed TFS the opportunity to re-syndicate its existing $13 billion credit facility into a more manageable $11.5 billion facility with fewer banks.
• Alleviated pressure for lead syndicate banks as the pre-committed credit lessened the overall need in the syndicated credit facility.

Johnson concludes: “The unique solution we developed was to approach each non-extended bank on a private, one-on-one basis and proposed a ‘pre-committed bilateral credit agreement’. These commitments would become activated upon the termination of the existing term facilities and provided an alternative to the syndicated credit commitment.”