A key driver of Honeywell’s valuation is its ability to generate, monitor, mobilise and deploy cash while maintaining other sources of liquidity that can be tapped where and when needed. Its banking relationship strategy, together with its debt management strategy, has enabled Honeywell to seamlessly finance $11 billion of acquisitions, $9 billion of share repurchases and $7 billion of dividends during the past ten years while maintaining its A/A2 credit rating through volatile economic conditions.

Jim Colby

Assistant Treasurer

Honeywell International is a Fortune 100 diversified technology and manufacturing leader serving customers worldwide with aerospace products and services; control technologies for buildings, homes and industry; automotive products; turbochargers; and specialty materials.

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As Jim Colby points out, “our banking relationship strategy, which has been consistently applied and communicated over many years, has allowed us to forge long-standing, stable banking relationships and obtain large, committed credit lines under favourable terms.”

In March 2011, Honeywell, with lead banks Citibank and J.P. Morgan Chase, launched and priced its new $2.8 billion five year credit facility maturing in March 2016. Honeywell took advantage of improved market conditions to price its five year deal inside of recent four year transactions by multi-industry peers, while obtaining an extra year of liquidity, with no financial covenants.

Honeywell realigned the composition of its top tier of banks to be better aligned with its anticipated requirements over the next five years by dropping one bank and adding two others. In total, seven new banks were added to the credit facility to diversify further Honeywell’s funding sources and ensure banks that were doing business with Honeywell, but not providing credit, provided some balance sheet support in return for that business. These banks tended to be in parts of the world where Honeywell’s presence was growing such as Asia and eastern Europe. Honeywell’s new bank group comprised 28 banks from 12 countries, with non-US banks providing nearly two-thirds of the credit commitments. Honeywell’s five year bank credit facility strengthened the composition of its bank group and established the credit infrastructure needed to support the growth of Honeywell’s worldwide operations for the next five years and beyond. This type of long-term credit support is critically important in an environment still fraught with systemic credit problems and excessive leverage, particularly with respect to sovereign debt. The diversification of Honeywell’s bank group by bank, geographic region and product capability ensures that Honeywell’s access to credit can withstand regional and bank-specific credit issues. This conclusion was borne out during the recent financial crisis.

Honeywell proactively manages the composition of its bank group, tracks the profitability of each bank and achieves banking diversification by geography and product capability.

Each year leading up to the financial crisis, Honeywell routinely amended its $2.8 billion five year credit facility and extended it by another year. This strategy provided an opportunity to fine-tune the bank group every year by weeding out non-performing banks and rewarding high performing banks. It also ensured that Honeywell had five years to ride out credit market dislocations before needing to renegotiate its core credit facility.

Honeywell’s approach demonstrates best practice as follows:

• The company quantifies the value of the Honeywell relationships to its banks by estimating each bank’s return on risk-weighted assets each quarter.
• Honeywell proactively rebalances the bank group to ensure that credit commitments and bank returns are maintained at sustainable levels.
• Honeywell has rigorously maintained high standards of diversification in its banking relationships by product capability and geographic location.
• State-of-the-art in-house and third-party treasury systems are employed to maintain centralised control over its cash balances and extremely high visibility to global cash balances on a daily basis.
• Honeywell systematically terms out its credit agreements and negotiates covenants aggressively in order to position the company for inevitable downturns in the credit cycle.

Honeywell has developed a strong international reputation for intelligently managing its banking relationships and this entry is a most worthy winner.