Photo of Nicholas Ro, Wei Shi, Jeff Carter and Jiming Chen collecting on behalf of Paul Boodee.

Despite the ongoing credit crisis and the Toyota product recalls that occurred prior to 2011, the company managed to rise above adversity and remain innovative while still providing uninterrupted, costcompetitive funding for its organisation, supported by an enhanced risk management framework. As it braced itself for 2011, TFS built upon the experiences of past crises to position itself for a changing regulatory environment and volatile global market.

The 2012 Top Treasury Team Award went to the Treasury Team at Toyota Financial Services

‘The Passionate Pursuit of Perfection’ is more than just a Lexus slogan. It is a mantra shared across all of Toyota. This is especially true for Toyota Financial Services (TFS) and its US treasury team based in Torrance, California. Despite the ongoing credit crisis and the Toyota product recalls that occurred prior to 2011, the company managed to rise above adversity and remain innovative while still providing uninterrupted, cost-competitive funding for its organisation, supported by an enhanced risk management framework.

As it braced itself for 2011, TFS built upon the experiences of past crises to position itself for a changing regulatory environment and volatile global market. Treasury’s goal of maintaining its position of competitive strength by staying ahead of the curve and ahead of its peers would be achieved by engaging associates cross-functionally, by improving operational efficiency (at minimal cost) and by fostering internal innovation through delivery of the following objectives:

• Significantly reduce counterparty credit risk.
• Reduce liquidity risk and enhance balance sheet flexibility with new diversified funding sources and improved time to market for asset-backed issuances.
• Ensure affiliates that are located in developing/strategically relevant markets have stable funding sources.
• Reduce the enterprise and operational risk of managing the compliance-related requirements of TFS’ numerous deal documents and establish readiness for potential new regulations.

TFS was the first corporate to initiate daily collateral exchanges with zero thresholds and same day settlement with its counterparties.

Continuous improvement

“Treasury’s approach is driven by the Toyota Way, or guiding principles that emphasise a culture of ‘Kaizen’, or continuous improvement, as well as respect for people,” says Wei Shi, Vice President, Treasury, Finance and Analytics at Toyota Financial Services. This approach fosters cross-functional collaboration and supports leveraging technology to deliver internally-developed solutions, which has helped establish the treasury’s current strategic position. Kaizen therefore played a key role in the success of many projects that enabled the team to meet its 2011 objectives.

“For example, TFS was the first corporate to initiate daily collateral exchanges with zero thresholds and same day settlement with its counterparties. Through associate engagement and by leveraging our treasury technology, TFS transformed a previously manual monthly process to a daily, automated, paperless process. Consequently, resource requirements were reduced from eight to three and total processing time was reduced from nine hours per day to one hour, truly exemplifying our Kaizen culture,” explains Shi. Furthermore, the company’s valuations team achieved 100% validation and 99% internal valuation of derivative deals through the implementation of Numerix and development in Wallstreet Suite (TFS’ system of record for debt, derivatives and investments). By doing this, the company succeeded in eliminating its dependence on counterparty values.

The front office of TFS’ treasury played its part in this enhancement project. The liquidity that was released through the new daily collateral exchange process led TFS to leverage Bloomberg’s FX forecasting models to improve cash flow modelling capabilities, allowing optimisation of its short-term investment portfolio. Separately, the front office also partnered with several internal and external parties to develop and execute TFS’ first ever asset-backed revolving conduit transaction, as well as becoming the first corporate to deliver a unique, $3 billion issuance platform that converts TFS’ assets into rated, registered ABS securities and strengthens TFS’ working capital profile.

Following the success of this approach, inter-company liquidity solutions are under evaluation for other emerging market affiliates.

The middle office designed and developed a compliance document database that leverages SQL Server and Microsoft SharePoint technologies. This allows paper documents to be stored digitally and relevant details and information catalogued appropriately in the company’s database. This solution facilitates the query of representation/warranty requirements and covenant sign-offs.

Elsewhere, in collaboration with its international and local treasuries, TFS established an innovative, sovereign risk protected inter-company funding facility for its Brazilian affiliate. According to Shi, “Following the success of this approach, inter-company liquidity solutions are under evaluation for other emerging market affiliates.”

Less is more

By leveraging technology and maximising associates’ strengths and core competencies, treasury has built highly effective — yet cost effective — solutions and capabilities to weather future storms. “All of the solutions developed and implemented by TFS were completed on time, on budget and with minimal licensing, consulting and development costs”, says Shi. As envisioned, TFS treasury is now strongly positioned for the spate of regulations coming down the tracks and to deal with the unpredictable financial market. This is due to the achievement of its plethora of goals, and the significant benefits of its successful projects and solutions. These include:

• Counterparty credit exposure has been reduced from $1,000m to less than $100m through the implementation of a new highly efficient daily collateral exchange process.
• TFS Treasury can support profitable asset originations, regardless of capital markets stress, given improved balance sheet flexibility provided by innovative funding tools like the new asset-backed revolving conduit (TORC) and retained asset-backed securities (ABS) portfolio.
• Debt compliance documentation (representation and warranty certifications, covenant management) are now maintained in an automated and auditable database where end users can quickly query an entire set of more than 80 deal documents (greater than 7,000 clauses) should internal parties or external regulators require.
• TFS emerging markets affiliates with inter-company lending facilities are protected from country risk through sovereign risk mitigation structures.

“The most significant benefit to arise out of TFS’ strategic positioning is a strengthened, engaged and collaborative team of associates, allowing us to achieve our business objectives in the most efficient and most cost-effective manner,” Shi explains. “For example, establishing the daily collateral exchange process impacted each area within treasury: the front office had to rework credit support agreements (CSA) with all 23 counterparties – many were required to post significant collateral; the middle office needed to upgrade valuation systems; and our treasury operations team had to completely re-engineer its processes and systems to automate the daily valuation, exchange, reporting and controls. Clearly this project would not have been successful or as effective without such cross-functional collaboration.”

TFS treasury is certainly proud of these achievements; however, in the spirit of Kaizen they represent only one chapter in our ongoing pursuit of perfection.

In addition, TFS has realised weighty economic benefits due to the success of these solutions. Where daily collateral exchange is concerned, the reduction of counterparty risk has saved TFS $50m, swap costs have been reduced by $20m annually and interest expense was reduced by $30m from lower funding needs due to collateral received. This compares to a mere $100,000 for total project costs.

For the compliance database, the company was quoted in excess of $10,000 per deal (in the region of $800,000 for the entire portfolio) for an externally-developed solution. However, the solution developed internally required no licensing or consulting costs.

Furthermore, the inter-company lending facility for global affiliates has achieved a $25m saving through reduced interest expense, while optimisation of the risk/duration of the short-term investment portfolio is currently earning an additional interest income of $10m annually for the company.

Shi concludes: “TFS treasury is certainly proud of these achievements; however, in the spirit of Kaizen they represent only one chapter in our ongoing pursuit of perfection.”