Our Top Treasury Team accolade this year goes to Hyundai Capital America (HCA) under the leadership of Frank Boroch, Director, Treasury Investor Relations. HCA embarked upon a multi-year strategic plan which mapped out a new organisational structure spanning eight domains of expertise from treasury operations, cash and bank relationship management to investor relations, governance and controls, DCM and exposure and risk management. This is a truly remarkable journey of transformation and a most worthy winner.

The challenges:

Hyundai Capital America (HCA), Hyundai’s and Kia’s only captive financing subsidiary in the US, experienced rapid growth in the years following the latest financial crisis and global downturn. An explosive pace of asset originations – driven by Hyundai’s and Kia’s completely transformed product lines, as well as HCA’s gains in customer financing market share versus other auto lending operations – catapulted HCA into a top ten auto lender position.

While initially HCA relied on low-cost asset backed securities (ABS) and attractive bank lending facilities to fund the lion’s share of its funding needs, asset growth propelled HCA’s balance sheet from $5bn in 2009 to close to $20bn by the end of 2012.

Scenario analysis pointed to potential funding ceilings in the ABS market if HCA’s pace of growth continued over the medium term. Furthermore, post financial crisis, global banking regulatory changes (including Basel III requirements) were beginning to surface and foreshadowed a future of less expansive bank balance sheets. And on the asset side, changes in vehicle purchasing patterns rippled through the company’s balance sheet with an influx of operating leases and wholesale loans. These introduced additional layers of analytical complexity such as interest rate sensitivity, shorter tenors and residual value risk.

In 2012, the treasury team at HCA was comprised of a handful of individuals responsible for either operations (whose responsibilities spanned deal execution to day-to-day cash operations) or planning (which focused on the funding plan and borrowing costs matters). As a finance company where borrowed funds are the business’ raw material, the treasury function has the potential to strategically influence core operations. However, organisationally at that time, HCA Treasury was one constituent of a larger corporation, with no meaningful voice at the table.

The solution:

HCA Treasury’s multi-year strategic plan began in 2012 with important foundational investments that would pave the way for a transformation into a world-class treasury organisation that strategically influences the broader business.

By the end of 2014, the roadmap that had been designed to transform the treasury function was in place and the larger organisation squarely aligned to leverage the full-fledged treasury Department as a strategic driver of the overall business. The vision for treasury was executed through a multi-faceted approach. It began with acquiring specific talent from key players in the industry to complement experienced in-house resources. The department built a team of 30+ treasury professionals with specialised experience and skills, including a bolstered management team. Specialisation focused on eight distinct domains of expertise: strategy and planning; funding (short-term unsecured funding, long-term unsecured funding, and secured funding); investment management; investor relations; liquidity management; cash operations; exposure management; and operational governance. The department also introduced new knowledge management and talent retention programmes to increase its institutional knowledge and further develop and strengthen the team.

While its multi-year strategic plan is well underway, the treasury department has brought to HCA world-class analytics and institutional credibility in treasury risk management and capital markets execution. These enhanced capabilities now assist HCA on its continued balance sheet expansion with a broader set of Hyundai and Kia financial assets in a more complex and volatile industry and economic environment.

Here is a flavour of the broad sweep of solutions adopted and their impact:

Funding diversification:

• Investor base doubled: 300 in 2011 to 600 in 2014. This has strengthened support from ABS investors as a top-five issuer, while establishing a firm US investment grade footprint with corporate bond investors.
• Unsecured bond platform has expanded to become a frequent US investment grade issuer and improved secondary trading liquidity for outstanding bonds. In 2014, HCA executed a $1.5bn unsecured bond, its largest ever, and at its historically lowest spread (representing a 43 bps reduction from prior year, equivalent to millions of dollars in interest savings over the life of the bonds).

Liquidity management:

• Liquidity increased from $6bn in 2011 to $11bn in 2014; established multiple new funding facilities while extending tenors.
• Commercial Paper programme was successfully launched in 2013 and subsequently upsized, reaching 10% of the total debt funding by March 2015. The CP programme drives significant interest expense savings over comparable bank facilities, producing millions of dollars in interest savings per year. It consistently prices inside of peer A2/P2 issuers on similar tenors and achieves an attractive Weighted Average Maturity, thereby reducing refinancing risk.
• Bank group diversified and expanded from 17 in 2011 to 22 in 2014, balancing regulatory constraints with banks’ appetite for syndicated and bi-lateral agreements to seek competitive terms.
• Earnings Credit Rates (ECR) implementation better leveraged cash balances and achieved significant annual savings.

Liability management:

• Access to the markets was reinforced by elevating the issuer profile in the financial community as recognised by key opinion leaders including rating agencies, financial media, sell-side analysts, industry platforms such as speaking engagement requests and trade publication recognition.
• Unencumbered balance sheet by increasing unsecured funding mix to close to 50% by year-end 2014, enabling the business to have more flexibility to originate assets that may be better suited outside of traditional asset-backed funding channels (eg ABS and bank conduit facilities).
• Strategic seat at the table allows Treasury to act as a critical partner and influence core origination and operations through the implementation and responsibility for a brand new Asset Liability Management Committee (ALCO), deeper participation in HCA’s Risk Control Committee, thought-leadership via periodic executive management reviews, and communication to HCA business leaders.

Source: HCA data as of 31^st December 2014

Best practice and innovation:

HCA Treasury benchmarked best-in-class treasury operations globally, surveyed leading investment banks on optimal funding strategies and risk management frameworks, and conducted rigorous roundtables with key internal stakeholders to determine how treasury could become a stronger partner. Critical insights from the exhaustive study included:

• The need for staffing to become true subject-matter experts through specialisation.
• The requirement for more sophisticated analytics and a robust risk management framework.
• Proactive investor and rating agency management infrastructure to collaborate with stakeholders across the full lifecycle.
• Talent development and retention programmes to curate world-class financial expertise miles away from Wall Street in Orange County, CA.

HCA Treasury mapped out a new organisational structure constituted of eight domains of expertise. These are:

• Treasury operations: focused on cash management and bank relationships.
• Debt capital markets: in charge of borrowings and deal execution.
• Liquidity management: optimising liquidity and cash returns.
• Strategy and planning: handling cost of funds, funds transfer pricing and liability analytics.
• Governance and controls: overseeing departmental policies and procedures to ensure operational safety and soundness.
• Investor relations: dedicating resources for investors and rating agency stakeholders.
• Investment management: leading and monitoring third-party fund managers for its new captive insurance business premiums.
• Exposure and risk management: deploying sophisticated ALM strategies and liquidity stress-testing to minimise P&L and balance sheet volatility.

Treasury expertise became even more granular and specialised in certain domains. For example, Debt Capital Markets professionals are segmented into distinct secured and unsecured teams. These teams are enhanced by key professionals with rich experience in term ABS, conduit funding, commercial paper and fixed income trading, resulting in improved analytics, readiness and execution capabilities.

HCA’s external stakeholder management infrastructure was also guided by a new multi-year strategic plan that supported the development of dedicated relationship managers for banks, rating agencies and investors across its increasingly diverse line up of funding providers (more than 20 banks, nine platform-specific rating agency analysts, over 600 investors spanning ABS, CP and medium-term corporate bonds, and multiple sell-side credit analysts). The newly formed Treasury IR team hit the road logging more than 200 meetings during 2013-2014 to proactively educate institutional investors about the business’ strategies and convey its value proposition.

In addition, HCA Treasury sought to develop new relationships with key opinion leaders – such as rating agencies and sell-side credit analysts – who influence investor purchase decisions. Though resource-intensive, HCA Treasury tailored its messaging and outreach to specific capital markets audiences so that its value proposition would resonate most effectively. Through extensive outreach, it transformed the market perception of HCA from an emerging markets issuer to one of investment grade. HCA was upgraded to A- by Standard and Poor’s in early 2015, further enhancing its credit profile and lowering its credit spreads. HCA Treasury also expanded global coordination with other Hyundai affiliates, conducting capital markets activities to ensure messaging consistency, optimise issuance sequencing and support the parent’s improving credit profile trajectory.

Source: Automotive News and HCA data as of 31^st December 2014

In similar fashion, HCA Treasury introduced a dynamic Bank Fee and Service Scorecard (BFSS), which enabled it to better evaluate banking partners across multiple dimensions and relationships. BFSS facilitated a more comprehensive approach to awarding business, which extended well beyond pure execution capabilities to reflect full-cycle partnering. This nuanced difference in approach helped elevate HCA’s profile among busy bank syndicate teams and resulted in more positive year-round dialogue between banks and investors about HCA.

In 2014, the final pillar of the HCA Treasury transformation was put in place with the establishment of a dedicated Exposure and Risk Management team. This team is charged with minimising earnings and balance sheet volatility through sophisticated ALM strategies and liquidity stress-test sensitivities. Adding further rigor to an already analytically sophisticated approach, HCA Treasury established its inaugural Asset and Liability Committee co-chaired by the CFO and CRO of the business to more adroitly manage both sides of the large and expanding balance sheet.

Once the multi-dimensional build out was well-underway, HCA Treasury implemented a range of human capital management strategies designed to create sustainable talent development and retention programmes. One of the flagship initiatives is the Treasury Leadership Development Programme (TLDP), a first of its kind at HCA, focusing on initiatives ranging from analyst rotational technical training to subject matter expert and leadership development for the talent who forms the current backbone and future of the department.

Comment:

HCA Treasury has armed itself with an optimised funding platform with access to a diversified pool of investors. It has realised meaningful cost savings, increased access to liquidity with upgraded bank relationships, mitigated operational and financial risks and launched a Treasury Leadership Development Programme that provides a career path for a team of dedicated professionals.

While the crafting and execution of its strategic roadmap to meet that objective in just two years is commendable, it can be most proud of its business impact and the opportunities it has created for treasury talent. But perhaps most importantly, HCA Treasury has created a department that is a valuable business partner across the organisation.