Photo of Peter Jameson, Bank of America Merrill Lynch, John Murray, Citi, Mustally Hussain and Chet Stefanski, Herc Rentals Inc. and Phil Lamariana, J.P. Morgan.
Our Top Treasury Team 2017 accolade goes to Herc Rentals who have truly established a classleading treasury department, within a very short period of time. The speed at which this particular department mobilised itself and tackled a host of challenges after a transformational spin event in September 2016 is remarkable.
Vice President and Treasurer
Herc Holdings Inc. (Herc), which operates through its Herc Rentals Inc. subsidiary, is one of the leading equipment rental suppliers in North America with approximately 270 company-operated locations in the United States and Canada. With its business extending back over 50 years, Herc is a full-line equipment-rental supplier in diverse end markets, including large and small companies in the construction industry, the industrial sector (such as large industrial manufacturing plants, refineries and petrochemical operations) and other customers in more fragmented industries (governmental entities/contractors, disaster recovery and remediation firms, infrastructure, railroads, utility operators, individual homeowners, entertainment production companies, agricultural producers, special event management and facility management firms). Herc reported revenues of nearly US$1.6bn with US$3.5bn in assets and approximately 4,800 employees in its 2016 10-K.
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Spin-off creates unique challenge for treasury at Herc
Herc began its new listing on NYSE in June 2016, following its separation from the vehicle rental operations of Hertz Global Holdings. The spin-off created unique challenges for the new treasury department (“Herc Treasury”). As a newly stand-alone public company, the enterprise had to quickly create an independent treasury organisation while transitioning and optimising the work streams within six months of the separation. Herc Treasury faced the challenges of disentangling from the former parent, creating new partnerships and overhauling the banking platform to create an end-to-end liquidity management process. Herc had inherited legacy retirement benefit plans and needed to establish a stand-alone investment management platform. In addition, the new enterprise – levered with over US$2bn of first and second lien secured debt with a bank group comprising over 20 partners – faced challenges to manage balance sheet risks, ensure compliance with these complex debt arrangements and recalibrate overall banking relationships.
Mustally Hussain, Vice President and Treasurer, says, “As the treasury department for a newly stand-alone public company, we were faced with the challenge of creating new analytical infrastructure, processes and operating models. Strategically, the task was to understand the business needs from a capital and liquidity management perspective and develop a financial strategy to meet these needs.”
A strategic plan was developed to define the mandate/structure and solve challenges of the new treasury department. The department structure was designed to cover a centralised treasury organisation with three domains:
- Banking and treasury operations.
- Corporate finance and strategic planning.
- Capital markets and exposure risk management.
Mr Hussain explains, “We on-boarded core and competent talents in the above domains within a short period of time. An implementation plan was put together with the help of a consulting partner with milestones tracked on a weekly basis. The combination of strategic and tactical planning enabled Herc Treasury to terminate the services under the Transition Services Agreement (TSA) with the former parent well in advance of the initial schedule, reducing significant TSA fees.” As a result, Herc Treasury was one of the first departments to operate autonomously from the former parent.
Banking and treasury operations had various working parts that needed to be pieced together to create an end-to-end liquidity management process. Herc Treasury worked with banking partners not only to optimise cash applications and lockbox processing but also to redesign a new customised depository process, enabling remote capture technology to make store deposits. The team also worked with technology partners to enhance payment processing by eliminating over-funding. Despite limited historical data, a rolling 13-week cash forecast model with a target cash balance was created by partnering across the enterprise to manage day-to-day cash operations. Utilising this tool, Herc Treasury reduced the daily target balance by over 30% and optimised the cash level, realising significant annual interest expense savings.
“Winning an Adam Smith Award is an excellent validation of our effort to build a great team and deliver value to the broader enterprise as a strategic business partner.”
Mustally Hussain, Vice President and Treasurer, Herc Rentals Inc.
Mr Hussain comments, “We brought in specialised treasury staff with fresh perspectives to design a banking platform to handle the demands of the cash-driven business model of Herc. These best in class practices are particularly epitomised by automating and streamlining existing work streams across daily cash positioning, user entitlement, banking administration and control monitoring.”
Herc Treasury introduced new elements of corporate planning, forecasting and risk analytics. As a result, the team overhauled the investment aspects of the benefits plans and provided a more prudent risk profile that will provide benefits in both the short- and long-term by:
- Implementing a new strategic asset allocation to optimise the risk/return trade-off and move the portfolio onto the efficient frontier.
- Setting new investment policies for the various plans.
- Administering the plan with appropriate committee governance.
Herc Treasury assessed the enterprise/entity level capital structure, funding needs and related balance sheet risks through a detailed review and understanding of the business. Based on various analyses, the team executed bond redemptions (10% of the outstanding secured notes) and locked in interest rate swaps with hedge accounting treatment to create value. The team also developed process and infrastructure to monitor covenants based on company events that could qualitatively or quantitatively trigger provisions in the debt agreements. The automation has significantly improved the auditability and accuracy of compliance reporting.
Eric Kim, Senior Director of Corporate Finance, comments, “We also realised that it was critical for the department to develop internal compliance processes and models to bridge the gap between the debt agreements and our accounting systems.”
Best practice and innovation
In summary, Herc truly established a leading treasury department within a very short period of time. The speed with which this team mobilised itself and tackled challenges after a transformational spin-off event is remarkable. Becoming a strategic business partner at Herc was not just about increasing the scope of treasury activities but also required a focus on creating the right organisation, infrastructure, decision support tools and systems to deliver on goals. From a performance assessment perspective, Herc Treasury delivered on:
Structure and skills:
Herc Treasury leadership designed a centralised treasury centre with a clear structure of banking and operations, capital markets, and corporate finance, enabling subject-matter experts to deliver specialist skills to solve challenges across the enterprise.
Herc Treasury laid out a clear governance structure where treasury strategy is approved and governed by decision bodies enabling transparent decision-making.
Policy and procedure optimisation:
Herc Treasury focused on streamlining and automating processes across payables/receivables, compliance and operations, enabling strategic decision-making while delivering multimillion-dollars in savings.
Data analytics and deliverables:
Herc Treasury used technology and data analytics to revamp the banking, investments and capital markets platforms with tangible deliverables to business partners.
Key benefit areas
The success or failure of a corporate treasury organisation can be evaluated by measuring excellence in execution of core functions and being a strategic business and stakeholder partner.
- Herc Treasury’s role in automating and re-engineering cash operations and banking administration workflows with a new banking structure and liquidity framework optimised number of users, secured control environment and improved customer relationships with multiple headcount savings. The initiatives also helped the company to cut fees from its banking wallet, reduce interest expense via cash target optimisation and save costs from early TSA termination.
- Herc Treasury, as a sophisticated risk manager, developed a financial strategy framework, de-risked the portfolio via capital markets transactions and strategic investment allocation while introducing safe and sound compliance reporting and delivering substantial net present value in savings.
- In its role as a stakeholder manager, Herc Treasury has led strategic corporate initiatives while serving banks, rating agencies and investors.
In summary, given increasingly complex liquidity and funding requirements, Herc Treasury built a leading-class team to deliver liquidity, risk and cost management, create shareholder value and be a strong partner to the business.
Key learning points
In summary, Herc designed a centralised treasury department with automated processes and advanced analytics to deliver benefits to the enterprise. These benefits ranged from re-engineering cash and banking operations to prudent risk and stakeholder management.