The challenge:

Honeywell’s sales grew to US$39.1 billion in 2013 compared with US$22.1 billion in 2003. During this period, sales in high-growth regions increased by a 15% compound annual growth rate (CAGR) and accounted for 23% of global sales in 2013. China was a key contributor to high-growth regions, with 20% of CAGR.

Correspondingly Honeywell’s cash position in China also grew. The challenge for Honeywell was what to do with this excess cash, because even after re-investment into capacity and business growth, a significant amount of investible cash remained. The company had also slightly changed its focus regarding yield; whereas after the financial crisis the focus had been to preserve liquidity, the strategy now was to ensure that yield was enhanced whenever and wherever possible, in a risk-prudent manner.

The solution:

Honeywell established cash concentration structures in China and these have proven to be very effective in concentrating liquidity for subsequent management and investment, managing counterparty limits and risks, investment allocation and also in seamlessly providing groupwide working capital and investment funding. Honeywell then looked at other approaches to obtain yield including finding a bank that pays higher deposit rates, extending the deposit tenor, using MMFs, and finally investing in structured deposits (SDs).

Honeywell decided the latter solution would best meet their requirements as a SD does not fall under the regulations that make it difficult for banks to adjust their deposit rates.

Honeywell then embarked on a fact-finding mission. With the research and due diligence performed, Honeywell China was able to broadly identify the risk profile of a SD as that of the banks which offer it; ultimately, it is the banks’ ALM approach which determines the level of risk on such instruments, and not the inherent risk of the instruments themselves. Honeywell was therefore able to obtain internal approval to increase the investment limits on certain types of SDs to that of the counterparty limit that is in place for that particular bank. It also benchmarked various MNCs’ practices and then made proposals for their reference. In the end, it successfully obtained approval to adopt the new practice by banks’ counterparty limits when investing in SDs.

Best practice and innovation:

In an era where companies are continuously faced with margin compression and abysmal interest rates, Honeywell Treasury carried out another review of the risk profile on the SDs on offer in China, and adopted a more pragmatic approach towards such instruments. “Honeywell has selectively increased its investments in such instruments, and helped contribute to Honeywell’s bottom line in the process,” says Lawrence Chang, China Treasury Manager at Honeywell China. “This does not mean that Honeywell has adopted a more relaxed approach in its risk management.”

In doing so Honeywell has worked with 12 banks in China that have committed to working with the company on standard legal documentation, targeting the elimination of clauses which pose the greatest concern to Honeywell. Among the 12 partner banks, ten banks accepted their request not to open current accounts for SDs, seven-day call deposits and three-month time deposits, avoiding having to open ten additional bank accounts for the investments.

Furthermore, through the banks’ monthly quotation, Honeywell has been able to get a good sense of its interbank liquidity position each month. This can potentially serve as a leading indicator to the interbank liquidity position, and enable it to advise their credit teams on any impending credit crunch which may impact their customers’ payment patterns.