The treasury strategy driving National Express
Global transport group National Express talks hedging, sustainability and bank relationships as the industry emerges from the pandemic.
Deputy Group Treasurer
National Express Group is a British multinational public transport company headquartered in Birmingham, England. It operates bus, coach and train services in the UK and Ireland, United States, Canada, Spain, Morocco, Germany, Bahrain, France, Switzerland and Portugal. It is listed on the LSE and is a constituent of the FTSE 250 Index.
National Express, the global transport operator renowned for its red, white and blue buses driving up and down the UK’s motorways, centrally hedges all its fuel exposure from its Birmingham-based treasury operation. In a strategy designed to absorb oil market shocks, the company is 100% hedged for the next year and on a decreasing or rolling basis over the next two years. Although keenly aware of spot prices, monitored daily for their impact on the forward price, the firm is sheltered from today’s high oil price triggered by Russia’s invasion of Ukraine.
Many transport groups including airlines, cruise lines and hauliers changed their hedging policies during Covid when they were stung by rock bottom oil prices negating all the benefits of hedging, and a collapse in demand for their services as everyone stayed at home. But National Express maintained its hedging policy, run by a busy and multi-skilled treasury team of four who decide how much to hedge according to the forecast volumes from the company’s European and North American divisions and which currently amounts to an annual addressable volume of around 200 million litres.
Not only has the approach paid off financially and capped fuel costs at a time oil is over US$100 a barrel, it also highlights the firm’s robust treasury policies in another source of quiet satisfaction for Deputy Group Treasurer, David Plimmer. “If you have to always rewrite policy, it’s not really fit for purpose in the first place,” he says. “It’s not our job to spot highs and lows, we run a prudent, board approved treasury policy that outlines limits and controls around hedging our fuel and FX exposure.”
The size of the hedging programme offers a window into the bus company’s growing, global business that stretches far beyond the UK’s road network. National Express runs a North America school bus business under its Durham and Stock brands, swapping the red, white and blue for yellow to ferry children and teenagers to schools and colleges across three Canadian provinces and 33 US states, where it is the second largest player in America’s outsourced school bus market. Other US businesses include a transit service in cities, specialist vehicles for the disabled and a fast-growing WeDriveU subsidiary that provides shuttle services for US corporates, universities and hospitals.
Europe is home to other prized parts of the portfolio. A Madrid-based subsidiary, ALSA, operates intercity coaches and regional and urban bus services across Spain; other European bus operations are based in Switzerland and France, and the company owns a German rail operation and a bus company in Bahrain. ALSA’s Moroccan subsidiary (the only division that hedges fuel locally because of market restrictions) operates services out of six of the largest cities including Rabat and Casablanca and is one of the fastest-growing parts of the business. “Our Moroccan business actually emerged from Covid bigger than at the beginning of the pandemic,” says Plimmer.
It is a startling turnaround for an industry hit harder than most when governments closed schools and discouraged all travel. Although National Express’s local divisions run their own cash management and handle local bank relationships, the Birmingham office had to jump into action to shore up the capital structure and guarantee diverse sources of liquidity when passenger numbers and revenues fell off a cliff. Strategies included securing bilateral bank facilities from two of the firm’s 16 banks; drawing down a private placement; selling an inaugural £500m hybrid bond and calling on a commercial paper programme. All the while treasury negotiated covenant waivers and amendments with the company’s banks and lenders in a fraught process that required robust communication skills and the ability of the team to step outside their comfort zones. “This wasn’t in any of our KPIs at the start of January!” he says.
Today that largesse has left treasury with a surplus to manage and more liquidity on hand than normal. It is currently invested in short-term money market allocations where it is easily tapped for intercompany loans when needed. Money market allocations are spread across the firm’s bank group to limit counterparty risk, explains Plimmer. “The yield is nice; we have security of funds and counterparty management. We don’t lock funds away as we need to react to different divisional needs.”
Liquidity is also a crucial seam to the company’s acquisition strategy as it seeks growth opportunities in a road transport industry rife with opportunities in the wake of the pandemic. Plimmer says that the firm is always looking at opportunities across its divisions and seeks to steadily bid and acquire contracts in its North American school bus business as well as expanding its Moroccan and Spanish operations. As and when opportunities arise, treasury will be ready to support, ensuring partner banks have the headroom to provide bid and performance bonds and compliance in the financing documents. Elsewhere, treasury will bring any new acquisitions into the fuel hedging programme and provide access to the company’s sizeable vehicle financing programme, he says, “We will make sure we provide whatever is needed.”
Treasury oversees 16 relationship banks in partnerships built on good communication, longevity and mutual support. The importance of a quid-pro-quo relationship leads Plimmer to reflect on the company’s willingness to support its banking partners in the LIBOR transition. National Express took out a bilateral SONIA loan in 2019 as part of a committed RCF from NatWest’s pilot scheme. The transition to new, risk-free rates was beset by unknowns around pricing, technology upgrades and extensive contract updates while bankers and lawyers were also worried whether the new rates would provide a close enough match to manage banks’ longer-term liabilities and assets, recalls Plimmer. “We had an opportunity to dip our toe in the water and learn how it works alongside providing important support to our banks.”
The company transitioned its remaining LIBOR exposures in 2021 which comprised a £495m RCF and various bilateral facilities. The group didn’t have any floating rate derivative exposures that crossed the transition date or longer dated swaps – nor did it have much euro or dollar exposure as most of its borrowing is in sterling. Next, treasury went on to transact early trades for real, including a fixed to floating interest rate swap. “This was our first real test of the systems and processes we had put in place,” recalls Plimmer. “It taught us what things needed tweaking and helped us find our feet early on.” Although treasury wasn’t banging the drum for change, he says the team understood the reasons for a more robust way of calculating borrowing costs. “We are fortunate that we are a large company. It must have been much more difficult for a smaller company.”
Now treasury’s focus is increasingly honed on a next, much bigger transition ahead: net zero. National Express hasn’t issued any sustainable debt yet and Plimmer says the company’s next, meaningfully sized financing, will be linked to sustainability KPIs. “We will make sure up and coming funding has an ESG element,” he says. It will involve another key role for treasury, particularly helping shape the discussion around which metrics to pick to support the company’s 2030 to 2040 net zero targets. Challenges will include the US market for electric school buses compared to the company’s UK and Spanish businesses where sustainable policies now include not buying any more diesel buses. Still, he notes that the transport company is intrinsically aligned with reducing society’s carbon footprint and has a compelling ESG story to tell investors and banks ahead. “Our strategy is all about getting people out of their cars and into public transport. We are determined to be the cleanest and most efficient transport operator we can be.”
Plimmer’s belief that treasury should be as comfortable shaping sustainable KPIs as it is running the hedging policy reflects his own varied treasury journey and aversion to pigeon-holing or specialist expertise. After starting as an auditor at PwC where he spent three years, he joined National Express as a Financial Accountant in 2012. A few months later he made Group Treasury Accountant where his strong relationships with the front office team positioned him to jump when a vacancy arose as a Treasury Analyst. His first treasury tasks involved overseeing daily management of the group’s cash pool including FX hedging, borrowing and depositing funds, running intercompany funding as well garnering compliance and KYC expertise, he recalls.
Later in the job he learnt to hedge fuel exposures and manage the derivative portfolio, as well as support the company’s different divisions access leasing and trade finance. Today his role is broadly strategic and has been particularly focused on securing liquidity through the pandemic where he helped lead the inaugural hybrid bond issue and oversaw the commercial paper programme. New responsibilities which Plimmer says have been facilitated and supported by the Group Treasurer, whose leadership style has become central to treasury culture at the firm. “He really encouraged me to meet banks and build relationships, giving me exposure to the higher-level stuff.” Still, Plimmer is more than happy to return to his old stomping grounds when required. “The routine elements of my job have fallen away, but we are a small team, and I can step in when needed.”
He is also convinced that the variety of treasury makes for one of the most compelling elements of the job. For instance, following the completion of year end he is now facing a to-do list that spans conducting annual reviews with banking partners and visiting the company’s overseas divisions. He’s also planning new financing, as well as preparing a high-level strategic overview. All this alongside the routine bread and butter of his day job which currently includes combing through EMTN renewal documents – something he also enjoys. “It’s an excuse to get my head into the annual report,” he says. “You plan for things but then you have to react to external forces. I love the fact no day is the same.”
It leads Plimmer to contemplate the difficulty he has describing treasury to new colleagues beginning their careers – especially in a single sentence. On one hand treasury encompasses routine elements (like spreadsheets) with communication skills and relationships management. On the other it requires reacting to markets and deep dive analysis. The ability to turn your hand to anything, but also stay focused and interact with colleagues, is key to success. “My advice to others? Celebrate the diverse and varied nature of treasury,” he concludes.