Toyota's 'adult playground'
Captive's treasury invests, lends billions and racks up awards
Photo credit: KIM GRISCO
LOS ANGELES -- Playing the global financial markets is often compared to high-stakes gambling, so it's no surprise that Toyota Financial Services' treasury department looks like a scaled-down Las Vegas sports book.
Located down the street from U.S. sales headquarters in Torrance, Calif., the treasury is the nerve center for the captive's U.S. financial strategy. This is where Toyota raises money to finance millions of consumers' car loans and its dealers' floorplanning and store expansion plans.
And it's a global giant in its field. Toyota's U.S. treasury is the second largest issuer of commercial paper in the world after General Electric. Including all financial instruments, the Toyota Financial Services portfolio exceeds $100 billion.
Financial executives call the treasury their "adult playground," a place where the company's sharpest financial minds plot the course of billions of dollars of transactions every day.
A bullpen layout half the size of a basketball court is bordered by 75 giant and constantly changing data screens. The monitors track anything that could affect Toyota's lending and borrowing rates, from stock market indices, currency exchanges and commodity index prices to Libor and commercial paper rates. Keeping all the data flowing to the terminals are cables that run 14 miles through the ceiling.
In a world where a slip of a credit rating or an ill-timed investment can mean tens of millions of dollars of losses instantly, this is no place for the unsure or faint of heart.
Toyota has several treasuries, including a smaller operation in the United States that finances U.S. manufacturing investments and pension obligations. Toyota's Japanese treasury oversees Japanese manufacturing, as well as risk management for commodities, parts and raw materials.
But Toyota Financial's treasury is the big one. And while other automakers have similar operations, Toyota's is the golden child, snapping up armloads of industry awards for its performance during the recession.
Overseeing the investment hothouse in Torrance is Wei Shi, 45, a native of Shanghai who departed the engineering fast track and became a finance whiz.
"Our mission is to provide uninterrupted and cost-effective funding to our dealers and customers, and we have done that despite the financial crisis," Shi says. "When everyone was pulling out, we stayed with our customers and dealers. That is why we exist; banks do not have that motivation. They come and go."
Shi came to the United States in 1989 at age 22 with an electrical engineering degree from Fudan University. He earned a master's degree in electrical and computer engineering from Carnegie Mellon University but then discovered the work of Fischer Black, the engineer-turned-economist and co-author of the Black-Scholes formula that calculates derivatives risk. Shi changed course and went to the University of California, Berkeley, to get a doctorate in finance.
After stints at Bank of America, Salomon Brothers, Goldman Sachs and credit-card issuer Providian Financial, he joined Toyota in 2006.
Grace under pressure
The treasury operation he oversees is a winner, according to those who track the role of corporate treasuries in global financial markets. It regularly scoops up coveted awards in the financial services realm handed out by the likes of Treasury & Risk, Treasury Today, GT News and EuroFinance magazines, as well as the Association for Finance Professionals. The awards cover performance, stability, technology, speed to market and risk management.
Indeed, Toyota Financial's treasury has won them all and currently holds three titles. No company, automotive or otherwise, has ever done that.
"We have professionalized our people, processes and technology," Shi says. "That way, we can be more competitive in credit and risk management, we can secure funding whenever we need it and also lower the cost of funding. If we just wait for a bank to call, then they are the middleman, and our costs and reliance on market conditions just went up."
Toyota remains the darling of the finance industry despite a lower credit rating that resulted when the automaker, in the throes of the recession, was struck by the unintended acceleration recall crisis. Standard & Poor's dropped Toyota Motor Corp.'s credit rating from AAA to AA-. Other agencies followed suit. The damage from the 2011 earthquake and tsunami in Japan cemented the situation.
The lower credit rating meant Toyota could no longer rely entirely on unsecured debt to meet its funding needs. So Toyota Financial's treasury got nimble, moving into new investment instruments without increasing risk exposure, Shi says. It automated much of its regulatory paperwork, reducing a process that took days down to hours, while setting up "trigger events" in the software in case anything went awry with the investment.
The treasury also cranked up its short-term lending portfolio, becoming the No. 2 issuer of commercial paper -- promissory notes not backed by collateral. It also increased its term lending efforts, making commitments of up to 30 years.
Nick Ro, Toyota Financial Services' national manager of sales and trading, says the treasury's traders have grown the business fast by maintaining good communications among its 75 employees and its base of 800 institutional investors. Indeed, the treasury relies on financial aces who also have people skills.
"We can't just put a math geek in the room with an institutional investor and expect dialogue," Ro says. "We have to come to market with Toyota's story."
Toyota Financial does not run its treasury as a profit center.
Steve Howard, corporate manager of debt and derivatives, says: "We simply borrow capital as economically and efficiently as possible and make those funds available to our business partners on the lending side of the business. We don't buy and sell securities or take positions for profit."
Toyota's desire for financial independence has deep roots.
In the late 1940s, Japan's post-war economy was in turmoil. The nascent Toyota Motor Co. was near bankruptcy. A group of banks, led by the Bank of Japan, bailed out the automaker with a huge loan that came with many strings attached -- including breaking Toyota into separate sales and manufacturing entities and laying off employees.
Toyota emerged from those dark times, but the company has since tried to stay as independent of outside control as possible. Toyota Financial's treasury is not beholden to investment banking giants to underwrite, place and make markets for its securities. It is its own broker-dealer, licensed by the Financial Industry Regulatory Authority, an independent securities regulator.
"We want to have our fate in our own hands as an organization, not rely on third parties who may not have the same motivations or incentives," Howard says.
These days, the treasury has a reserve that ensures sufficient capital to meet its obligations. "Our liquidity portfolio is between $4 billion and $8 billion. We typically plan for at least three months' worth of needs," Howard says.
Having the reserve also aids with Toyota's speed to market. Shi says some companies can take a year to book and process the financing necessary to meet customer demand. But Toyota Financial's treasury is able to fund hundreds of millions of dollars in obligations within minutes.
"If you are ready, you can capture the investor demand while it's still there," Shi says. "The key is being able to respond to market demand."
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