Corporate Example: IBM

Centrali zed funding

IBM's Global
Back-Up Line
IBM has negotiated with
overseas banks to roll-in
local credit lines under the
umbrella of a centrally guar-
anteed facility.
IBM started clown t he path to
insure its CP program in Apri l
1993 wit h a one-year, $4.6
billi on credit line put together
by Cred i t Suisse. Thi s was
I BM's first suc h committed
fac ili ty in years. It was qui ckly
foll owed by a larger, $10 bil-
li on committed faci li ty involv-
in g 81 banks wor l dwi de,
arranged by Chemical Bank.
Thi s second facility provid-
ed longer coverage, 5 years,
and included a $4 billion dol-
lar equi valent multi-currency
component. The multi-CLmen-
cy component all ows IBM to
structure local credit faciliti es
for i ts fore i gn subsidiari es
under the umbrell a of a cen-
tra li zed, parent guaranteed
faci li ty. It is more than a
back-up.
Rolling-in local lines
The faci lty is useful as a direct
funding source in coun tri es
where central i zed intercom-
pany f unding is less accessi-
b l e. Lat in America i s one
example. "We still have a lot
of work to do in Lat in
Ameri ca," notes Assistant
Treasurer Jesse Greene [now
with Kodak], "and it wi ll take
a number of years to get the
most benef it out of it. " The
benefit is cheaper local fund-
ing in those countr ies where
IBM i s wi lling to provide a
parental guarantee.
Aff ili ate treasu ry managers
are st ill on the front li ne to
negot i ate w i t h l oca l ba nks
within the facili ty for specific
amounts, rates, and spreads in
t he local currency. In effect,
t hey set th e rate at whic h
local currency wi ll be provid-
ed if the credit line were to be
drawn clown. Maximum com-
mitment amou nts are set by
the parent and corporate rep-
resentat ives are usually pre-
sent during the renegotiation
of the local lines.
Withholding taxes
The most broad-based bene-
fits come in countri es where
access to centra l funding is
limited by withholding t ax
penalti es. Generall y speaking,
intemal and f inanci al-market
operations provide a l ower
ail-in cost of funds than the
credi t facility.
For exa mpl e, in Eur ope,
I BM aff ili ates borrow more
c hea ply from t he reg ional
treasury center. The company
has an in-house bank at the
Intern at i o nal Financial
Serv i ces Center (Dub lin
Docks) in I re l and . Thi s
European center taps surplus
cas h pos i t i ons at regio nal
aff ili at es and on- l ends the
fu nds to affili ates with deficit
posit ions-all at market rates.
If the European operat i ons
dip into a net deficit position,
and there are not eno ugh
funds to recycle, the bank will
i ss ue CP or tap longer-t erm
capital markets vi a a Dutch
fu nding ve hicl e (I BM
International Finance) .
In either case, managing the
f unds centrall y from Irel and
and on-l ending them to com-
pany aff ili ates, reduces t he
cos t of fu nds for the group.
Thus, the credit facility l argely
serves as a back-up.
The credit-line is more than
a back-up, however, in coun-
tri es w here b il ater al tax
treaties do not provide reli ef
from withholdi ng tax. In these
cases, the centrall y guaran-
teed faci I ity provides cheaper
fund ing. Ita l y and Portugal
are part icul arly troubl esome:
"These are the two countri es
where you have withholding
tax wherever you are situat-
ed," notes Ray Pillai , head of
the Dublin treasury center.
March 21, 1994

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