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Getting more bank for your buck.

Although banks are vital to most businesses, the relationship isn't always as harmonious as it could be. But as AT&T's experience demonstrates, you can be a more satisfied customer.

About six years ago, we asked our primary banks if they would be interested in entering into a partnership with us unlike any we'd had with them before. We asked each bank to make an investment in learning about our cash-management operations in order to help us improve our processes.

What was the logic behind the proposal? First, we recognized that banks know much more than we do about cash management, so we wanted their best people to study our operations and make some recommendations. We agreed that if we had any bids or proposals, the banks would be able to bid, but we couldn't guarantee that they would get the business. In return, we offered to spend a great deal of time and money studying their telecommunications needs and problems, with the understanding that we could bid on any of their proposals.

The partnership bore fruit with some of the banks, and AT&T and the banks all benefited from the process. Since banks and customers don't always see eye-to-eye, success doesn't always come easily, but it is possible.


At AT&T, banks provide us with many operational services. We have approximately 87.2 million remittances annually, which includes 13 million payroll items per year. Sixty-two percent of our employees (mostly the monthly management payroll) are on direct deposit of payroll. We have seven retail lockbox banks, four wholesale lockbox banks and our own in-house lockbox, where we process 3 million items a month.

The in-house process provides another processing option that's competitive with bank pricing and quality, and it keeps the banks honest in their pricing. It also gives us a backup facility in case a bank is unable to process. Conversely, we can move volume out of our in-house lockbox into the banks.

The banks provide us with other services, too. In June 1993, we established a 364-day, $6 billion revolving-credit facility with 65 banks for general corporate purposes, including a backup for commercial paper. AT&T arranges for letters of credit with approximately 20 banks, and for foreign exchange contracts we also use about 20 banks. We invest in money-market instruments issued by banks, sometimes buying them directly from the banks. At other times, we purchase instruments in the secondary market.

We have approximately 65 major banking relationships, down from about 300 10 years ago. Since 1980, we've made a concerted effort to reduce the number of major banking relationships and bank accounts to cut costs. During this time, the banks have also been consolidating, another reason the number of relationships has declined. In addition to our major banks, we have a number of smaller relationships, particularly in other countries where we need a local bank to facilitate operations.

Our compensation to banks amounts to about $75 million annually. Operating fees are primarily for lockboxes, payroll and vendor disbursement, dividend payments, and the facility fee for the revolving-credit facility. We also compensate the banks for their services as trustees and investment managers for our pension-fund and savings-plan assets. We hire external money managers, many of whom are commercial banks. Bank fees are negotiable, and we need to find ways to obtain higher-quality services for less cost. It's important to have the fees in the budgeting process because it helps us to focus. I have a few people who manage these fees exclusively.


One of our major objectives in our banking relationships is maintaining access to funds. Before we entered the commercial paper market in 1969, we had cash surpluses and we banked ourselves. We had never borrowed from a bank. Even if you do your own banking, it's still important to maintain access to funds through a good banking network. Balancing the money center, regional and international network will accomplish two objectives. First, the regional banks have strengths that money-center banks don't have and vice versa. Also, if we ever need to borrow from banks, a diversified network will probably make the process easier.

Price strategy is another big issue for us. We centralized all of our bids in the treasury organization so that each of our 20 major business units isn't asking banks for service proposals. The business units come to us and we issue the request for proposal and coordinate the banks' bidding on the project.

Since 1988, we have permitted our business units to go outside the company if they're not satisfied with the in-house service, quality or pricing. For processing, we contract with about five or six major business units for those 87.2 million items. We can go through the in-house lockbox or through banks. If the business units don't like what's available, they can do it themselves. As a matter of fact, Universal Card Services in Jacksonville, Florida, our credit-card subsidiary, did just that by building and running its own in-house remittance processing center.

Generally, we contract with each business unit separately. But when we talk to the banks that are servicing multiple business units, we tell them to view us as one enterprise. Moreover, when pricing services, we don't want the banks to low-bid today and then come back in two or three years when the contract expires and raise the prices by 50 or 60 percent. We centralize the activity so that the banks are consistent with their pricing.

For our $6 billion revolving-credit facility, I explored an agreement that used grid pricing for the facility fee. I didn't succeed, but at least one major U.S. corporation did this a few years ago. The company structured the fees that it pays so that the stronger banks get higher fees. Their strongest banks, for example, got 12 basis points, those in the middle received 10, and the weakest got eight basis points. Why shouldn't we recognize the risk they pose to us (in terms of backing us up) in the fees we pay?


Operational quality is number one in our banking relationships. If a bank has operational snags, we want it to solve the operational problems promptly. That's worked pretty well in disciplining the banks, and it also sends a signal about our priorities, which are the day-to-day movement of money and cash management. That's what we're really buying from our banks. The banks want to discuss mergers and acquisitions, commercial paper and securities issuance as well as other high-margin activities. We're looking for operational quality.

We look closely at the relationship team that the bank assigns to AT&T, and quite often we can influence its composition based on our knowledge of people at the institution. It's mutually beneficial when someone from the bank's senior management takes a personal interest in the AT&T account. The senior bank officer doesn't have to be in charge of the bank's relationship team or even directly responsible for it. But usually, the bank's relationship team is inspired to do a better job knowing that senior management is committed to its customer, AT&T.

For many years AT&T had not had a revolving-credit facility with banks. In mid 1990, we established a $1.5 billion 364-day revolving-credit facility for general corporate purposes including a backup for commercial paper. At that time, we had just entered the credit-card business. Toward the end of 1990, AT&T made a tender offer for NCR and we wanted a $6 billion revolving-credit facility. It was expensive because the market was terrible, and we offered the banks incentive fees (in addition to the facility fees), since we were in a hurry to wrap up the NCR deal. During 1991 the NCR situation began to solidify, so we didn't finalize the $6 billion revolving-credit facility. Instead, we established one for $8 billion for 364 days and paid a facility fee of 10 basis points. In 1992 we renewed our $8 billion revolving-credit facility, but structured it with $6 billion for 364 days and $2 billion for three years. We paid a facility fee of 10 basis points on the 364-day portion and 12.5 basis points for the three-year maturity. In June 1993, when the $6 billion 364-day portion matured, we canceled the $2 billion three-year maturity. Simultaneously, we established our current $6 billion, 364-day revolving-credit facility. The facility fee is eight basis points, which reflects the current low interest-rate environment.


Standard & Poor's and Moody's have told us consistently over the last few years that they'd like to see AT&T use a sensible mix of U.S. and non-U.S. banks. The rating agencies also wanted us to have a list of banks with which we have good, two-way business relationships.

In addition, the rating agencies like to see 100 percent backup. Now, if you look at the published numbers, finance companies tend to have a lower percentage. The number is an average, so if we have periodic or seasonal differences, we can go down to 70 or 80 percent without a problem. If you can demonstrate that you've got a $2 billion need, but it's going to go away in four months, and if you discuss it with the rating agencies, you can get by with that.

But deciding which bank to use or what the fees would be wasn't the toughest job. The material adverse change clause turned out to be the most difficult negotiation in our banking relationships. We have had a MAC clause in each facility but we're not alone -- most companies have some kind of MAC clause in their facilities.

Finally, we also use 4(2) commercial paper in addition to 3a3. The 3a3 is the standard exemption for commercial paper from registration and it includes an accounts receivable test, principally to determine how much of that you can have outstanding. It must be used for current transactions. The 4(2) commercial paper is a private placement of commercial paper and it's typically used for bridge loans, such as debt refunds or acquisitions. We've issued 4(2) paper without a backup line and even told the rating agencies that. They've published that piece of information in their rating books. That's one way you can reduce the percentage of your backup.

Mr. Prendergast is vice president and treasurer of AT&T in Berkeley Heights, N.J.
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Title Annotation:Treasury Management
Author:Prendergast, S. Lawrence
Publication:Financial Executive
Date:Nov 1, 1993
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