Treasury goes for a spin.

• Author: Wargo, Albert
• Position: Managing corporate spin-offs

Selecting vendors, developing a cash management system, starting a credit department from scratch - there's no end to the details when you're spinning off from your parent company. Two treasurers tell how they survived - and even enjoyed - the melee.

WHY REINVENT THE WHEEL? by Albert Wargo Assistant treasurer Eastman Chemical Kingsport, Tenn. (423) 229-4795

Before Eastman Chemical spun off from Eastman Kodak Co. in 1994, we'd been an autonomous division since 1920. Eastman Chemical's headquarters and the main plant are in Kingsport, Tenn. Eastman Kodak is in Rochester, N.Y., and other than an occasional flight back and forth, there wasn't a whole lot of interaction between the two companies. Kodak was quite happy letting the Eastman folks manufacture their products (acetate fibers, the plastic for soft-drink containers, and other chemicals), and Eastman was happy about that, too. So other than a treasury function and a couple of legal functions, Eastman was, for all intents and purposes, already a stand-alone company before the spin-off.

But for many companies, things aren't so clear-cut, and the number of issues stemming from the spin-off process can pile up very quickly. If your company is contemplating spinning off a division, you may find it overwhelming to think about how much needs to be done in such a short period of time. That's why I've created this treasury checklist, based on my own experiences with Eastman Chemical's spin-off.

Clone the parent's revolver. We put together a $2.3-billion credit facility, with a bit of cushion in case the business turned down and we needed a little extra cash. Basically, we just cloned Kodak's revolver and its banks. It's a fairly simple but time-consuming process, because you need to meet with all the banks and introduce them to the "new" company.

A word of caution: Banks may view the spin-off as an opportunity to negotiate more favorable (for them) terms in the parent company's revolving credit agreement. Even if you just plan to use this as a backup for commercial paper, it's important to stand firm against changes they might try to request. We told our banks that if the old agreement was good enough for Kodak, it should be good enough for Eastman Chemical.

A CAPITAL IDEA

Develop a capital structure early. The parent often will assign the new company some debt, typically in the form of a bank loan that's payable in a short period of time. You'll need to refinance much of this short-term debt into long-term, or fixed-rate, debt and commercial paper. Plus, you'll have to decide upfront how much, in what maturities and in what form you want to do this. For example, shortly after we were spun off, we issued $1 billion of long-term debt, as well as $800 million in commercial paper. Don't forget about selecting an investment bank to issue the debt, as well as a debt trustee.

Establish good relationships with the rating agencies. It's true that debt ratings are based on numbers, but management integrity and impressions are just as important. Get the relationship off to a good start. When you're doing a spin-off, you usually make a formal presentation to the rating agencies. Eastman Chemical and Eastman Kodak did the presentation jointly.

Go overboard to...