As you pursue global business opportunities, it’s inevitable that you’ll encounter some degree of foreign exchange (FX) risk. From the moment a price is quoted until payment is settled, FX rates can vary dramatically—especially in the current economic climate. Without FX hedging tools in place, your profit margins will likely be impacted.
There’s no single best approach for hedging FX risk. Working with your FX provider to develop an FX hedging strategy using tools, like forward contracts and currency options, is the best way to mitigate the risk of fluctuating currencies. But using these tools often means that a portion of your working capital is frozen to cover the collateral requirement of your FX provider. This can limit your ability to fulfill your contracts and grow globally.
Enter the Foreign Exchange Facility Guarantee (FXG). Export Development Canada’s (EDC) FXG eliminates the need to post collateral as payment assurance for the settlement of an FX contract, freeing up your cash for operations. This can help you better predict your cash flow and profitability and put your company in a more competitive position.
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Our FXG provides a 100% guarantee of the collateral your financial institution requires. Once the guarantee is in place, your FX provider can use the value of EDC’s FXG in lieu of a margin deposit, providing you with full access to your working capital. It’s a flexible solution that allows companies of all sizes to manage currency risk (and other financial needs), as shown by the following three Canadian businesses.
Headquartered in Riverton, MB, ECBVerdyol (ECB) manufactures high-quality revegetation, erosion and sediment control products. Whenever dirt is moved to make way for roads and other infrastructure requirements, the net effect on the surrounding environment can lead to erosion that’s more than 2,000 times the natural rate. By installing ECB’s mulch barrier and revegetation solutions, this accelerated erosion can be prevented, resulting in cleaner waterways and the storage of large amounts of carbon emissions.
The company exports primarily to the United States, but also to Mexico and the United Kingdom. With Canada being a relatively small market, it’s no wonder that 70% of the company’s sales derive from exports. Their first shipment went to the U.S., which continues to be their leading market. Although most of their receivables and product input payables are in U.S. dollars, they still have considerable operating expenses back home that need to be paid in Canadian dollars.
Having an effective FX hedging strategy is essential to ECB’s bottom line. They rely on natural hedging for half of their currency exchange requirements in any given year. For the rest, they buy forward contracts through their financial institution to lock in rates and provide stability to their cash flows. The downside is this ties up their working capital in contracts, putting a strain on their small, but growing company. With advice from their FX provider, they put EDC’s FXG in place, to guarantee their forward contracts while keeping working capital liquid.
“A company, like ECB, has to remain competitive, and one way they do that is through longer payment terms—up to 90 days in some instances,” says EDC account manager, Colin Smith. “From the time their invoice is issued to the time it gets paid, currency rates can roller-coaster. In the meantime, they still have to meet payroll, pay taxes and all their other expenses. So, an EDC FXG eliminates the unknown, while still allowing them to put their full working capital to work to reach new customers.”
We’ve been using FXG's for so long, I can’t even remember when we started. It’s an important part of our hedging strategy, and just like EDC’s Accounts Receivable Insurance, it provides the security we need to continue to grow our business.
Averna is an advanced technology company that builds innovative test solutions for a wide array of industries such as automotive, aerospace and defence, life sciences, consumer electronics and telecom infrastructure. The company is headquartered in Montreal, QC, with eight additional offices located around the globe. About 85% of their sales come from exports, with the United States, Mexico, Europe, and Asia being their key markets.
The company operates in a highly specialized space, requiring them to design test and quality solutions throughout a product’s entire lifecycle. Working with high-tech customers and extremely complex innovations, a test system can take up to six months to develop. This, on top of bidding, contract negotiation, and invoice settlement timeframes, may result in a very long order-to-cash cycle.
Given that the bulk of their sales aren’t in Canadian dollars—yet, their expenses are—the growing company needed to guard against the adverse effects of currency fluctuations. At the same time, they needed access to their credit line to secure the cash flow needed to take on new international contracts.
EDC’s FXG provided a guarantee to Averna’s financial institution (FI) that enabled them to put hedging tools in place, which protected the company’s profit margins.
“Using the right FX hedging tools can have a huge, positive knock-on effect for exporting companies. With profit margins protected, a company’s equity will continue to grow over time, as will R&D expenditures—and ultimately, global growth,” explained Bruno Soares, EDC’s senior account manager for Averna.
Working with EDC has allowed us to pursue new and existing clients while supporting our rapid growth. They supported our international expansion by negotiating local financing and protected our financial results from currency fluctuations.
Acadian Seaplants Limited
Although it started out as a small-scale, seasonal seaweed harvester Acadian Seaplants Limited (ASL) has grown into the largest independent manufacturer of marine plant products of its type in the world. And their continued growth is assured as the popularity of marine plants flourishes. Check the labels on everything from beer, ice cream and toothpaste to animal feeds, crop biostimulants and other commercial products, and you’ll find some form of marine plant.
The company began exporting early on, first to the United States and Japan. Eventually, their market penetration numbered more than 80 countries, with annual sales exceeding $90 million.
With more than 90% of their sales flowing from foreign markets, one of the key challenges faced by this global agri-tech giant is managing currency fluctuations. Their FX strategy involves hedging for up to 36 months in advance. They rely on EDC’s FXG to free up their working capital needed in developing international markets while their FI mitigates currency risk by using sophisticated foreign exchange contracts.
ASL has a huge customer base, with many placing recurring orders. And while EDC’s FXG allows for predictable cash flows, budgeting and business projections, a big plus for the Dartmouth, NS company is being able to offer stable pricing to their international buyers. With locked-in rates, there’s no need for them to constantly adjust their price points or take unexpected currency hits.
According to EDC senior account manager, Tarek Al-Owaishi, the company’s FXG needs have grown right alongside their revenues. “A company, like ASL, which operates in many markets around the world, can be exposed to numerous currencies that can fluctuate in value over time. So, it’s every bit as important for them to have foreign exchange hedging strategies in place now than it was when they first started exporting.”
EDC has played a substantial role in our company’s growth. They help us maintain our competitive advantage and allow us to capitalize on new opportunities.
Benefits of EDC’s FXG
- Protect your profit margin by locking in exchange rates—without tying up your working capital: When you don’t have to post collateral to secure your FX hedge, you’ll have more available working capital, allowing you to take on more opportunities, explore expansion plans, and grow your business.
- Take the guesswork out of FX budget forecasts: By locking in a rate in advance, you’ll be more confident when pricing your products or services, which will increase the accuracy of your cash flow forecasts.
- Increase your borrowing capacity: You can secure FX contracts without posting collateral, making your financial institution more confident in lending you money against those assets.
- Improve cash flow management: Margin calls (the amount required as collateral for your FX hedge) can be unpredictable. With EDC’s FXG, you don’t need to meet those calls until the maximum liability of the guarantee is reached.
- Access to more sophisticated FX tools: By allowing EDC to support the inherent working capital constraints accompanied by advanced hedging, you can book longer (up to three years) and more sophisticated FX contracts.