Montreal-based Effenco provides both hybrid-electric and 100% electric solutions for heavy-duty vocational vehicles, such as terminal tractors, waste collection trucks and dump trucks, to name just a few applications. Although essential, these work horses contribute upwards of 20% of all transportation-related GHG emissions. But with Effenco’s hybrid technology onboard, fuel consumption can be reduced by 20% to 35% and engine-hours by as much as 40% to 50%—translating into substantial operational and maintenance cost savings. Add to these twin benefits, a 20% to 35% reduction in GHG emissions—not to mention a quieter functional environment—and you’ve got a clean and compelling solution for fleet managers in this space. Heavy-duty vocational vehicles represent a market worth an estimated $200 billion globally and Effenco is poised to take on a growing chunk of that.  

Although they’ve found traction in Canada, 90% of Effenco’s historical sales come from international markets; most notably, the U.S. and Europe. As the company looked to expand beyond the domestic market, the U.S. was a natural choice given that both California and New York State have always been on the forefront of technology adoption. Further expansion led them to France, Norway, Italy and elsewhere on the continent. Growth throughout the European Union has been made easier by the region’s commitment to GHG reduction alongside its uniform certification requirements. Today, their hybrid solution is used in more than 400 trucks in 10 countries around the world.

Growing cash flow pains

As with many small exporting companies, Effenco has a long order-to-cash cycle with their global customers, coupled with a significant lead-time requirement from their supply chain in China. They need financing to support both sides of the equation, and in the early days, that meant a 100% personally guaranteed line of credit through their financial institution (FI). But as orders grew, so too did their cash flow needs. Which is when their FI suggested getting Export Development Canada (EDC) involved. 

“Our FI knew they needed to support our international expansion because you can only achieve so much growth domestically. But without the EDC guarantee on our pre-shipment facility, we wouldn’t have got the bank line,” recalls Shaun Parmar, Effenco’s Chief Financial Officer. “Initially, it was 90% guaranteed by EDC. And then about a year back, we doubled the size of the facility and reduced the guarantee to 75%, reflecting the continued maturation of our company. A pre-shipment facility doesn’t work like a typical line of credit. We can only factor based on a confirmed sale. But it’s been absolutely critical and crucial to our company's growth,” adds Parmar. 

Luis Torres, EDC’s account manager for the client, expands on how EDC’s Export Guarantee Program (EGP) worked in this instance. “It was a perfect solution that was tied specifically to the cost of delivering on signed contracts. And as they collect the receivables, they reimburse the pre-shipment facility,” explains Torres. It’s a perfect tool for FI’s to use in support of their exporting customers that are facing high-revenue growth. 

In the beginning, the FI typically looks for a high percentage guarantee from EDC, but as the exporter proves their ability to reimburse the facility, the FI will start reducing the amount of coverage they want from EDC. Eventually, as a company matures and they have enough equity, accounts receivable and inventory in place, a regular line of credit backed by a lower percentage EDC guarantee is all that’s needed. “It’s still an EGP, still the same tool, but it’s adapted to the needs of Effenco’s growth and is a perfect example of the normal financial evolution of a successful company,” Torres explains.

 Truck near Eiffel Tower—Paris, France

Currency challenges

Beyond a doubt, managing foreign exchange (FX) risk is one of the company’s key challenges, according to Parmar. “In the past, we’ve tried to do whatever natural hedging we could by using the receipts of funds we have to offset the expenses. We didn't always get the CAD, USD, Euro or Renminbi when we needed them. So, we typically ended up dipping into the market at spot rates to buy whatever countervailing currency was required,” he adds.

It’s not an ideal solution for any growing company. Even the experts can’t predict how exchange rates will evolve. And when you also consider that Effenco might experience a two-year lapse between the time they price a contract in a foreign currency and the day they need to convert funds, that’s a considerable amount of risk to take on. Especially when there’s a simple solution: FX forward contracts. “In my experience,” Torres adds, “a major sign of a company’s maturity is their adoption of FX contracts as a risk mitigation tool. If you try natural hedging and your timing’s off, your margins can be completely wiped out by currency fluctuations.” 

Guaranteed win-win

Effenco knew they needed to protect their balance sheet, so they turned to their FI for help in managing their FX exposure. Their FI was definitely onboard, subject to an EDC backstop in the form of a Foreign Exchange Facility Guarantee (FXG). Understandably, FIs need to cover themselves in the event that their client’s not able to execute on an FX contract. They often opt to do this by freezing their client’s line of credit, or by obtaining cash as collateral in an amount equal to the default risk—which typically runs between 10% to 30% of the underlying FX contracts. 

For a company like Effenco—with suppliers in China and buyers in the U.S. and Europe—it’s not an inconsiderable amount of cash to have sitting on the sidelines. Which is why FIs count on EDC to provide a 100% backstop. It’s a win-win for an FI’s customers, with the twin virtues of freeing up the collateral requirement and locking in currency rates in advance. EDC’s FXG is a 100% irrevocable and unconditional guarantee that’s issued on a facility basis, and is typically set for a one-year period. What’s more, the foreign exchange contracts that are supported under an FXG can be up to three years in duration. 

It’s a tailor-made solution for Effenco. “Our FX line lets us lock in a rate for any one of the currencies we deal in, without actually having to deliver on it. And then depending on whether we actually need the funds or not, we can swap them out for another time period. It really comes in handy from a hedging point of view,” claims Parmar. “It might seem like an obvious solution,” adds Torres, “but most small companies don’t know about it, which is why we rely on our FI partners to get the word out.” It’s a tailor-made solution for FIs as well. “Instead of freezing a client’s collateral, EDC issues a paper committing to the full collateral amount. If there’s ever an event where the client can’t pay, we will,” Torres explains. 

In the final analysis, every company needs to come up with their own FX hedging ratio based on the amount of risk their willing to take on; ideally, this is a decision made only after a formal measurement of exposure to FX risk has been undertaken. FIs can then work with their clients to determine the total amount of future contracts required for any given year, then work directly with EDC to put the Guarantee in place. It’s fast, it’s affordable—and in these days of extreme volatility—it’s an essential tool to help support your customer’s growth.

5 things you need to know about FXG

Prior to joining EDC as regional vice president and bank channel manager in 2017, Luc Fournier was senior manager international for the National Bank of Canada’s Ontario and Western regions. He lived and breathed FX, having managed their FX trading desk for four years. Following is his take on what you need to know about EDC’s Foreign Exchange Facility Guarantee (FXG).

  1. Standalone business development tool: FXGs can be leveraged as a standalone, non-client facility, offering an ideal foot-in-the-door for new customer prospects.
  2. Provides a 100% irrevocable and unconditional guarantee on notional limit: EDC will issue a 100% guarantee to your FI for the full collateral requirement, waiving the need to freeze your customer’s credit line.
  3. Flexible timing: FXG coverage doesn’t have to be in place at all times throughout the life of a contract and can be initiated part-way as the deal progresses. 
  4. Customized coverage: The percentage of coverage can be tailored to support only a portion, or the total FX risk—making it a flexible solution tailored to both your FI and your clients’ needs. 
  5. Also works for domestic companies with foreign suppliers: Even if your customer isn’t exporting, if they’re importing product inputs or machinery, for example, they’re subject to FX risk. EDC has extended FXGs to include non-exporters through our temporary domestic powers.