As your clients pursue business opportunities beyond the domestic market, they’ll encounter currency risks with each contract they sign. From the moment a price is quoted until payment is settled, foreign exchange (FX) rates can vary dramatically—especially during the current economic climate. And without an FX strategy in place, their profit margins can be significantly impacted.
Forward contracts offer a simple workaround: They lock in rates, so companies can be assured of future revenues. But oftentimes, a portion of a company’s working capital is frozen to cover the FX provider’s collateral requirement. Unfortunately, this can severely curb a company’s ability to fulfill contracts and grow internationally.
Enter the Foreign Exchange Facility Guarantee (FXG). With Export Development Canada’s (EDC) FXG in place, you can book FX contracts with your clients without restricting their credit line or working capital. Our FXG provides you with a 100% irrevocable and unconditional guarantee to cover your full or partial collateral requirement.
It’s a flexible solution that allows small, medium and large companies to manage their currency risks—plus other financial needs—as shown by the following three companies.
This small environmental solutions manufacturer uses FXG to offset natural hedging risks.
FXG helps this leading test and quality assurance solutions provider to accommodate long order-to-cash cycles.
Acadian Seaplants Limited
With 80-plus markets, this agri-tech giant can provide customer pricing stability with FXG.
Headquartered in Riverton, MB, ECBVeryol manufacturers high-quality revegetation, erosion and sediment control products. Whenever dirt is moved to make way for roads and other infrastructure projects, the net effect on the surrounding environment can lead to erosion that’s 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 unfathomable amounts of carbon emissions.
The company exports primarily to the United States, but also 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 the vast majority 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 their bottom line. They rely on natural hedging for half of their currency exchange requirements in any given year, which, they admit, is more art than science. For the rest, they buy forward contracts through their financial institution (FI) to lock in rates and provide stability to their FX strategy.
Many FIs tie a cash collateral requirement to their forward contracts, which can put a working capital strain on a small, but growing company, like ECB. So, their FI advised them to use an FXG, which had the benefit of guaranteeing their FX line without freezing their liquidity.
“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 FXG eliminates the unknown, while still allowing them to put their full working capital to work to reach new customers.”
We’ve been using FXGs 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 develops automated test and quality assurance solutions for a wide array of applications in the automotive, aerospace and defence, life sciences, consumer electronics and telecom sectors. The advanced technology company is headquartered in Montreal, QC, with eight additional offices located around the globe. A full 85% of their sales derive from exports, with the United States, Mexico, Europe and Asia comprising 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—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 for both their payables and receivables. At the same time, they needed unencumbered access to their credit line to secure the cash flow necessary to take on new international contracts.
Using an FXG, EDC provided a guarantee to Averna’s bank 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.
And what’s good for an exporter, is good for their FI. “By using an FXG, FIs can offload the collateral risk from their client to EDC, freeing up their credit line. From what I’ve seen, by offering these types of strategic working capital solutions early in the relationship, FIs end up solidifying their position with their client.”
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 they 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 surges. 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 reaching in excess of $90 million.
With well over 90% of their sales flowing from foreign markets, one of the key challenges faced by this global agri-tech giant is to manage currency fluctuations. Their foreign exchange strategy involves hedging for up to 36 months in advance. They rely on EDC’s FXG to free up 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 an 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.”
Similarly, it’s just as important for their FI, adds Al-Owaishi. “The foreign exchange credit facilities required by large companies can often translate into significant exposure for their bank, so it’s critical to have the collateral security available to provide the necessary coverage. The FXG provides just that, while freeing up working capital capacity for the company to utilize to continue running and growing their business.”
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.