Foreign Exchange Facilities

An exporter pays its staff, its suppliers and its bank in the currency of the country it stands in, and is paid by its customers in someone else's. Between the day the container leaves and the day the US dollars arrive — seventy-four days on Issue 02's file, and lengthening — the business is long a currency it did not choose. If the dollar falls in that window, the same invoice buys fewer of the home-currency dollars the wages are paid in, and nothing about the business's own performance was involved.

A bank gives that business two products, and a good deal of confusion comes from treating them as one. The multi-currency facility lets it borrow in the currency it earns, so the debt and the receipts move together — a working-capital line, priced and structured like the revolving credit facility it usually is, with currency sub-limits inside it. The forward exchange line lets it agree today's rate for the dollars it expects to receive in three or six months, so the margin on a sale is known when the sale is made. The first is money owed; the second is a promise about a rate. The desk reads both as credit, for different reasons.

The multi-currency line. A limit expressed in the home currency — NZ$6.0m equivalent on Issue 02 — with sub-limits for each currency the business may draw in, each sized to something the bank can see: the US dollar sub-limit to eligible US dollar receivables, the home-currency core to the rest of the cycle. Drawings are converted into the limit currency at the day's rate, and revalued as rates move, so a fall in the home currency can push a fully drawn line over its limit without a single new drawing. Interest runs at each currency's own base rate plus the margin; the rest of the mechanics — annual review, clean-down where the need is seasonal, the borrowing base where there is one — are the revolver's.

The forward exchange line. Not a loan but a limit: the maximum face value of forward contracts the bank will hold with the business at once, and the tenor it will write them for. The bank's exposure on each contract is the cost of replacing it if the business cannot deliver the currency on the day and the rate has moved — so the credit line is set as a fraction of face value, and larger for longer-dated contracts. Behind it sits the hedging policy: how many months of expected receipts are covered, how far ahead, and who is allowed to decide. A business without one has a treasury run on opinions.

The visible cost is the margin; the real cost is the currency the debt is in. A constructed illustration, every figure invented for teaching — an exporter with US$2.0m of receivables due in ninety days, borrowing against them:

The first structure is a hedge that costs nothing and requires no view on the exchange rate; the second is an unhedged position that happens to look like ordinary borrowing. The forward line closes the same gap by a different route — it fixes the rate on the US$2.0m for ninety days, for a price built into the forward rate — and it is the right tool when the business does not need to borrow at all, only to know its margin. A business that does neither is not being brave; it is running a currency book alongside a food business, and usually without knowing it.

Net exposure, not gross sales. The currency risk is receipts in a currency minus costs in that currency; an exporter that buys packaging in US dollars is less exposed than its sales figure suggests. The desk wants the net number by currency, and then wants to see the debt and the hedges sitting against that number and no other. The guide How Banks Read Exporters takes this reading through the whole file.

Every currency matched to a reason. A sub-limit exists because customers pay in that currency; a forward contract exists because a receipt is expected in it. A drawing in a currency the business does not earn, or a forward with no receipt behind it, is a position — and a position is the bank funding a bet. On Issue 02, the request was for NZ$6.0m equivalent in US dollars and a currency “to be confirmed”, and the managing director would not say which. The senior read approved an NZD core plus a USD sub-limit sized to eligible USD receivables, and made any further currency conditional on a disclosed schedule.

The trend in the cover. Hedge cover falling from nine months to four while the US dollar share of sales rose from 55% to 75% is two lines on a dashboard, and read together they say the business took more of the risk on at exactly the moment it stopped insuring against it — with a view on the dollar where a policy should have been. The limit in the wrong currency. A line expressed in home currency and drawn in US dollars breaches when the home currency falls, with no new borrowing at all; a desk that sets the sub-limit in the currency it is drawn in has removed a breach that means nothing and would have hidden the ones that do.

Borrowing in a currency the business does not earn. Usually because that currency's interest rate was lower. The saving is visible every month; the loss arrives all at once, when the currency moves, and it lands on a business that thought it had a loan and in fact had a carry trade.

Hedging that became a view. Cover run down because the dollar “is going to fall”; forwards rolled rather than delivered because the rate went the wrong way. A hedging policy is there so that the business never has to be right about the market; the moment a managing director's opinion is doing the policy's job, the forward line is funding speculation.

The currency to be confirmed. A third currency added to a line for flexibility, with nothing in the business that earns it. Flexibility is the word a position uses to get through a credit committee.

Forwards read as free. A forward exchange line carries no interest and shows no balance, and so drops out of the borrower's picture of its own debt. It is credit all the same: a business that fails with contracts outstanding leaves the bank to close them at the market's price, and the desk that sized the line was lending to that day.

Issue 02 is the multi-currency line at full difficulty — an exporter whose US dollar share of sales rose to 75% while its hedge cover halved, asking for a third currency it would not name — and its file appendix carries the receivables the sub-limit was sized to. The same file is read from the exporter's chair and, on the hedging policy itself, from the finance manager's chair. The reading is How Banks Read Exporters; the borrowing mechanics are the revolving credit facility's; and the two trade products that sit beside these on an exporter's file are the trade loan and LC discounting.