Insight & Analysis

Rush to repatriate FX shows dangers of liquidity opacity

Published: Nov 2020

A recent report finds that during the height of the pandemic companies that didn’t have enough visibility of their liquidity were quick to pull their assets out of multiple locations and centralise them in singular countries - primarily the US - without taking currency impacts into consideration. Six months on, banks report that more companies are interested in hedging their FX risk, but are prioritising short-term, flexible strategies.

The tail of a plane during sunrise

Kyriba’s latest currency report shows the damage wrought by companies’ lack of awareness of their liquidity position - and actual lack of liquidity - earlier in the year in a particularly stark light. Using data gathered from earnings calls from 1,200 publicly traded companies, the cloud treasury and finance solution group’s latest Currency Impact Report finds that American and European companies reported a combined US$17.53bn in quantified negative currency impacts in Q2 2020, up 44% from the previous quarter.

The problem was two-fold, explains Kyriba's Senior Strategist, Wolfgang Koester. As soon as the pandemic hit, many corporates immediately sought to shore up their liquidity by bringing FX reserves back home. “The first reaction to COVID amongst many corporations all over world was to bring their cash back into their home currency,” he said, adding that the repatriation strategy quickly triggered other risks in a domino effect. A French company, for example, bringing dollars back to France would still have business in America and therefore payables in dollars. Bringing cash back home to France would therefore leave the company “massively exposed” to dollar euro exchange rate risk.

The survey also found that the Brazilian real was (again) referenced as most impactful by North American companies for the second quarter in a row, mentioned in 28% of earnings calls in which companies named specific currencies that impacted their revenue. Prior to Q1 2020, the euro held a 12-quarter streak as most impactful. The Canadian dollar reappeared on the list for the first time since Q2 2019.

Kyriba’s findings are borne out by banks also reporting how some corporate treasury teams found themselves suddenly exposed to supposedly risk-free, developed market currencies during the early weeks of the pandemic. Currency moves have eaten into their profit margins and shaken many companies out of an enduring belief that currency volatility won’t affect them, and that they don’t need hedging programmes, explains Jonathan Pryor, Head of FX sales at Investec.

However, he also notes that enduring volatility means companies are opting for short-term cover over long term hedging programmes. Although treasury teams know they will have to buy and sell currency next year, few have the confidence or certainty in forecasts to commit to hedging all that risk at this stage, he says. Although companies still want products that give them a guaranteed hedge, they also want an element of flexibility when it comes to the amount they want to buy. “A lot of the work we’ve done with clients is around providing them with zero premium solutions given guaranteed hedges with an element of flexibility.”

Rush to borrow

Koester also highlights another important consequence of some companies’ liquidity blind spot. It has led to drawdowns of huge debt with US companies drawing on credit lines in their home country, while their subsidiaries in Europe also drew on credit lines. “Many companies managed their cash without thinking about their exposure and managed their debt without thinking about their exposure,” he said. “Multinationals made blanket statements to repatriate all their cash. Then they loaded up on debt as fast and as much as they could. Raising debt would not have been necessary if they had had a holistic picture of their liquidity.”

Kyriba’s latest figures should act as a rallying call for companies to hire chief liquidity officers, concluded Koester. The role, non-existent in many companies, should be holistic, monitoring liquidity across every division of a company and sit under the CFO. “Many corporations we talk to, now more than ever, see the need for a chief liquidity officer."

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