Australian businesses to avoid credit crunch through hedging
Indeed local businesses have leapt at the chance to borrow cheaply in US dollars - the practice that has spooked investors in Indian and Indonesian financial markets in recent weeks.
In the past 18 months Australian companies have raised about $US147 billion ($163.7 billion) in US-denominated debt.
But unlike many businesses in emerging markets local companies have taken a cautious approach towards protecting themselves against currency market gyrations.
A big reason for the market pessimism towards India and Indonesia in recent weeks is because firms in these countries issued large amounts of bonds denominated in US dollars.
Now that global capital is being pulled out of emerging markets, causing these currencies to fall, servicing this debt has become much more expensive.
The trend has been especially alarming in India. Its big companies, including the Reliance and Essar groups, are estimated to hold about $US225 billion in US-denominated debt.
Indonesia - where greenback-denominated bond issues have this year more than doubled the amount of debt issued in rupiah - is also a worry.
"The companies in emerging markets such as India and Indonesia have borrowed heavily overseas because of constrained domestic credit markets, which have been unable to meet funding requirements needed, and to take advantage of lower offshore rates," a credit market analyst at Deutsche Bank, Anthony Ip, says.
"It was not an issue when the exchange rates were stable, but with all the concerns about tapering that's really hit emerging markets hard. Their currencies have fallen and that's left the companies quite exposed."
Australia, a net importer of capital, also raises plenty of money on overseas bond markets.
Deutsche Bank figures shows local companies have issued $US47 billion in US dollar debt so far this year ($US100 billion last year) with most of the issuance accounted for by the big banks.
Authorities are confident, however, that Australian companies can avoid the pain being felt in India and Indonesia, because local firms have "hedged" their liabilities against changes in the exchange rate. While about half of India's corporate debt is thought to be unhedged, the latest official figures, from 2009, showed nearly all of Australia's foreign liabilities were hedged into Australian dollars.
"Australia's foreign currency debt liabilities are essentially fully hedged into Australian dollars using derivative instruments, with the small amount of unhedged liabilities largely held as natural hedges," the Reserve Bank said.
The big exception is the mining sector, where many companies borrow "unhedged" because they are often paid in US dollars and can withstand currency shocks.
The Reserve Bank is expected to publish the latest results of its hedging survey this year, but there is little reason to think Australian firms' approach to hedging has changed.
Frequently Asked Questions about this Article…
Authorities say Australian companies have largely hedged their US-dollar liabilities into Australian dollars, meaning currency swings hit them less hard than firms in some emerging markets. The Reserve Bank noted foreign currency debt is essentially fully hedged into AUD, unlike many companies in countries such as India and Indonesia.
According to the article, Australian companies raised about US$147 billion in US‑denominated debt over the past 18 months. Deutsche Bank figures show local firms issued about US$47 billion so far this year (compared with roughly US$100 billion last year), with much of the recent issuance coming from the big banks.
Market pessimism was driven by large amounts of US‑dollar bond issuance by firms in those countries. As global capital withdrew from emerging markets their local currencies weakened, making it much more expensive for unhedged companies to service dollar‑denominated debt—an issue highlighted in India and Indonesia.
Hedging typically uses derivative contracts to lock in an exchange rate or otherwise convert foreign‑currency liabilities into Australian dollars. That way, if the local currency falls, firms with hedges aren’t forced to pay much more in AUD to service US‑dollar debt, reducing the currency‑risk exposure that has hurt some emerging‑market companies.
Yes. The mining sector is a notable exception: many mining companies borrow unhedged because they are often paid in US dollars and can tolerate currency volatility, so they accept some exposure that other sectors hedge against.
Deutsche Bank’s credit market analyst Anthony Ip said firms in countries like India and Indonesia borrowed heavily overseas to make up for constrained domestic credit markets and to take advantage of lower offshore rates. That left them exposed when exchange rates moved and global capital flowed out.
While Australian big banks account for much of the recent US‑dollar issuance, the article reports authorities are confident local firms have hedged those liabilities. The Reserve Bank describes foreign currency debt as essentially fully hedged into AUD, suggesting less immediate currency‑related risk than in some emerging markets.
Yes. The Reserve Bank is expected to publish the latest results of its hedging survey this year. The article notes there’s little reason to think Australian firms’ overall approach to hedging has changed since the last official figures in 2009, which showed nearly all foreign liabilities had been hedged into Australian dollars.
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