Local companies likely 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…
The article says Australian firms have largely hedged their US dollar liabilities into Australian dollars using derivative instruments. That means they’ve protected themselves from exchange-rate moves that made servicing dollar debt much more expensive in India and Indonesia as capital flowed out of emerging markets.
According to the article, Australian companies raised about US$147 billion in US‑denominated debt over the past 18 months. Deutsche Bank figures show about US$47 billion was issued so far this year, while issuance was around US$100 billion last year, with much of this coming from the big banks.
The piece explains that many firms in India and Indonesia issued large amounts of US dollar‑denominated bonds. When global capital was pulled out of emerging markets, those currencies fell and the local cost of servicing dollar debt rose sharply, leaving unhedged companies exposed.
Hedging typically uses derivative contracts to lock in exchange rates or otherwise convert foreign‑currency liabilities into local currency. The Reserve Bank said Australia’s foreign currency debt liabilities are essentially fully hedged into Australian dollars, so companies aren’t hit directly by adverse currency moves.
Yes. The article notes the mining sector is a big exception—many miners borrow unhedged because they are often paid in US dollars and can tolerate currency swings, so they remain more exposed than other sectors.
The article reports that about half of India’s corporate foreign debt is thought to be unhedged. By contrast, official figures (from 2009) and Reserve Bank commentary indicate nearly all of Australia’s foreign liabilities were hedged into Australian dollars.
Deutsche Bank data cited in the article says most of the recent US dollar issuance by Australian companies has been accounted for by the big banks.
Based on the article, investors should check whether a company’s foreign‑currency liabilities are hedged (and how), which sector the company is in (mining firms may be more likely to be unhedged), and any official hedging survey results such as those published by the Reserve Bank to gauge overall exposure.
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