VituVingiSana wrote:stocksmaster wrote:Mainat wrote:Having seen East Africa Portland and KenGen go through this, how come Athi River didn't even try to hedge the fx risk?
They had assumed that the USD Loan of 74.2M (FY 2010) was naturally hedged through its exports of its USD Denominated non-cement exports. As such,they assumed that the USD inflows should have covered for the USD interest payments. I think this assumption did not hold.
Happy Hunting.
There 3 choices in this case:
1) Hedging the FX Loan in its entirety which can be pricey thus negating the advantage of borrowing in FX (US$) vs KES.
2) Hedging the FX CASH FLOWS - which can be pricey as well since ARM has to find a counterparty whose premiums/costs may negate the advantage of borrowing in FX (US$) vs KES.
3) "Natural" hedging the FX CASH FLOWS - These are through sales of goods & services in FX.
The 'loss' made by ARM is a Mark-To-Market loss but as most export sales are made in US$ the 'loss' will be reduced by the difference in increased KES per US$ earned. The 'problem' arises if US$ sales drop.
4Q 2011 will probably see another MTM loss but hopefully ARM can export more cement/goods priced in US$.
KQ is another firm that faces this accounting 'problem' since the Loans (in US$) are MTM during the period to account for KES depreciation. The income in US$ (used to pay the Loan) comes in over several years.
So for all practical purposes, this is a Balance Sheet adjustment not a P&L item.
Historically, the shilling has weakened against the USD, hence the FX loan was not a hedge on FX, but rather just designed to take advantage of lower interest rates (USD being cheaper than LCY by > 3%).
@VVS, do you have a view of the markets they earn these USD inflows from because if it's EA, it wont work - they have the same USD problems as we do
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