2019 saw "Export 2.0" - phase two of the industry export plan - published by the Scotland Food & Drink Partnership. Building on the success of phase one (2014-19), the Plan affirms the Partnership's commitment to supporting Scottish producers as they grow their businesses, and Scotland's biggest export.
But with new opportunities comes new jargon, new considerations and new risks, not least within finance arrangements.
In this first of three blogs on finance, we look at currency exchange risk, and forward fixing.
So what is currency exchange risk?
A business with a UK production line (or, local provenance, if you will) is likely to incur all production expenditure in sterling. If income from exports is received, and expenditure associated with exports is incurred, in a currency other than sterling, fluctuations in the rate of exchange between the two currencies will directly affect profitability.
How can this risk be managed?
Forward fixing
Forward contracts are one option for managing that risk. A forward contract allows a business to fix the rate of exchange between two currencies for a fixed period, which may be up to 3 years. The rate of the fix is based on the interbank exchange rate at the time of booking.
Fixing may be utilised by businesses to:
- provide the business with greater certainty as to future pricing and cashflows;
- allow the business to prepare more robust forecasts and budgets;
- mitigate the risk of significant swings in foreign currency exchange rates and, to an extent, the requirement to pay close attention to daily rates when assessing best timing for payments in a second currency; and
- demonstrate appropriate risk management to the market - i.e. funders, customers and other stakeholders.
Food for thought
As with any financial product entered into for a fixed period, there is a risk that the financial markets move against the fix - i.e. rates falling such that the business would have received a better exchange at the daily or spot rate of exchange.
As a financial product, any existing or future funders will also require to be fully informed of the rate and terms of a proposed fix. If, as likely, the business already has facilities in place with a bank or other lender, the facility documentation is likely to prevent the business from entering into a forward contract without the prior consent of the lender.
Finally, and perhaps of more immediate concern, as a financial product there will generally be a cost associated with entering into any forward contract. That cost will require to be assessed against the risk of further currency movement, the rate and the term of the proposed fix.
Taking the right advice
This is a situation where one size does not fit all. Key factors which may drive further consideration might be the business's exposure to currency risk as a percentage of sales, the level of exposure to one or more particular currencies and the intended future direction of the business. Most major (and mid-sized) lenders offer multiple forms of foreign exchange risk management and will be happy to discuss particular products with their customers - both new and existing.
Brodies is able to assist in discussions with your existing lender, as well as advising on the interaction between existing facility documentation and a new potential finance product and/or the contractual terms of particular products. For further information please get in touch with Amy McVey or your usual Brodies contact.
The theme of Brodies Food & Drink Conference 2019 is New Markets: New Opportunities. The conference will provide an engaging forum to discuss exciting new opportunities and growth areas for the sector. For more information and to register your place please click here.
