Risk ManagementTalking Shop

Talking Shop: Net Investment Hedging When There Is No Underlying Income

By December 17, 2020No Comments

Member question: “Do you hedge net investments where there is no underlying operating income or cash flows?

  • “Curious what philosophy or triggers companies have around net investment hedging—and if any companies do NIH where they don’t have an underlying positive cash flow or plans to liquidate? For example, a region where you may have a lot of fixed assets but no material underlying revenues.”

Peer answer 1: “At our company, we have to raise debt regularly, so our NIH program is mostly foreign currency debt (both organic and synthetic via cross-currency swaps). Our NIH currencies happen to be in countries with material revenues.

  • “But for us, the thought process is that we’re going to raise debt and some of that capital will be deployed into other countries and currencies; why not raise some of that debt in the same currency in which the assets will be deployed as a natural hedge?
  • “We do also sometimes use forwards tactically as short-term NIH if we’re declaring a dividend or return-of-capital or putting money into a foreign sub prior to that sub making an acquisition.”

Peer answer 2: “We execute NIHs in anticipation of large dividend payments as a way to hedge the cash flow prior to dividend declaration.”

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Justin Jones

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