Oil down Loonie follows

The cheers are beginning to start as the Canadian dollar has fallen from about US$0.90 to US$0.85 in a matter of weeks. The exporters are already trumpeting this as fabulous, if belated, Christmas/Chanaukkah gift.

And those public tech firms that report in Canadian dollars will have a bit of breathing room to make their consensus numbers when they report their coming January quarter end.

But, what if you borrowed from a Canadian lender in US$ last fall? What does this mean for you?

The face value of that unhedged US$2.5MM loan is now about 5.9% higher when converted to Canadian dollars. Yikes. “You mean I saved a few basis points on the closing fee, or got lower warrant coverage (or not), but when I market-to-market that new loan I’m down C$163,000 already? And my interest costs just went up C$21,000 as well?”

Yikes.

“So, just six months into the loan, my effective cash interest cost has risen from the 12.68% in the original term sheet to 19.31%? Before the closing fee and warrants?”

Why is it that a warm winter drives up a Canadian borrowers cost of debt? That I think we understand: our currency is closely tied to the global mood on natural resources.

But why do people borrow in a currency that isn’t their own? It makes as much sense as taking your savings account and moving it into Yen or Euros or Baht; unless of course you are planning a holiday in another country or intend to speculate on foreign currency.

My advice is to buy a F/X swap (and hope that the deal is still “cheaper” than a comparable C$ transaction), or don’t play the international currency markets with your balance sheet.

Unless, of course, you don’t mind paying 19.3%+.

MRM