Where were the Boards on the CDN currency risks?
On this, “Black Friday”, why do Canadian consumers literally feel poorer as the Loonie peels off from US$1.10 to US$1.01? But we do.
The more important question is this: why did so many Boards appear to ignore currency hedging as part of their risk management / oversight role?
Think about all of the unique risks that Boards tend to worry about: privacy/protection of customer data//information, retaining key employees, IT security, employee harrasment, government remittances, etc. Important issues, but as topics they rarely turn profitable firms into ones that lose money. Why did so few firms that benefitted from the Canadian cost base / U.S. revenue strategy not think about hedging their exposure to the currency?
Looking at the 30 year chart, you can see why it was worth the conversation (source CIBC WM):
– between January 1977 and January 1986, the CDN$ fell from better than par to C$1.45 per US$1 over 9 years
– over the next 6 years, the CDN$ rallied to C$1.15
– between the 10.5 year period from January 1992 to January 2003, it fell through C$1.55
– the current rally we are experiencing began 5 years ago in January 2003
Not every company ignored this chart. Torstar (TS.B:TSX), for one, hedged their currency risk at a key point. Former CFO Bob Steacy’s great gift to that company prior to his retirement was to hedge Torstar’s exposure to the U.S. dollar, which meant that Harlequin’s fabulous U.S. dollar-based EBITDA kept on flowing back to the mother ship, even as the CDN$ rallied.
Here’s a quick snapshot of just some of the tech firms that are now struggling with this issue: Air IQ, COM DEV, Dalsa, Hemisphere GPS, MKS, Mosaid, Nurun, NUVO, Tundra, Wi-LAN, etc. Some have had to put out the “for sale sign”, while others are trimming staff with the Canadian dollar at parity.
And there are just as many publicly-traded companies in the automotive sector (Linamar, Martinrea, etc.) living the same nightmare.
For so many Canadian-based firms that knowingly enjoyed the Canadian “cost advantage” of a 75 or 80 cent Canadian dollar, one has to ask themselves why so few firms hedged themselves against the pain that is now flowing through both the tech and manufacturing economies.
When the dollar flew from C$1.55 to C$1.25 (per US$) between January 2003 and January 2005, it still wasn’t a bad time for the various investment banks with currency platforms to have been pitching these Boards on currency hedges. And it certainly would have been an appropriate time for Boards to ask their CFOs to get the conversations started. Maybe they were “too expensive” to strap on, but let’s hope they at least had the conversation.
Who wouldn’t be happy with a C$1.25 hedge today, if a majority of their revenues come from the U.S. and their costs are in CDN$?
(disclosure – I own MKS; our Fund II has warrants in Air IQ)