Importance of Hedging your Buyers Credit Exposure

Companies take buyers credit for 2 primary reasons, either they don’t have cash to pay out their dues on time or they expect the INR to appreciate. In both the situations what companies usually forgot is the risk which they carry of further INR depreciation. With this article, i am trying to give you a real time example of how a company paid 20% interest rate by taking a buyers credit.ABC Company took a buyers credit as under:Following is a real time data pertaining to the above transaction:Following were the Fixed Cost for the company, irrespective they do hedging or not.Hedging Vs Non Hedging outflows for the client:Findings of the above example:a. In case client would have hedged; his eventual cost in INR turns out to be 9.46% pab. If the client didn’t hedge, his eventual cost in INR turns out to be 19.35% paStrategies around the above example:Underlying theory for any strategy around Buyers Credit: The difference between Importers CC Interest Rate and the BC Cost (LOU, Arrangement, Interest, Coupon) is the break even point. Strategy 1: On the day of draw down if the summation of your BC Cost, LOU Cost and Hedging Cost is below the CC Interest Rates by say 2 to 3% then hedgeStrategy 2: From the date of draw down till repayment if INR appreciates against USD, the % of appreciation can be factored to cut down the BC Interest cost. Having said and done, companies clearly need to undermine the Risk Management Policy under which they are working. Questions like what if the INR appreciates against USD should be tackled by the RMP of the company. The whole idea of writing this article was to bring in a point that lots of companies who take buyers credit don’t even consider the option of hedging because they are only adept to the point that Buyers Credit is a low cost funding.
Piuesh Daga
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Importance of Hedging your Buyers Credit Exposure

Piuesh Daga
Blog
07th Aug, 2017
Importance of Hedging your Buyers Credit Exposure

Companies take buyers credit for 2 primary reasons, either they don’t have cash to pay out their dues on time or they expect the INR to appreciate. In both the situations what companies usually forgot is the risk which they carry of further INR depreciation. With this article, i am trying to give you a real time example of how a company paid 20% interest rate by taking a buyers credit.

ABC Company took a buyers credit as under:

Following is a real time data pertaining to the above transaction:


Following were the Fixed Cost for the company, irrespective they do hedging or not.

Hedging Vs Non Hedging outflows for the client:


Findings of the above example:

a. In case client would have hedged; his eventual cost in INR turns out to be 9.46% pa

b. If the client didn’t hedge, his eventual cost in INR turns out to be 19.35% pa

Strategies around the above example:

Underlying theory for any strategy around Buyers Credit: The difference between Importers CC Interest Rate and the BC Cost (LOU, Arrangement, Interest, Coupon) is the break even point.

Strategy 1: On the day of draw down if the summation of your BC Cost, LOU Cost and Hedging Cost is below the CC Interest Rates by say 2 to 3% then hedge

Strategy 2: From the date of draw down till repayment if INR appreciates against USD, the % of appreciation can be factored to cut down the BC Interest cost.

Having said and done, companies clearly need to undermine the Risk Management Policy under which they are working. Questions like what if the INR appreciates against USD should be tackled by the RMP of the company. The whole idea of writing this article was to bring in a point that lots of companies who take buyers credit don’t even consider the option of hedging because they are only adept to the point that Buyers Credit is a low cost funding.

Piuesh
Blog Author

Piuesh is the cofounder of White Matter Advisory and is responsible for the overall delivery and execution at WMA. He profoundly believes in significance of financial literacy in emerging markets. He is the youngest amongst the co-founders with an overall experience of 7+ years in the banking industry.

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