Donnerstag, 24. April 2014

Metito’s hedge cuts cash flow risk on chinese currency

A hedging strategy enabled water supply company Metito to fund its China subsidiary in renminbi without fear of foreign exchange volatility

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A planned multi-million dollar infusion of equity into to a Chinese subsidiary meant Metito Group was keen to reduce the risk of currency fluctuations between US dollars and renminbi. Sanjiv Banerji, the Group’s Finance, IT and MIS Controller, explains how they worked out a solution.


Founded in 1958, Metito builds and supplies advanced solutions for water supply and wastewater treatment – turning dirty water into clean water for industry, the oil and gas sector, and for municipalities.

“As Metito has a sizeable business in China, we’ve been in discussion for some time around converting part of its business to renminbi,” says Anurag Jain from HSBC Bank Middle East. “Surprisingly, the first opportunity came, not in form of a trade flow, but for an equity infusion to support its rapidly expanding China business.”


Injecting equity into China using funds raised abroad

Metito had organised a 10-year, USD20 million loan from a German financial institution. Part of this – USD6.4 million – was due to be drawn down in February, with a further USD3.28 million scheduled for May.

“Although the government still maintains tight control over large aspects of the economy, including interest rates and the exchange rates, the currency had been volatile since the beginning of the year,” explains Sanjiv Banerji. “This was further confirmed with the new daily trading band on the Chinese currency, the renminbi, doubling to two per cent on either side of a government-set parity rate. This step is a significant indication of the government’s commitment to market-orientated reforms.

“We had been watching the currencies and could see that we needed to find a way to hedge the effects of our exposure for these two imminent remittances.”

The risk was that, if the forex rate moved against them from the time they carried out their costing and cashflow estimates, Metito would lose a substantial amount of RMB at the time of the transaction.


Reducing forex exposure

“We discussed various hedging options with HBSC,” says Banerji. “For the February transaction, there was only a short gap between booking and remittance, so we opted for a basic Forward transaction. For the May payment, we looked at Forward Extra, Collar and Participating Forward options. We decided to go for Collar because we wanted to hedge the forex exposure and also get the upside potential if the spot moved in our favour. We saw a value in this even though the guaranteed hedge rate is slightly lower than the forward.”

The bank’s Anurag Jain takes up the story again: “We emphasised on the forwards prevailing in Metito’s favour and the risks in keeping the forex open due to the appreciating nature of currency.”

Metito has been in business for more than 50 years. The design and build arm of the group specialises in custom design and manufacture of water treatment, wastewater treatment and desalination plants and systems. Through this business unit, Metito has carried out more than 3,000 projects across the globe. The concessions and utilities business provides full service water supply and wastewater treatment under BOO, BOT, BOOT, TOT and full concession business models, as well as O&M contracts.

The global headquarters in the UAE is supported by strategically located regional offices in Egypt, Indonesia, and China, and oversees 12 offices in various regions. Through this network, the Group manages hundreds of projects, spanning four continents.


On the ground in China

HSBC’s expertise and experience in forex, and in particular the bank’s knowledge of the Chinese market, was a deciding factor for Metito.

“We chose to work with HSBC because of our long-standing relationship covering all facets, including treasury, trade finance and funding,” adds Banerji. “HSBC’s strength and reach in the RMB market meant they could offer a wide range of hedging solutions, plus their extensive on-the-ground presence in China gives us good connectivity.”

“Since RMB is a volatile currency, clients should consider hedging full or part of their forex exposure,” advises Jain. “We’ve also seen that, for some of our clients, it can prove cheaper to hedge their exposure through HSBC rather than the client's China-based supplier or customer hedging it through their own bank and charging it on to our client.”

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