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It was a fantastic two days rubbing shoulders with the Local Government finance community at the recent SOLGM Strategic Finance Forum in Wellington. It was an opportunity to listen to some of the inspiring initiatives going on in the sector such as the Hamilton City Council/Downer Waikato Infrastructure Alliance and the Gisborne District Council presentation on its business intelligence software.

Gisborne DC’s presentation resonated particularly strongly with us at Hedgebook as it was a practical example of how Councils can leverage technology to work smarter.

Hedgebook is designed with a strong focus on the New Zealand Local Government sector. Our latest update to the software adds the ability to include LGFA Borrower Notes as a companion to the LGFA Loans functionality that was completed in January.

Councils now record all debt information (LGFA, bank, private placements, term borrowings), including LGFA borrower notes, alongside the interest rate swaps used to manage the fixed interest rate profile.

Councils use the simple and intuitive Hedgebook system to:

  • Confirm BKBM rate-sets against bank notices = better internal controls
  • Manage cashflows arising from debt and interest rate swaps = better internal controls, improved efficiency
  • Calculate month-end interest accruals = saves time
  • Calculate interest rate swap valuations for key reporting dates = improves compliance, know your position
  • Run sensitivity analysis for financial year-end reporting = improves compliance reporting
  • Compare hedging against Treasury Policy limits = strategic decision making, closer collaboration with advisors
  • Move away from error prone spreadsheets

At SOLGM we met many existing Hedgebook clients and many potential new ones too. Hedgebook is already the most widely used treasury management system in NZ from both a Local Government and corporate perspective.

North Island Quote3

If you would like one of the Hedgebook team to take you through a 20 minute on-line demo of the system then just click here and we will be in touch to arrange it. Alternatively, if you would rather explore the functionality for yourself click here for your free trial.

The introduction of IFRS 13 in January 2013 was, in part, recognition of the mispricing of market credit risk that had resulted in the near collapse of financial markets in 2008. IFRS 13 requires “fair value” to include a credit adjustment for financial instruments such as FX forwards, FX options and interest rate swaps representing the credit worthiness of each counterparty to the transaction. It makes sense to adjust valuations by a credit component. IFRS 13 bases fair value on an “exit price” of the security i.e. the price at which you can go to the bank and close out an existing transaction. Whether you are buying or selling a financial instrument the bank will naturally add a margin so it is counter-intuitive to mark-to-market a position without a credit component.

What has been most surprising about the introduction of IFRS 13 has been the lack of engagement by auditors to champion the credit adjustment component of valuations. Often lack of materiality is cited as the reason for not asking companies to provide the credit adjustment when put in context of other risks within the business, but how can the adjustment be deemed non-material if the calculation is never done?

Given the deterioration of credit conditions over the last few months it will be interesting to see if auditors continue to stand-by the “non-material” argument or whether there is a move towards compliance of the IFRS 13 accounting standard.

Aussie Bank Big 4 CDS 3 -year

At Hedgebook we do not dispute that the credit adjustment adds little value to a business and is another thing to ensure year-end financial reporting is dragged on, however, we have made it easy and low-cost to achieve. The CVA module within the HedgebookPro app allows the user to create credit curves, assign them appropriately to the relevant instruments and produce a report to satisfy audit requirements.

For a demo of Hedgebook’s CVA/DVA functionality, register your interest here.

 

Just like Kathmandu, who recently became a Hedgebook client, we are pleased to announce the signing of another iconic New Zealand brand, Skellerup.

Many people know Skellerup as being the leading producer of gumboots, however, there is much more to Skellerup; the Group designs and manufactures a variety of Agri and Industrial polymer products for dairy, infrastructure, plumbing, water, automotive, marine, waste, gas and mining applications.

Skellerup was founded by George Skellerup in 1910 and has grown to employ almost 800 people in New Zealand, Australia, the United Kingdom, Italy, USA and China. As a listed company on the NZX, Skellerup is focused on the compliance reporting aspects that Hedgebook brings to its foreign exchange and interest rate derivatives. However, as Graham Leaming, CFO noted, “Hedgebook also gives Skellerup good visibility of its fx risks across multiple entities and multiple currencies”.

Hedgebook is pleased to welcome Skellerup as a client.

There can be no greater affirmation of the global movement towards digitalisation than the world’s biggest firms putting their considerable resources to work. The launch of PwC’s Next platform gives small and mid-sized businesses access to the tools to grow quicker, work smarter and level the playing field against the big boys. Hedgebook will be available on the Next platform alongside a growing number of other smart and leading edge apps.

http://www.pwc.co.nz/media-centre/news-releases/pwc-working-with-xero-and-spotlight-reporting-to-create-innovative-cloud-solution/

We often encounter a common misconception among SME importers and exporters that the FX hedging market is the domain of the “big boys”. SME importers and exporters often believe that the use of financial instruments such as FX forwards and options are for “large” foreign currency costs and/or sales receipts. However, the definition of “large” is obviously subjective; the more crucial consideration is one of materiality. If the importer or exporter has the luxury of being a price maker and can pass through the impact of foreign currency movements to the customer/supplier then there is less necessity to hedge. Many businesses are not fortunate enough to be in this situation. Rather, adverse movements in foreign exchange rates have a direct impact on margins and profits. So how much foreign currency exposure warrants hedging through derivatives and what are the administrative costs of doing so? As a rule of thumb if the company has on average >$50,000 of monthly FX exposures then there is merit in taking a more active approach to managing the risk, as opposed to passively transacting at the prevailing spot rate on the day. Of course this needs to be put into context of total revenue.

Having determined that the FX exposure warrants hedging, there are further important considerations of an FX hedging programme:

  1. Does the company have the knowledge base to transact and manage FX derivatives? There may be a certain level of education required before committing the company to financial obligations. There are many resources available to aid the understanding of the common financial instruments available for hedging purposes. On-line resources are plentiful. Banks and brokers are always available for training sessions, too. This is mutually beneficial. Banks and brokers make money from the FX transactions, whilst the company is put in a better position to manage and mitigate FX exposures.
  2. Does the company have the systems and processes to transact and manage FX derivatives? Derivatives such as FX forwards and options require recording, reporting and valuing. Until relatively recently many companies were reliant on spreadsheets and bank valuations to manage FX derivatives as systems were prohibitively expensive. With the advent of cloud based systems, SME companies have access to systems at a fraction of the cost of more traditional solutions. Systems allow better management of derivatives, give better visibility over exposures, in turn increasing confidence to enter hedging. Systems allow more time to be spent on strategic decision making.

So the hurdle to entering FX hedging is not so much one of quantum, but more about having the skill set and systems to adequately manage a portfolio of derivatives. There is a wealth of resources available to help transition a company into a hedging programme and take the volatility out of profit outcomes.

For a closer look at the fundamentals of FX hedging download our Dollars & Sense eBook.

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