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Lowering risk and saving money: Part II

A CFO’s roadmap for foreign currency debt
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Following the historic Brexit referendum vote and Trump’s U.S. election victory, global markets have experienced increased volatility in both FX and interest rates. The U.S. dollar has continued to strengthen against almost all currencies. How should management teams mitigate FX exposure? Given rising U.S. bond yields, how can U.S. firms capitalize on the lower interest-rate environment overseas?

Senior decision makers should revisit foreign currency debt, as it both hedges long-term FX exposures and reduces costs. Though non-USD debt issuance surged over the last 2 years, many firms have not yet issued (or issued enough) non-USD debt and could potentially remain exposed to FX shocks. Firms can access non-USD debt at lower nominal yields than that of USD debt. They can also benefit from investor diversification and access to different maturity profiles. Alternatively, certain firms may benefit from synthetic debt alternatives.

Click the currencies in the chart legend to filter

Source: J.P. Morgan, Bloomberg
Note: USD value of non-USD issuance using the spot rate as of the issuance date

In addition, senior decision makers will need to remain cognizant of key accounting considerations, leverage and liquidity implications at refinancing, as well as asking the right questions in the context of foreign currency debt.

Real value can be created for shareholders with this opportunity to both lower risk and save money.

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