Top CFOs explain their companies' approaches to rand hedging
To hedge or not to hedge? That is the question. Five CFOs unpack their reasoning.
The volatile rand is one of the most commonly listed external challenges facing South African CFOs.
“The rand volatility, where the currency moves in an unexpected fashion, is difficult to contend with,” says Jasco CFO Warren Prinsloo.
Former Imperial Holdings CFO Osman Arbee said that “The weak rand is a big issue, as we [Imperial Holdings at the time] import 75,000 vehicles every year and you cannot pass on a 25% increase to the customer.”
Sasol CFO Paul Victor (pictured) was faced with the challenge of the oil price bottomed out just as Sasol was facing a R2 billion overrun on the Lake Charles Chemical Cracker Project in the United State. His reaction has been to implement a cash conservation strategy and a rand hedging programme, while still keeping shareholders happy.
As a result of these types of challenges, in recent years, rand hedging has become more prevalent - but not all CFOs believe it’s the best way to mitigate risk.
Warren doesn’t much hold in hedging strategies, saying that:
“It doesn’t matter if you have a hedging strategy in place and if you regularly review this, our policy is not to speculate the rand. When the rand does something suddenly you could end up with a smile on your face or a frown.”
Read more: Interview: CFO Warren Prinsloo Jasco
Aspen CFO Sean Capazorio said the company has dedicated teams that monitor changes, ensure compliance and find areas of advantage. “We have rigorous hedging processes and a comprehensive treasury team that focuses on general forward cover. We have introduced constant currency reporting to remove the impact of forex volatility.”
Read more: 8 Questions for Aspen CFO Sean Capazorio
For Sasol, the company’s rand hedging programme was part of a broader financial strategy.
“Oil prices were low, we had to deal with a $2 billion overrun on our Lake Charles Chemical Cracker Project in the United States. It was essential for us to further look at business opportunities and financial risk mitigation measures to keep the balance sheet in good health as well as progressing our Lake Charles project. Being a rand-hedged stock results in shareholders sometimes not preferring an extensive hedging programme, but we had to mindfully look at all relevant business solutions to protect the balance sheet against market volatilities and keep cash flowing in the organisation,” said Paul.
“If you don’t do things the right way, you can expose the company to unnecessary risk and with that lose trust with shareholders and stakeholders. We implemented a very focused cash conservation programme and with regards to managing our financial risk we basically started from scratch in building a robust hedging programme which we believed effectively protected the balance sheet, thereby ensuring a sustainable operating cash flow to complete the Lake Charles capital programme and keep paying dividends to all our shareholders.”
The chemical and energy company’s reaction to prevailing market forces saved it from the worst outcomes.
“Our hedging programme was implemented in a prudent, transparent and thoughtful manner. We’re currently dealing with 23 global banks in executing the programme. At first, shareholder buy-in was not easy. A rand-dollar exchange rate hedge for example was new to our shareholders, and we had to be respectful to their views but needed to change their mindset that our aim was to protect the balance sheet. Our board needed to ensure that balance sheet protection was a core focus and played a significant oversight role with regards to the hedging policy formulation and in setting clear mandates within which we executed the programme. In times like this, a board's effective oversight is absolutely invaluable to management and shareholders.”
While Imperial has always had an established forex treasury function, it has set up a formal FX committee that looks at the group’s FX exposures and, based on this, implements appropriate hedging and forward cover strategies to mitigate FX risk, says Mohammed Akoojee, Imperial Holdings CEO (CFO at the time of interview).
“This was set up to reinforce our focus on forex, given the volatility of the rand,” he explains.
How Imperial presents itself to the market is another key focus area, says Mohammed, as this must be done in such a way that the company’s business is easily understood, and the correct valuation for its logistics and motor divisions – two self-sustaining businesses – is easily apparent.