HEDGE OR DIE

(Lessons we can learn from FTI Touristik’s failure – part 2)

Doing business in countries with volatile currencies is risky.

Yes, your business can grow its sales, but it can also backfire and ruin your business completely.

I have to start with a disclaimer here: FTI actively used hedging practices and this post does not say they did something wrong, they are just a good example of the magnitude FX can have on financials.

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If you did business in Türkiye, Ukraine, Russia, some African countries, etc., you have probably experienced currency volatility.

Perhaps you hedged and minimised the impact, perhaps not. Anyway, it can get nasty if you didn’t.

FTI reported negative EBITDA for 2022 of -46m €. And then to “better capture the underlying business results”, in their Adjusted EBITDA calculation, FX losses of 71m € were added back. Including some other elements, the Adjusted EBITDA turned out to be positive at 49m €.

Is this ok?

I think it’s not ok.

71m € is a huge impact, more than their annual EBITDA BEFORE the pandemic.

If you sold something for 100 and it is actually worth 70 because the currency you sold it in depreciated, you actually lost 30. These 70 will never be 100.

So, to exclude this from the EBITDA calculation is wrong. Who says this will be a one-off effect?

Yes, this adds to the volatility of EBITDA, which again makes it more difficult to calculate the annual debt repayment capacity, but this volatility also says a lot. It says you have to be careful with the assumption of the annual cash flow available to repay debt.

Doing business in countries with unstable currency is a risk of your business model. You should reduce it as much as possible.

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All of this has a huge impact if your debt is exclusively in hard currency (in this case the euro).

This is where many Croatian companies fail. They borrow exclusively in euro and sell in many countries in different currencies.

There are 2 most common ways to mitigate the FX risk:

1) Natural hedging by borrowing money in local currency in countries of operations.

Yes, you might have to pay more, but it’s worth the risk you will eliminate.

2) Buy appropriate hedging instruments, like FX swaps (contact your local banker for more info).

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Having appropriate financing strategy is key to a company’s survival.

Borrowing in many countries has its risks and benefits. In order to do this properly, your financing agreements have to be aligned with the financing strategy.

In case you need help with developing your financial strategy and / or negotiating financing agreements with banks, feel free to get in touch.