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Your company banker is the one taking the FX risks if he doesn't want to lend in USD, if your banker is not completely incompetent he should be the one begging your to hedge the FX risk in some way :).

I looked around and at least on paper it seems that this canadian bank has all you want:

http://www.desjardins.com/en/entreprises/solutions/services-internationaux/financement/pret-terme-us.jsp

In France there's a state backed institution called COFACE that offers all sort of services for french exporters and importers, including FX risk insurance:

http://www.coface.fr/CofacePortal/FR_fr_FR/pages/home/pp/assurchange/interet

Otherwise most french banks offer tools for FX:

http://entreprises.bnpparibas.fr/Commerce-international/Risques-de-change

Hi Laurent,

Thanks for the link, particularly the Desjardins one! My experience (and that of my clients) is naturally just anecdotal - I have no hard data on how easy/hard it is to actually obtain U.S. dollar financing (and how much the rate premium would be if one were able to obtain it). It would be great data to have, but I suspect nobody has collected it.

Neat! I hadn't thought of the "borrow in US$" solution. It's obvious now you mention it. Of course, borrowing in foreign currency is normally a recipe for increased risk, hoping to take advantage of lower interest rates. But not in this example.

How about an interest rate swap?

You have to think that if you can walk the bank through the story, it should be able to see that this is a way of reducing risk. Or put it another way: if it was willing to lend in CAD, it should be even *more* willing to lend in USD. It can hedge its own forex risk much more easily and cheaply than the small business can.

Very cool anecdote.

The issue for the bank though is that it also finds 10 year FX options/forwards expensive. It would only be more willing to make the USD loan if it can borrow short in USD, if it has no USD deposits this means relying on US money markets. The ones that got run somewhat recently.

Really? Banks can issue debt on the US market pretty readily, no? And at least some banks offer USD accounts. Not sure how these are treated by CDIC, etc.

Thanks for your comments everyone - much appreciated!

Nick: Thanks for the kind words. Like investing in commodity futures borrowing in foreign currencies can either increase risk or decrease existing risk. In my course at Ivey one of our classes is devoted to types of exchange rate risk (transactional, translational, competitive) and ways to reduce that risk. Borrowing in a foreign currency is often the easiest and cheapest way, though it is one that is typically overlooked.

Fred: In theory an interest rate swap could work. We're talking about a small (3-4 million dollar a year in revenue) company that probably isn't all that savvy when it comes to financial markets - and there are hundreds, if not thousands, of companies in Southwestern Ontario alone that fit that description. I'm not sure an interest rate swap is an option for them.

Stephen, Adam and Andrew: Many Canadian banks offer USD accounts and typically USD overdraft protection and small lines of credit in USD, however it is extremely difficult (at least in my experience) to get larger loans in USD. I am not sure how much deposits a branch would have at any one time in USD. Overall if this company goes to the Royal Bank in Brampton and received a 900 000 USD loan, it largely is just shifting the forex risk from themselves to the bank. I would think that should not be that large a problem as the branch should be far less risk averse than a small company and the parent company should have all kinds of tools on hand to manage the risk.

To me the more obvious solution would be for the company to borrow from a U.S. bank - they could drive down to Buffalo and borrow from a branch of M&T. However (again anecdotally) it is extremely difficult for a small Canadian company to borrow from a U.S. bank. There may be some risk to the US bank that a change in Canadian policy could correct. Without knowing *why* U.S. banks are reluctant to lend to Canadian companies (assuming that my anecdote represents a wide-spread phenomenon), it is tough to know what policies or regulations need to be changed.

Mike, I do not truly know the reason why US banks will not make small loans to Canadian companies. But may I draw the following facts to your attention?

1. Relationship banking. Banks believe that they know their customers better than outsiders do, and that this gives them an edge in credit assessment (for today's purposes, I am just the messenger: I am neither supporting nor disputing this belief.) Why then does an unknown customer from a far-flung location come knocking on your door for a loan? Why not deal with their regular bank? There is an implied risk of adverse selection.
2. Default resolution. Suppose the worst happens, and the customer defaults. Bankruptcy will be handled in a foreign court, and whatever assets pledged in credit support disposed of in a foreign market, possibly with unknown tax consequences. Hiring foreign experts to deal with these matters will be expensive compared to the amount of the loan. This effectively reduces expected recovery rates and raises the fair credit spread for the loan.

To me, the greater mystery is the one you dismiss, why Canadian banks will not routinely make USD commercial loans. Isn't financial intermediation the purpose of banks? In effect, the proposed USD loan is just a bundled CAD loan + USD/CAD swap from the bank's perspective. The bank would happily swap 100mm CAD to USD, so why won't it do 100 x 1mm (at a price)?

I suspect that much of the problem here is that banks are not unitary entities, but loose collections of business units with disparate political powers within the organization. Cooperation between these different units always raises the problem of transfer pricing, which is notoriously difficult to get right. You correctly point out that a large company could simply swap a CAD loan to USD; however, a large company would probably not be taking a loan anyway, but rather borrowing directly in the bond market. It is possible to float issues denominated in either USD or CAD on international markets; the question of whether to float in CAD and swap to USD or float directly in USD is purely economic. But note that in doing this the large company would not be dealing with bankers but with investment bankers. The latter usually claim to be more profitable than the stolid lending business, though of course they would be unable to operate if they could not lean on the balance sheets of the commercial and retail businesses. In theory this is reflected in some sort of risk-adjusted capital charge, but as I said, transfer pricing is hard to get right. Anyway, the bottom line is that investment bankers are politically powerful within the bank. The proposed small USD loans made by branches would be aggregated on a book in the treasury and risk-managed there, with the branches being charged for the service. It is just harder for initiatives to come from that direction.

It does seem like this is an opportunity for government policy to make USD loans easier to obtain relative to CAD loans. I wonder if BDC is on this issue.

I would also note that a bank that is willing to accommodate a SME on a matter like this is likely to get the firm's other business, including payroll, etc.

It doesn't have to be a USA bank, USD is prevalent in lots of countries.


"I would think that should not be that large a problem as the branch should be far less risk averse than a small company and the parent company should have all kinds of tools on hand to manage the risk."

I don't see any difference between SME or bank exposure. I remember when our big banks tried to merge like all the rest of the world's incestuous bank breeding (for some reason our banks get conservative-investor status instead of P.Martin). Won't the banks just be buying the same LEAP-ish instruments as SMEs would have to? Is two currency transactions and currency options more expensive than banking fees and more USD/US-economy bank exposure?
Vancity is only institution to use microfinance. It would be interesting to know how large a Canadian loan must be before banks offer services that generate a decent profit. Somewhere between $50k-$500k sized loans, banks start to offer services. Maybe the mini-SME loans could be pooled and insured by AB or Ont, but why increase USD exposure on Canadian banks now while their banks still inflict meltdown regulations?

Just read Laurent already showed the problem is SME lack of shopping skills. As Andrew F's 1st comment already noted, it wouldn't be practical for CDIC to insure USD accounts, no? I'll read comments 1st for now on.

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