Introduction to Corporate Finance

17: International Investment Decisions

surpassing domestic issuance. One explanation could be that these companies increased their use of

natural hedging strategies over this timeframe.

A classic example of this natural hedging strategy is provided by Keybridge Capital Limited, an

Australian listed structured finance and investment management company involved in transport

and infrastructure investments around the globe. The bulk of these investments comprise long-term

mezzanine debt, subordinated debt or preferred equity investments, and are structured in these ways so

that the assets are tied to long-term lease contracts, yielding fixed or predictable long-term cash flows.

Unfortunately, since 2008, the global credit crunch, global economic slowdown and currency volatility

all combined to work against this long-term investment strategy. The company was able to keep trading

by entering into a special debt arrangement with its lenders, but was subject to severe restrictions.

These included operating under a cash sweep whereby all cash flows in excess of minimum working

capital requirements were applied to debt reduction, as well as an inability to utilise any hedging trading

strategies that were perceived as risky. This made liquidity management and cost control paramount

for the ongoing success of the business. Since the majority of its assets were non-Australian-dollar-

denominated, cash flows from these were subject to exchange rate volatility, making Keybridge Capital

very sensitive to currency volatility. The problem was exacerbated by the strengthening Australian dollar,

which meant that overseas income did not cover its domestic borrowing costs.

To mitigate some of this risk, the company renegotiated its debt obligations so that its corporate borrowings

were denominated in US dollars, giving it a natural hedge for about 80% of its US dollar-denominated assets.

The following table highlights the company’s currency exposures as at 31 December 2011.

FIGURE 17.4 CORPORATE BONDS ISSUED (BY COUNTRY OF DOMICILE)

3.5

%

3.0

2.5

2.0

1.5

1.0

0.5

0

Germany*Australia

Japan

UK

Sweden France*

US**

Canada

* Domestic bonds include ‘eurobonds’ sold in two or more countries

** Domestic bonds include securities that can be sold publicly in the US

Offshore Domestic

Average annual issuance to GDP, 2005-13

International corporate issuance

Source: © Reserve Bank of Australia, 2001–2016. All rights reserved. Callam Pickering, ‘Why Australia isn’t banking on corporate bonds’, Business Spectator, 26 March 2014.