Germany's Merck Overhauls Currency Hedges
May 14 2019 - 03:14PM
Dow Jones News
By Nina Trentmann
Germany-based pharmaceuticals company Merck KGaA has revamped
its hedging policy to protect against unfavorable shifts in
currency-exchange rates sparked by global trade tensions.
The company shortened the horizon of its currency hedges to one
year from three years while expanding the hedging program to cover
revenue in all currencies in which it does business, Chief
Financial Officer Marcus Kuhnert told CFO Journal on Tuesday.
"Currencies have become more volatile, and there is more risk
potential because of international trade disputes," Mr. Kuhnert
said.
The Darmstadt-based pharmaceuticals, chemicals and life sciences
company operates in more than 60 countries but previously hedged
currency exposure to revenue in only six currencies: the U.S.
dollar, Chinese yuan, Japanese yen, Korean won, Taiwan dollar and
Swiss franc.
Merck also set a cap for the maximum negative impact that
foreign-exchange fluctuations should have on its cash flow. "We are
taking extensive measures to make sure that the potential effect of
currency losses does not amount to more than 5% of our cash flow,"
Mr. Kuhnert said.
The company expects a positive earnings effect of as much as 2%
from currencies this year. "In 2019, we will benefit from the
strength of the U.S. dollar and Asian currencies," Mr. Kuhnert
said.
However, the weakening of certain South American currencies and
of the Turkish lira could soften the impact, especially for Merck's
health-care business, which generates a significant share of its
revenue in Latin America. The company had previously forecast a 3%
to 4% negative impact from foreign-currency effects in 2019.
Companies typically hedge foreign-exchange risk by paying a
small fee to lock in the exchange rate of certain currency pairs in
the future. This can protect the company against adverse moves in
exchange rates, but it also can increase costs and cause a firm to
miss out on beneficial currency fluctuations.
Merck's move comes as global currencies have gyrated wildly in
response to renewed trade tensions between the U.S. and China and
concerns about the health of the global economy. Meanwhile,
political uncertainty and weaker economic data from emerging
markets including Argentina and Turkey have hurt the value of those
currencies.
Merck is currently hedging around 40% of its exposure to foreign
currencies. "This ratio can be increased to 90% if necessary," Mr.
Kuhnert said.
Write to Nina Trentmann at Nina.Trentmann@wsj.com
(END) Dow Jones Newswires
May 14, 2019 14:59 ET (18:59 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.