Travel companies are exposed to fluctuating exchange rates on a daily basis. A travel agent that buys flights and hotel rooms, say six months in advance of selling them to customers, in a foreign currency such as the US dollar is vulnerable to movements in that currency.
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"Travel companies’ international revenues have grown so much that they are targeted by derivatives salespeople" Jackie Bowie, |
Therefore, these companies turn to the derivatives market, says Robin Henry, a partner in the financial services team at law firm Collyer Bristow.
“They need to put in place some kind of hedging strategy, to make sure they are not affected adversely by moves in exchange rates in say six or nine months’ time when they have to pay up the balance of these contracts,” he says.
“That’s why they will be drawn into obtaining forward contracts with banks.”
Forward contracts are a relatively straightforward way for a company to manage its currency exposure – they allow a business to buy or sell a foreign currency in the future date at today’s prices.
Forward contracts were the first choice of product for one of Henry’s clients, a well-known travel company with an annual turnover of more than £100 million a year. However, they soon made the mistake of venturing into more risky products and came unstuck.
Henry explains: “Then the banks said: ‘Well, would you like to get the benefit of better rates?” [But it came] with all these extra complications. I think as banks found that [forex derivatives] was a very profitable thing to be selling, they’ve devoted more resources and time to it. They have started pushing them to more and more companies.”
Forex hedging products are indeed more lucrative for banks as they can charge higher margins on derivatives than straightforward spot FX – the more complex the derivatives, the pricier it is. However, they are not appropriate for everyone, and often a simple forward will suffice.
Henry’s client ultimately settled out of court and does not wish to be named.
“Without sophisticated software that is available to the banks, it is humanely impossible to work out what the consequences of these derivatives would be, particularly if banks don’t provide you with sufficient information and warnings about what could happen,” says Henry.
Travel sector hots up
UK-based travel agencies have grown considerably in the past couple of years, with the proliferation of companies such as Expedia, Opodo and lastminute.com. This has attracted the interest of private equity firms, says Jackie Bowie, chief executive officer of consultancy firm JC Rathbone Associates.
“It’s a real sweet spot for private equity investment with a number of completed deals,” she says.
Deals in recent years include: Web Reservations International’s acquisition of HostelBookers.com; Bravofly Rumbo Group’s acquisition of lastminute.com from Sabre Corporation; and Vitruvian Partners’ acquisition of UK-based hotel consolidator JacTravel.
“Booking agencies and online travel platforms have grown their revenues so much that they have more exposure to FX movements,” says Bowie.
This has not escaped the attention of banks and brokers, who are good at researching which sectors are hot and targeting them to sell hedging products, says Bowie.
“Travel companies’ international revenues have grown so much that they are targeted by derivatives salespeople,” she says. “Sales of FX products can be aggressive and it’s rarely the right product for the client.”
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Robin Henry, Collyer Bristow |
JC Rathbone advises businesses that need help with their FX hedges, such as UK airline BMI Regional, which needed help formulating its treasury policy, with regards to jet fuel and FX hedging strategies. "Mis-selling of FX products is more acute in the travel industry now because it’s an interesting sector at the moment with lots of deals, and FX is more prominent than before,” says Bowie.
Companies might not realize they have been sold an unsuitable hedge until volatility in currency markets spike, and their products behave in unexpected ways. Disputed forex products tend to be those that are structured with little flexibility, and might have set triggers or optionality in them.
“We speak to finance directors who have never been involved in foreign exchange before,” says Bowie. “It is not fair to suddenly expect them to have detailed information about how these products work and are priced.”
Dan Fallows, founding director of Seneca Banking Consultants, has seen a few cases from importers and exporters, including a UK-based pottery dealer who does business in East Asia.
He believes the Financial Conduct Authority should investigate forex mis-selling and has written to the regulator, but has yet to receive a response.
“I personally don’t think [they] have cast their eye over this yet – they are still dealing with the interest-rate swaps scandal.”
Still, unless there is more transparency on the nature of claims, it’s unclear whether this is sour grapes from corporate treasurers’ whose firms typically boast healthy risk-management budgets to oversee multi-million-dollar revenues.