Pharma Industry - Savings upto 28 crs.

• A leading pharma MNC based in India was planning to borrow from its parent company, situated in Japan.
• The borrowing was in the form of External Commercial Borrowings (ECB) in JPY worth Rs. 100 Crores. The tenor of the ECB was seven years at an interest of LIBOR+0.25%, payable every quarter.
• The company approached IFA global to evaluate all the risks associated with it and prepare a note for presentation to the Board.

Challenge and Observation

• IFA Global corporate finance team observed that the company is subject to risks in 2 different currencies - USDINR & USDJPY. Additionally, it also exposes itself to interest rate risk.
• The team calculated the volatility using back-tested data and found that the currencies have been historically quite volatile. The team observed that the JPYINR average movement in the last ten years is only 2.40%. Concurrently, we have also seen steep depreciation to the tune of 25% in a single year. 
• Also, with the forward premium of 7% and an average movement of 2.4% over the last ten years, one could look to explore ways of reducing the hedging cost of 7% 
• Since the firm was a well-known MNC and had a stated treasury policy (cost-center), they wanted to hedge their risks completely.

Process

• IFA studied the RBI regulations and discussed with multiple bankers on all possible hedging strategies possible for hedging the ECB.
• They prepared a detailed note with proper hedging models and risk: a reward matrix and presented it to the Board.
• The Board shortlisted a couple of option strategies after IFA's recommendation where the upfront cost of hedging reduced to 2.5 to 3.25% instead of a 7% cost of hedging. These option structures allowed the company to benefit and lower its borrowing cost in case the Rupee did not depreciate to the extent of the outright forward rate against the Japanese Yen. Under the best-case scenario, the company would end up saving Rs 4crs per annum i.e. Rs 28crs over the tenor of borrowing. 
• The company executed the structure, and IFA's structuring team negotiated the terms with the banks.

Outcome

• The company could borrow cheaper loans from its parent, making sure they were hedged completely.
• The cost of hedging reduced from 7% to 3% with minimal risk to the downside using an option structure.
• The company also saved immensely (30 lacs) while negotiating with the banks while executing the deal. 
• Which IFA Global Services did the Pharma exporter had subscribed to 
• Bespoke ECB Hedging Project
• Treasury Outsourcing Services.
• Banking Negotiation Desk.