UK Corporate credit crunch: 74% report tighter FX lending

With global inflation remaining relatively high, the cost of doing business has continued to rise. FX hedging was no exception to this, our UK corporate FX report revealed that 7 in 10 (70%) of corporates struggled with an increase in the cost of FX hedging over the last year.

Rising costs were also the primary reason for not hedging FX currency risk, with 76% stating that it was simply too expensive.

In this blog, we delve into the some of the key FX challenges confronting UK corporates and examine the strategies they are employing to overcome these hurdles:

• UK Corporates facing rising credit challenges
• Hedging strategies amongst geopolitics tensions
• Corporates are turning to FX options

 

UK Corporates facing rising credit challenges

The majority of UK corporates reported that their current credit provider had tightened lending criteria over the past year, with 74% experiencing stricter lending conditions, of which 27% noted a significant tightening.

Smaller businesses felt the impact more acutely, with 87% facing stricter lending criteria compared to only 59% of larger businesses.

The tightening doesn't end there, as 79% of UK corporates have also reported recent hikes in interest rates and fees from their credit providers. This increase was notably observed among CFOs and finance managers, with 88% reporting a spike within both roles. While larger firms may not feel the impact of stricter credit terms as severely, they have experienced the highest increase in fees, with 4 in 5 businesses noting a rise.

Tighter lending criteria is a common feature of turbulent economic times. If the average corporate earnings take a downturn, then lenders perceive a higher risk of defaulting on loans, causing them to allow only the most creditworthy companies to borrow, particularly given higher interest rates. This tends to cause liquidity headaches and restricted investment opportunities.

 

Hedging strategies amongst geopolitics tensions

As an economic superpower, what happens in the US impacts the rest of the world. This is especially the case in the UK, with the US being their largest trading partner, so it is no surprise that their 2024 election caused additional concerns.

Prior to Trump being re-elected into The White House, when asked what their primary concerns were regarding currency risk in the context of the US election, UK corporates main responses were all focused around the idea of uncertainty; counterparty risk in hedging transactions (40%), the impact of policy changes on currency values (37%) and unpredictable market movements (37%). So now the election is over, how are UK corporates feeling?

Our latest hedging monitor revealed that 4 in 5 (81%) UK corporates feel optimistic about how the newly elected Trump administration will affect their operations and strategic plans in the US over the upcoming year, despite concerns around potential tariffs and trade tensions.

In response to the election results, 9 out of 10 (94%) have adjusted their FX hedging strategies. The majority of them opting to increase both their hedge ratios and the duration of their hedging activities, which essentially means buying more protection for longer, underscoring a desire among corporates to secure certainty amid market volatility.

 

Corporates are turning to FX options

As finance leaders grow increasingly aware of the impact currency volatility has on their balance sheets, they are exploring new FX hedging strategies to protect their bottom lines against these fluctuations. One such strategy is to use FX options, which 64% of corporates have started utilising more frequently.

FX options are financial derivatives traded over-the-counter (OTC) or exchange traded. They grant the holder the right, though not the obligation, to exchange two currencies at a pre-determined exchange rate (known as the strike price) on, or before, a specified expiration date.

FX options offer the benefits of hedging with limited downside risk, as the buyer is not obligated to buy or sell an asset, limiting the maximum loss to the premium paid for the option. However, this upfront premium is typically high due to the instrument's flexibility and is non-refundable if the trade does not go through.

“Historically corporates have experienced a negative impact on their balance sheet through currency fluctuations. As macroeconomic conditions evolve and potentially lead to increased currency volatility, they are becoming more aware of the effects on their balance sheets. Consequently, their decision to hedge using options is often influenced by the attractive (low) volatility levels observed in Q2/Q3 compared to the anticipated higher future currency movements.” Nick Wood, Head of Execution at MillTech and Millennium Global.

 

 

This blog post examines & refers to the data and results of a survey conducted by Censuswide on MillTech’s behalf conducted between 17 and 30 September 2024 of 250 CFO’s, treasurers and senior finance decision-makers in mid-sized corporates (described as those who have a market cap of $50mil up to $1 billion/£38m to £770m), in the UK.

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