Why Debt Ratios Alone Cannot Measure Foreign-Currency Borrowing Risk
Match the currencies, rates, and maturities of foreign-currency borrowings to cash inflows. Calculate debt-service pressure when the won weakens and rates rise, and understand the limits of net foreign-currency debt.
Foreign-currency borrowing risk includes both an increase in debt translated into won and the inability to obtain the currency needed at maturity. Foreign-currency earnings do not eliminate liquidity risk if receipts arrive after repayment is due. Review principal amounts, currencies, fixed or floating rates, maturities, and hedges together in one table.
Start with the repayment schedule rather than the carrying amount
Debt on the balance sheet is a balance at a specific date. To translate it into an actual repayment burden, identify the timing of principal and interest payments in each currency. Risk disclosures under IFRS 7 and funding and borrowing items in SEC Form 20-F help organize these questions. Even a long contractual maturity may be brought forward by covenant breaches or early-repayment provisions. For undrawn bank facilities, check how long they remain available and whether conditions must be met; do not simply add them at face value as if they were cash.
A natural hedge requires matching amounts and dates
Using dollar export receipts to repay dollar debt can reduce currency conversion needs, but total export revenue is not all freely available dollar cash. First deduct payments for raw materials, freight, taxes, and other outflows. Delayed receivable collection or canceled customer orders reduce the expected hedge. Overseas deposits held by another legal entity may also be unavailable for immediate repayment if fund transfers are restricted. Even if consolidated net foreign-currency debt is small, separately check for funding shortfalls concentrated in particular entities or months.
Calculate interest rate and exchange rate risk together
For floating-rate foreign-currency borrowings, higher benchmark rates or lending spreads increase interest payments in the foreign currency itself. If the won weakens at the same time, a higher exchange rate applies to those larger payments. Where currency swaps or forward exchange contracts exist, check maturities and settlement terms without assuming that a contract eliminates every risk. Collateral requirements and counterparty risk may remain. Separate scenarios in which only exchange rates move, only interest rates move, and both deteriorate to identify the largest exposure.
Worked example
Hypothetical example: A $10 million borrowing at an annual interest rate of 4% and an exchange rate of KRW 1,300 per dollar produces simple annual interest of $400,000, or KRW 520 million. Assuming a 6% rate for the entire following year and a payment-date exchange rate of KRW 1,400, interest becomes $600,000, or KRW 840 million, an increase of KRW 320 million. The translated principal also rises from KRW 13 billion to KRW 14 billion. Distinguish repayment dates rather than adding the principal translation difference and the period’s interest expense as if they were the same cash outlay.
What to check
- Have you separated the timing of principal and interest payments by currency?
- Is there cash left after foreign-currency costs are deducted from foreign-currency revenue?
- Have you checked restrictions on using overseas deposits and borrowing facilities?
- Have you calculated a scenario combining higher interest rates with a higher won-per-dollar exchange rate?
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.