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Cross-border shopping: TransCanada's big currency play to get Columbia


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Cross-border shopping: TransCanada's big currency play to get Columbia

As Canadian shoppers forgo trips to the U.S. because of thegap between the countries' currencies, TransCanada Corp. stepped up to a US$13 billiontransaction in March in a show of cross-border bravado.

But timing is everything. TransCanada's March 17 of its plan to buyColumbia Pipeline GroupInc. coincided with what was then the 2016 high for Canada's currency— known as the loonie for the bird depicted on the C$1 coin — and has thepotential to trim US$350 million off the cash portion of the transactioncompared with the Canadian dollar's low in January.

A Canadian-denominated equity issue was announced on the daythe loonie surged to 77.38 U.S. cents. If TransCanada hedged its estimatedC$4.21 billion issue of subscription receipts that it sold to Canadianinvestment banks that day, the proceeds would be approximately US$3.24 billion,according to Bank of Canada data. Two months earlier, when the loonie touchedits year-to-date low of 68.54 U.S. cents, the offering would have yielded onlyUS$2.89 billion. A week after the issuance, the volatile loonie would havepared the equity proceeds by US$50 million, to US$3.19 billion.

Ultimately, TransCanada raised C$4.4 billion — the biggest equity sale inCanadian history — as investment dealers snapped up the subscription receiptsand an overallotment. Details of how and when TransCanada will convert itsequity issuance to U.S. dollars have not been released by the company.TransCanada has extensive U.S. holdings that generate cash, providing a naturalhedge against changing currency rates.

"Currently, TransCanada has more U.S. debt than it doesearnings and cash flow," Gavin MacFarlane, a vice president and seniorcredit officer with Moody's in Toronto, said in an interview. "With theColumbia acquisition, there will be an improvement in the mismatch."

TransCanada joins power companies , and in shelling out large quantities of U.S. dollars for opportunities outsideconstrained markets at home despite volatility in the loonie. At the same timeit announced its plan to buy Columbia to expand its U.S. footprint to includethe hot Marcellus and Utica shales, TransCanada issued the equity to bridge theUS$3.2 billion gap between debt and anticipated Mexican and Northeast powerasset sales — expected to be priced in U.S. dollars — to make up theanticipated US$10 billion cash portion of the deal. It ended up selling 4.6million more subscription receipts to meet excess demand for the 92 million itoriginally offered.

Currency volatility is raising concerns across the Americas,as companies that do business in the U.S. struggle with large foreign-exchangeswings. Companies with cross-border operations often try to match in-countryrevenue with expenses to avoid exchange surprises, but a high-flying U.S.dollar is making that difficult.

"Multiple currencies are at their lowest levels in overa decade due in part to waning demand for commodities, particularly copper andoil," Glaucia Calp, managing director with Fitch Ratings in Colombia, saidin a March 31 note. "That, coupled with a [U.S. dollar] that was up 78%over various Latin American currencies through February, has created asituation where FX risk is heightened — and at the same time more difficult tomitigate."

Canada's close ties with the U.S. and its stable economy andlarge cross-border trade volume mitigate some of the problems that have arisenfor companies in other countries for which hedging may be limited orunavailable because of a limited appetite for long-term exposure to a countryor currency, Calp said. In the case of large transactions, hedging currencyrisk is almost a necessity, said Jason Schenker, chief economist at PrestigeEconomics in Austin, Texas, and author of the book Recession-Proof: How to Survive and Thrive in an Economic Downturn.

"The currency volatility has been very high,"Schenker said. "Whenever you're dealing with foreign-exchange risk if youhave unhedged transactions, the impact can be significant."

While Schenker did not comment on the TransCanada situation,he said a slowing U.S. economy, or even the perception of one, could give alift to the loonie.

"There's been a dynamic and huge change in what Canadahas done from January to now," Schenker said. "If the U.S. economyslows further, the U.S. dollar could fall against Canada, not necessarilybecause Canada gets much stronger, but just because of the perception of theAmerican economy. If that perception wanes further, then you'd have furtherdollar weakness. So anytime you have currency volatility, it can really monkeywith — if you have an unhedged position — what the final result is going to be."