Currency Risk Mitigation for Funds Awaiting Repatriation

San Jose, California–based eBay Inc. has substantial revenue flows in myriad regions and currencies around the globe. “eBay has some presence in a large proportion of the world’s countries,” says Dmitry Martynov, director of foreign exchange (FX) and corporate finance. “We have long operated in China, India, Korea, South Africa, and many others.”

Historically, eBay built up significant currency reserves in some of these jurisdictions. “We have long had an imbalance, where we generate 60 percent to 70 percent of our cash overseas but spend the bulk of our free cash flow in the United States,” Martynov explains. “Before the U.S. tax reform in late 2017, bringing back our overseas cash was not the most economical decision. The Tax Cuts and Jobs Act allowed eBay Inc. to receive future offshore distributions without U.S. taxation.”

Thanks to the law, the company’s international subsidiaries were able to distribute excess offshore cash—funds above what they needed locally—to eBay Inc. In some markets, though, distributing excess cash was easier said than done.

“Moving money across our European jurisdictions was pretty seamless, but other countries we were looking to distribute excess funds from were more challenging because of currency restrictions,” Martynov says. “For example, in the third quarter of 2018, we sold our equity investment in Flipkart [an e-commerce company headquartered in India] for cash proceeds of approximately US$1 billion. Getting that cash out was going to require us to move the money to Singapore first, because the Indian business was held by a Singapore-based eBay subsidiary. Then, in order to execute a capital reduction, we would have to file with ACRA [Singapore’s Accounting and Corporate Regulatory Authority], followed by a six-week creditors’ objection period. After all that, the local regulator would give us approval to repatriate the funds to an eBay treasury center.”

For the annual dividend eBay executed in Korea, “we had to actually put a public filing in a newspaper,” Martynov says. “The rule was that if we had minority shareholders, we had to make a public statement about a dividend declaration and give these shareholders time to object. We also needed to make sure we were withholding all the taxes that were due. There were a lot of factors to take into consideration and a lot of regulatory requirements to work through, which was very time-consuming.”

The time delay from announcement of a repatriation move to completion of the transaction necessarily introduces currency risk, which raised concerns with eBay’s leadership. “Once we approached our leadership team for approval to execute these large money movements,” Martynov reports, “we consistently heard the question: ‘How much of that money is subject to FX or regulatory risk? How much is actually going to make it back?’ If we got approval to bring back $1 billion from India but ended up delivering only $950 million, that would not be acceptable.”

Martynov and the FX team needed to commit to bring a specific amount of cash back from each country, then use financial engineering to deliver that amount. “That mandate established the parameters for our risk management,” he says. “Once we made a decision to bring the funds to the U.S., we had to assign a dollar equivalent to that value. And from that point on, we had to protect that amount and deliver it in U.S. dollars to our treasury center, without any loss or deterioration during the process.”

The risk assessment was clear and easily quantifiable. The challenge was that most strategies for repatriating funds from India or Korea had significant tax consequences, as well as legal and accounting impacts. eBay started by focusing on India.

“Currency risk from the repatriation from India was a conundrum,” says Martynov. “We had an Indian investment, held by a Singapore subsidiary that was Singapore-functional, and we needed to turn those funds into U.S. dollar proceeds. So there were three currencies in the mix.” The company assembled a team of 10 people from treasury, tax, accounting, and legal. The group collaborated to identify risks and select the best possible solution.

“As soon as we had all the information, we met with the accounting policy team,” Martynov reports. “We quickly made a decision to eliminate any Indian rupee risk. Even though the divestiture was taking place in India, we were selling to a U.S.-based company and would be receiving U.S. dollars. Since we were not actually going to receive any Indian rupee, we just needed to choose a spot accounting rate to quantify the gain. Once we had done that, we were dealing only with Singapore dollars [SGD] and U.S. dollars [USD].”

One idea that was floated was to create a U.S. dollar bank account for the Singapore subsidiary and park the proceeds in that account until they could be repatriated. “Right off the bat, remeasurement risk was an issue,” Martynov says. “If we had $1 billion cash sitting in Singapore, it would be remeasuring every month. That could have a significant non-GAAP P&L impact for our Singapore subsidiary, so we didn’t like that idea.”

The next option that the project team considered was to cover remeasurement risk using forwards. “We were OK with paying forward points, but USD value was now pegged to SGD, so we couldn’t guarantee that we would still have US$1 billion at the time of repatriation,” Martynov says. “We shut down that idea as well. From there, we had to get creative.”

eBay settled on the idea of converting the U.S. dollars it received from its divestiture in India into Singapore dollars and entering into a net investment hedge. “The idea of converting USD to SGD did not initially resonate with us,” Martynov says. “But then we looked at structuring the exchange as a swap with the near leg being a spot trade to convert USD to SGD, and the far leg being a net investment hedge executed at a USD treasury center level. We had no mark-to-market on the net investment hedge or SGD cash because it all went into equity, so our P&L was perfectly protected. In addition, we locked in the USD value with minimal slippage related to forward points.”

As regulatory approval of the repatriation drew nigh, eBay unwound the net investment hedge and replaced that instrument with a balance sheet hedge entered into by the downstream eBay entity that would receive the funds. “At that point, we had protected the value of the divestiture proceeds through balance sheet recognition and locked in the gains and losses at the parent level,” Martynov says. When the repatriation transaction cleared the final regulatory hurdles and the cash was ready to move out of Singapore, eBay executed the final swap by closing out the balance sheet hedge and entering into a deliverable spot trade that converted the SGD back to USD.

“The cool thing about this approach is that we had a lot of flexibility on timing,” Martynov emphasizes. “When we got management approvals, we committed to the transaction and entered into the net investment hedge. If the regulators had needed another month to review the transaction, we could have simply extended the forward with no economic or P&L risk.”

After converting the Indian funds to USD, the team turned its attention to Korea. “The second time we used the strategy, we fine-tuned it,” Martynov says. “The market movement in Korea can be pretty significant, so we had to consider whether it made sense to hedge the full amount of annual repatriation. Would we be handicapping ourselves by locking in the full amount to the market spot rate on a single day? We decided we would be, so we gradually layered into the hedge over a period of three months.”

The team ensured they were getting the right spot rate by instructing eBay’s banks to trade at the fix. Martynov explains: “For undeliverable currencies, there is typically a central bank fixing rate that all the banks use to fix their non-deliverable forwards [NDFs]. In Korea, that fixing is tradable onshore. By having our banks trade at the fix, we knew our transactions would produce minimal leakage from offshore to onshore.”

In the end, this strategy worked very well. The Korean won shifted so much relative to USD during the time eBay was waiting for regulatory approval of its repatriation that the company would have lost around US$34 million if it hadn’t implemented the hedging strategy.

Martynov attributes the initiative’s success to collaboration across all impacted eBay functions, to careful planning, and to the project team’s willingness to explore new ideas. “These are restricted currencies, and we historically believed that if we wanted to hedge them, we had to do everything offshore via NDFs,” he says. “But as corporate risk management functions get more sophisticated, they find other ways to mitigate FX risk, such as pairing offshore hedges with onshore spots, using net investment coverage, and taking advantage of playing in both jurisdictions.”

See also:

• Taking Credit for a New Approach to Risk Management
• FX Risk Management That’s Fit for Purpose

And don’t miss our March 17 webcast recognizing the 2021 Alexander Hamilton Award winners in Technology Excellence. In this first event of our 2021 award season, learn from the three winning projects, and receive AFP recertification credits. Register today!