A sudden realisation appeared to hit the NZ financial world earlier this week as to what the US economic downturn means for us. Whiteware manufacturer Fisher & Paykel Appliances announced a sizable profit downgrade as a result of a plunge in sales in the US market. The widespread “shock-panic” reaction to one of our iconic companies under some financial pressures was way overdone in our view. The timing of the global recession could not have come at a worse time for the company as they incur material relocations costs from shifting their manufacturing to Thailand and Mexico , to remain cost competitive. However it was the inaccurate media reporting that the company suddenly had an excessive debt problem that intrigued us. The company's debt/debt + equity ratio of 43% is certainly by no means high compared to other NZ and international peers.

Like most other global manufacturers and NZ companies following treasury and financial risk management best practice, the company has for a number of years denominated its debt in the same currencies as its offshore assets/businesses. This financial risk policy hedges balance sheet translation FX risk and delivered the company stable 4% interest costs at a time NZ interest rates were hitting 9%. It appears that the broker/analyst surprise at the debt increase (measured in NZD's) was more about the lack of understanding by those parties as to the company's financial structure/policies. F & P Appliances has fully disclosed its foreign currency denominated debt in its annual reports since 2002. The table below measures the foreign currency debt in USD terms (EUR, THB and AUD debt converted to USD to simplify the comparison) and equivalent NZD terms:-

The large debt increases occurred in 2005 and 2007 when F & P Appliances made acquisitions in the US and Europe . The high NZD exchange rate value in 2007/2008 disguised the extent of these debt increases when measured in NZD terms. The 36% depreciation of the NZD over the last 11 months has artificially increased the debt amount. Bank lending covenants are calculated in NZD's, but the exchange rate movement impact should be carved-out from the calculations in the same manner derivative “marked-to-market” revaluation gains/losses are.

(Disclosure: APRM advises Fisher & Paykel Appliances on FX and interest rate risk).