When a Danish company decides to start a business in a developing country, the financing is often made in Western currencies. Therefore the company assumes a currency risk that may influence the payments of interest and instalments on loans – or the sale of shares.
IFU has seen several examples of companies getting into serious financial difficulties, because the local currency has depreciated against e.g. the euro. Suddenly, payments on the loan increase dramatically, and the company risks ending up in a debt trap or falling behind its original business plan. Especially companies in the start-up process with a need to invest and limited liquidity are at risk.
Together with a number of foreign financial institutions, IFU has invested in The Currency Exchange Fund (TCX), which offers to take on the currency risk that companies normally run. In that way, IFU can offer financing which is not dependent on the development in the local currency.
It is easy for the companies to use the arrangement, as IFU is responsible for the cooperation with TCX and makes the necessary agreements. The company only has to assess the currency risk in the country where it wants to invest, and decide whether it is high enough to insure against it by paying a slightly higher interest.