“Dollar-linked revenue” needs a closer look

A business may describe its revenue as dollar-linked because contracts refer to a foreign-currency price. That description can conceal several different arrangements.

Payment may be made in naira at a specified rate. Prices may reset only periodically. Customers may challenge an increase or delay settlement. Meanwhile, an actual foreign-currency debt payment has its own amount and due date.

The World Bank’s project-finance risk guidance highlights the importance of currency alignment. In practice, that requires a closer reading than the label on the revenue line.

Test the link in cash terms

Ask what currency is received, when conversion occurs and who carries a movement between invoicing and payment. Establish whether the mechanism is contractual, operationally workable and supported by a customer able to perform it.

Costs also matter. Foreign-currency inputs, maintenance and equipment replacement may use receipts that appear available for debt service. A revenue hedge is less helpful if the same money has already been committed elsewhere.

Build more than one view

Management should examine how a weaker exchange rate, slower collection or delayed price adjustment affects liquidity. These scenarios can expose a timing problem even where the long-term economics remain attractive.

Specialist advice may be needed on available hedging arrangements and their documentation, price and duration. The existence of a possible product should not be assumed to solve the company’s specific exposure.

B&A’s view is that claims about currency protection should be evidenced as carefully as revenue forecasts. A financier needs to see what cash will be available on the repayment date.

The useful question is whether the proposed structure works when the link is tested, rather than simply whether a contract mentions dollars.