Foreign exchange (FX) and payments business Alpha FX (AFX:AIM) is facing a £30.2m black hole after one of its key clients was unable to lodge collateral. This forced the company to axe its dividend and saw investors sell the shares down 38% to 584p.
Coming just eight trading days after reporting a strong set of full-year results on 18 March, the company said it has seen an ‘unprecedented and ongoing slowdown in global trade’ over the last two weeks as major economies engage in lockdown to slow the spread of coronavirus.
RAPID DETERIORATION
Management anticipate a slowing of FX activity from its clients as a result of the measures taken by governments, especially in forward contracts, as clients delay or even cancel their commercial activities until the economic situation becomes clearer.
Forward contracts involve buying or selling a fixed amount of currency at a predetermined rate and maturity. Around 70% of the company’s FX business is based on forward contracts.
Where the current exchange rate moves against them, clients are required to send Alpha FX cash equal to the ‘running losses’.
UNPRECEDENTED VOLATILITY
The £30.2m debt derived from a food-exporting client representing around 15% of the company’s forward contracts business.
In order to keep up with increased demand from supermarkets as people began stockpiling, the company didn’t have the required short-term working capital financing in place to meet the demand and pay the required collateral for its forward currency contract with Alpha FX.
This was exacerbated by extreme volatility in the US dollar Norwegian Krona exchange rate (USDNOK) with the Krone falling by 15.9%, nearly three-times more than the previous weekly record during the financial crisis.
The client continued to pay the required cash to keep the contract open. But after a further 15% fall the client cancelled the contract leaving Alpha Fx with the debt.
STRONG LIQUIDITY
The company is negotiating a weekly repayment plan with the client, which has an unblemished record and has previously settled hundreds of millions of pounds worth of business.
It goes to show how the unintended consequences of the spread of coronavirus can reach far and wide and investors need to be alert to ‘left-field’ events which may impact them.
Alpha FX has net cash of £39m and net assets of £58m to adequately deal with the current situation without recourse to bank lending. In addition the cancellation of the contract has released £9.2m of ring-fenced cash and the cancellation of the dividend will save a further £2.1m.
Given the rapidly changing economic landscape, the board is sensibly reigning in expectations of future growth and guiding for underlying earnings to be similar to 2019.
