April 23, 2014  
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Canadian dollar depreciation is credit positive for most Canadian industries
(Editor's Note: This article appeared on Moody's Investors Service on March 31, 2014)

A depreciating Canadian dollar is generally credit positive for Canadian companies, says Moody's Investors Service. The industrial sectors that are benefitting the most from the Canadian dollar's decline to $0.90 are exploration and production (E&P) and market pulp and wood products, according to the Moody's report "Canadian Dollar Depreciation is Credit Positive for Most Canadian Companies."


The depreciation is also credit positive for metals and mining companies and credit neutral for natural gas and oil pipelines. It is credit negative for some transportation companies, including Air Canada (B3 stable), whose revenues are denominated in Canadian dollars, but which buys fuel priced in US dollars.

"Part of assessing the impact on a company is reviewing exposures to US$ denominated costs, debt and equipment purchases, all of which increase with the depreciation of the Canadian dollar," says Bill Wolfe, a Moody's Senior Vice President. While it adversely affects these parameters, Wolfe says that a depreciating Canadian dollar positively affects cash flow when sales are U.S. dollar denominated and costs are incurred in Canadian dollars.

The Canadian E&P companies benefit from the fact that they sell oil and gas at prices highly correlated to the US$ prices, while many of their expenses are denominated in Canadian dollars. Most of the E&P companies, however, have debt denominated in U.S. dollars, leading to an increase in balance sheet debt as the Canadian dollar depreciates.

The benefit of having prices that are tied to U.S. dollars among the paper and forest product companies is most pronounced for the Canadian market pulp and wood product companies. The weaker Canadian dollar moves Canadian producers to the low end of the global production cost-curve, enabling them to better compete with pulp manufacturers in Europe, Latin America and the U.S., says Moody's.

Similarly, a falling Canadian dollar increases revenue for Canadian lumber, plywood and oriented strand board producers, with even the price of wood products sold in Canada implicitly tied to the U.S. dollar.

The depreciation is also credit positive for Canadian metals and mining companies, as they sell commodities priced in US dollars. Partially offsetting the benefit, however, is exposure to US-dollar priced fuel, U.S. dollar denominated debt, as well as higher input costs for items that are imported.


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