Latin Finance - November 2008 - 62

derivatives losses facing credit-related losses tied to the derivatives. As most contracts mature in 1-2 years, companies will have enough leeway to pay back debt without tapping cash reserves, he adds. Marcelo Fleury, who handles business development and foreign affairs for Cetip, Brazil’s biggest clearing house, agrees. Losses on currency derivatives contracts registered in the clearing house may be smaller than the $2 billion previously estimated, he adds. However, the real problem may lie with the contracts signed between companies and banks directly, Meibak says. “At this point, they look like a Pandora’s Box to me,” he adds. The start of earnings season in midOctober was expected to yield more disclosures and controversy. Deutsche Bank corporate debt analysts expected “almost every company” in Brazil to post currency-hedge losses during the third quarter. The CVM now requires all listed companies to detail derivative exposure in third quarter filings, but not future ones. Companies are asked to estimate the anticipated impact of existing FX derivative contracts according to three different scenarios provided by the CVM. While Braga says steel companies and agribusiness conglomerates are likely to report faulty bets, Deutsche says investors should be attentive of beef producers, who hedge about 50% of exports. Larger companies such as Petrobras and Vale tend to be more conservative than other exporters on hedging strategies, according to Deutsche. Mexican Surprise Brazil is not the only LatAm country suffering a derivatives headache. In September, rating agencies downgraded Mexico’s Gruma and Posadas amid similar losses. Tortilla maker Gruma lost investment-grade status from both Fitch and S&P after taking a $684 million mark-to-market loss. Meanwhile, S&P axed hotel operator Posadas to BB- from BB, after a $38 million currency swaprelated loss, and Industrial Saltillo said it would record a write-down in its thirdquarter results due to derivative trading. Retailer Comerci’s exposure meanwhile helped push it into to bankruptcy, Vitro disclosed a mark-tomarket loss, while even blue chip Cemex had to declare a $711 million hit. A rating agency official says that the ensuing round of downgrades may just be the tip of the iceberg as analysts work overtime to reassess Mexico’s corporate balance sheet. “The derivatives explosion has accelerated the global credit crisis to Latin America. Its impact will hang over the corporate sector for quite some time,” says ING. “The region’s corporate sector can move forward, in time, by improving transparency, corporate governance and contract resolution,” it concludes. Braga expects agencies and the Brazilian government to tighten scrutiny of exporters with large derivatives positions. Pih says the situation offers regulators an opportunity to enforce more disclosure in a segment that is still opaque. “I wouldn’t be surprised if after all this we don’t see tougher rules on the use and disclosure of derivatives positions,” Pih concludes. LF 62 LATINFINANCE November 2008

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Latin Finance - November 2008

Table of Contents for the Digital Edition of Latin Finance - November 2008