Brazil firms with derivatives hit by credit crisis

Fri Sep 26, 2008 3:40pm EDT
By Elzio Barreto
SAO PAULO, Sept 26 (Reuters) - The financial crisis battering global equity and bond markets looks closer to spilling over into the real economy in Brazil, where two large exporters disclosed massive trading losses this week.
Pulp producer Aracruz (ARCZ6.SA: Quote, Profile, Research, Stock Buzz) (ARA.N: Quote, Profile, Research, Stock Buzz) and meat processor Sadia (SDIA4.SA: Quote, Profile, Research, Stock Buzz) (SDA.N: Quote, Profile, Research, Stock Buzz) became the first companies to take hits late on Thursday, when they revealed losses on derivatives. Sadia fired its chief financial officer and Aracruz said its finance chief asked to step down.
"The issue with derivatives is that it's an interesting hedging tool, but if it's employed the wrong way it can be like a razor in the hands of a child," said Carlos Daniel Coradi, the head of Brazilian consulting firm Engenheiros Financeiros & Consultores.
Large exporters use derivatives to lock in exchange rates so they can better plan their operations.
Sadia, Brazil's largest poultry and pork producer, booked 760 million reais ($411.5 million) in losses from foreign exchange positions and Lehman Brothers Holdings Inc (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) bonds. The company's stock plunged as much as 37 percent on Friday.
Aracruz said its exposure to so-called "target forward" agreements that lock in the price of a currency against the real at a specified date was strongly influenced by volatility in global financial markets.
The company said losses with the contracts exceeded limits set by management, without disclosing details. Its shares sank as much as 21 percent.
The announcements capped two weeks of wild swings in Brazil's currency, the real BRBY, and raised concerns of losses in foreign exchange derivatives at other companies, mostly exporters.
The real, which weakened 12 percent in September, had days in the past weeks when it gained 5 percent and others when it plunged 4 percent, creating havoc on the balance sheets of companies with the derivatives.
"Our understanding is that this is focused on exporters who lock in at a certain exchange rate going forward," said Alexander Carpenter, chief credit officer for Latin America at ratings agency Moody's Investors Service. "We're looking into the situation right now. Not all the exporters -- some did, some didn't."
Brazilian meatpacker Marfrig (MRFG3.SA: Quote, Profile, Research, Stock Buzz) issued a statement on Friday saying the company has no leveraged positions in derivatives.
Rogerio Zarpao, a pulp and paper analyst at Unibanco, said clients are calling to ask the bank to map out companies with derivatives that may fall victim to the trading losses.
"Investors are right to be worried. It's a red flag," said Lucy Sousa, president of Brazil's Association of Capital Markets Analysts. "We will all look at companies that have businesses abroad and that are used to doing transactions in derivatives." (Additional reporting by Reese Ewing and Alberto Alerigi in Sao Paulo; Editing by Brian Moss)