Mexican companies face derivatives probe

Financial Times
By Adam Thomson in Mexico City
Published: October 16 2008 20:19 Last updated: October 16 2008 20:19
Mexico’s financial regulators this week announced an investigation into some of the country’s best-known listed companies in an attempt to reveal the nature of their use of foreign-exchange derivatives.
The announcement, confirmed by Guillermo Babatz, Mexico’s financial regulator, comes as a sudden and un¬expected scramble for dollars last week sent the peso to a 10-year low against the US currency. It also forced the central bank to spend about 11 per cent of its international reserves in less than 72 hours.
Initial suspicions, including those of Agustín Carstens, Mexico’s finance minister, have centred on the possibility that Mexican companies played a decisive role in the peso’s plunge as businesses ran to cover dollar-denominated debt and positions they had taken in exchange-rate derivatives.
The resulting concern about companies’ exposure to derivatives has compounded existing fears for Mexico’s corporate sector, which is highly dependent on the US economy.
Already, the share prices of iconic names on Mexico’s stock exchange are far below the highs reached towards the end of last year. Carlos Ponce, who heads stock market strategy at Mexico’s IXE financial group, says the enterprise value of Mexico’s listed companies as a multiple of earnings before tax, interest, depreciation and amortisation is now at a 10-year low.
“The impact of the US downturn and financial crisis on Mexican companies has been very, very, very big,” he says.
One potentially worrying sign came last week when Comercial Mexicana, the country’s third-biggest supermarket chain, declared bankruptcy after admitting that it had racked up $1bn (€746m, £580m) of debt through purchases of exchange-rate derivatives that had gone badly wrong with the recent appreciation of the dollar.
Guillermo Ortiz, governor of Mexico’s central bank, criticised the retailer for getting involved in what he described as “selling volatility”. He also reserved a special criticism of the banks behind the instruments.
“The investment banks that accepted as a counterpart a company that had nothing to do with the type of products it was handling – well, that to me suggests a lack of professionalism, to put it mildly,” he said.
As fears have grown that there could be similar cases yet to be discovered, some Mexican companies have issued statements during the past week clarifying the extent of their exposure to exchange-rate derivatives.
Cemex, which has a total debt of $16.4bn, 79 per cent of which is denominated in dollars, yesterday announced that its derivatives programme’s mark-to-market loss stood at $647m.
North America’s biggest cement maker also said it would reduce its workforce by 10 per cent this year and close plants, providing annual savings of $500m. In the US, Cemex is now forecasting drops of 19 per cent for cement volumes and 29 per cent from concrete.
Standard & Poor’s has downgraded Cemex’s long-term credit risk.
Other Mexican companies hit by derivatives include Alfa, the steel, paper and consumer products conglomerate, with a mark-to-market loss of $191m as of September 30.
Gruma, the corn flour and tortilla producer, had a mark-to-market derivatives loss of $684m on October 8 compared with $291.4m a week before.
On Monday, Fitch Ratings downgraded Gruma as a result of its exposure to such exchange-rate derivatives.
However, the biggest names in Mexico’s corporate sector are unlikely to go the same way as Comercial Mexicana. In addition, few, if any, were using derivatives for anything other than a hedge.
Cemex and others have pointed out that they have cash on hand to meet all of their immediate obligations and financing needs.
One positive factor is that, in general, Mexican companies with large dollar-denominated debt are generally exporters to the US and therefore have a natural cover for exchange-rate volatility. A second is that they have long-term debt.
For Sergio García, head of research at Value, a Mexican stockbroker, these facts provide more than enough confidence to dispel the worst fears. “The exposure to derivatives and to dollar-denominated debt is not a generalised problem,” he says.
As for the authorities themselves, they are playing their cards close to their chests. Refusing to mention specific companies and also clarifying that the investigation would centre on companies failing to comply with disclosure rules, Mr Babatz limited himself to say: “We know where to look and what to look for.”