This is a follow up to the post I am responding to regarding the massive price volality this year and how it's translating into Company FASB 133 getting completely out of line, as well as companies losing exceptionally large amounts of money in their non core business.
Citic Pacific is looking at a potential loss on their AUD currency hedge that is more than 4 times it's income from 2007.
It's also 4 times larger than the companies current market capitalization. There are well over 100-200 such situations(hopefully not of this magnitude) that companies have around the globe, luckily some companies and banks are on the winning end of big hedging gains, However YOUR COUNTERPARTY has got to be around to pay you for the gain to be realized. Just start to ponder all of the global oil and Natural gas produceres who have currency hedges and hedges on their oil and gas, that are spinning away out of control.
It truly is very hard to get a 360 degree perspective of the global financial picture at this time as John Snow of Cerberus commented to congress to.
John
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Citic Pacific Tied to Australian Dollar After Losses (Update2)
By Bob Chen and Theresa Tang
Oct. 23 (Bloomberg) -- Citic Pacific Ltd.'s attempt to manage currency risk means the Chinese steelmaker and property developer has four times more money riding on the Australian dollar than it earned last year.
The unit of China's largest state-owned investment company has contracts committing it to buy as much as A$9.44 billion ($6.3 billion) of the currency, according to an Oct. 20 statement. That's more than quadruple Citic Pacific's market value yesterday and compares with 2007 net income of HK$10.8 billion ($1.4 billion).
Citic Pacific has plummeted 66 percent in Hong Kong trading since disclosing it has an unrealized loss of HK$14.4 billion on the contracts, which force it to purchase Australian dollars at an average price of 87 U.S. cents. The currency traded at 66.72 cents as of 7:54 p.m. in Sydney.
``If you buy the stock, you're taking a view on Australian dollars,'' said Billy Ng, a Hong Kong-based analyst at JPMorgan Chase & Co. ``I won't recommend buying, even at this price.''
Shares of Hong Kong-based Citic Pacific tumbled 25 percent to HK$4.91 percent yesterday, after a 55 percent drop Oct. 21. They rose 2 percent to HK$5 today. Australia's dollar will appreciate to 72 U.S. cents next year, the median forecast of 25 analysts surveyed by Bloomberg shows.
The Australian dollar may trade as low as 50.45 U.S. cents through March 31, according to Divyang Shah, chief strategist in London at CBA Europe, a unit of Commonwealth Bank of Australia.
Global Losses
Companies around the world are posting losses on foreign- exchange hedges amid record high volatility in currency markets. In Brazil, a pulp producer, a poultry company and a cement maker have reported $2.3 billion in losses on currency derivatives. Korean companies may lose as much as $2.2 billion on such contracts, according to Standard & Poor's.
Central banks and governments are pumping unprecedented amounts of cash into the financial system and banks that lost money on derivatives and asset-backed securities. Citic Group, the company's parent, is controlled by the State Council, China's cabinet.
Citic Pacific's largest position was in so-called Australian dollar target redemption forwards, according to the company, which didn't elaborate. Such over-the-counter contracts aren't traded on an exchange. They differ from typical forwards, or agreements to buy and sell assets at current prices for delivery at a specified time and date, in that they are customized for clients.
`Very Popular'
The total notional value of outstanding foreign-exchange OTC derivatives in the world increased 78 percent in the two years ended 2007 to $56 trillion, according to the Bank for International Settlements in Basel, Switzerland.
``They have gotten very popular in the last three years and a lot of people have been hurt already,'' said Joseph Ngai, a principal for the financial services sector in Hong Kong at McKinsey & Co., a New York-based consultancy. ``When prices fall, you have to keep buying at a loss.''
Citic Pacific didn't give details of the contracts, except to say that they would deliver a maximum of A$9.44 billion, while its U.S. dollar losses weren't limited. The company said it plans to take delivery of some of the currency, known as the Aussie, because it needs to finance an A$1.6 billion iron ore project in Australia.
Tracking the Aussie
``The contracts they're holding will track the Aussie dollar,'' said Jackson Wong, an investment manager at Hong Kong- based brokerage Tanrich Securities Co. Wong, who declined to say how much he manages, said he bought Citic Pacific shares yesterday. Deciding whether the stock is worth buying would be ``a very sophisticated calculation,'' he added.
The Australian dollar was trading close to its 25-year high of 98.49 U.S. cents when Financial Director Leslie Chang and Financial Controller Chau Chi Yin bought the forwards. The contracts have an average strike price of 87 U.S. cents.
Citic Pacific ousted Chang, 54, and Chau, 52, this week because the company said the trades weren't authorized. The contracts incurred losses as the Aussie tumbled 32 percent from its high in July. Chang and Chau couldn't be reached for comment.
They ``didn't understand the potential downside risks,'' Managing Director Henry Fan said in an Oct. 21 interview. Frances Yung, 36, daughter of Chairman Larry Yung and head of the finance department, will be demoted, Fan said.
`Great Unwinding'
HSBC Holdings Plc, BNP Paribas SA and Citigroup Inc. were among the banks who sold the derivatives, according to the company. Spokespeople for the banks declined to comment. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events, such as the weather or changes in interest rates.
To limit losses, Citic Pacific has started to cancel some of the contracts, costing it $104 million, and is trying to renegotiate the remainder.
``Citic Pacific stands a good chance to restructure the contracts with the banks because of its State Council background,'' said Kenny Tang, a director of Tung Tai Securities Co. in Hong Kong. ``Probably no banks dare to screw up their relationship with the government if they still want to do businesses with Chinese companies.''
The Securities and Futures Commission in Hong Kong said it started an investigation of Citic Pacific, without giving details. Hong Kong Exchanges & Clearing Ltd., which runs the city's bourse, is also ``looking into'' whether the company complied with listing rules, said Henry Law, a spokesman.
``I'm not quite sure how many understood what they bought, but when everything was going up in a straight line it looked very sensible,'' said Song Seng-Wun, an economist at CIMB-GK Securities Pte Ltd. in Singapore. ``The great unwinding will see more casualties.''
To contact the reporters on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net; Theresa Tang in Hong Kong at ttang3@bloomberg.net;
Last Updated: October 23, 2008 05:04 EDT |
