Reuters: US Dollar Report: Brazil firms boost hedges as currency swings, debt soars

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Brazil firms boost hedges as currency swings, debt soars Jul 22nd 2013, 18:50 Mon Jul 22, 2013 2:50pm EDT * Rising value of NDFs contracted signals caution * Dollar rose on concern of global surge in rates * External company debt almost doubled since 2008 By Guillermo Parra-Bernal SAO PAULO, July 22 (Reuters) - Brazilian companies, seeking to buffer their growing foreign debt from the impact of a surging U.S. dollar, are stepping up demand for hedges known as non-deliverable forward contracts, data by Cetip SA Mercados Organizados showed on Monday. Non-financial companies had a long position on NDFs, as the contracts are known, of $13.36 billion at the end of June, about 30 percent more than $10.27 billion last December. Short positions, or bets that the dollar will weaken against the real, rose 25 percent to $12.17 billion in the same period, the data showed. While it is hard to foresee whether the trend will continue in the near future, the rising value of NDFs contracted means companies want to avoid problems caused by a weakening currency on their balance sheets, Fabio Zenaro, Cetip's senior vice president for business development, said in an interview. Cetip is Latin America's largest securities clearinghouse. "What the numbers hint at is that there was probably a decision by several companies to hedge against a sudden gain in the dollar," Zenaro said. The real has lost 8.2 percent of its value against the dollar this year, and is now trading near a four-year low. Still, the weaker real is expected to have a modest impact on companies with dollar-denominated debt, unlike what happened at the onset of the global financial crisis of 2008, when dozens of firms were rattled by a credit market squeeze. A growing current account deficit and sluggish growth in Latin America's largest economy, coupled with expectations of rising global interest rates, fueled this year's drop in the real. A wave of government-sponsored mergers between ailing companies followed the currency's sharp slump in the aftermath of the 2008 crisis. Investors worry that years of rampant government and household spending have left Brazil's economy, and therefore some of its bigger companies, vulnerable to global market turmoil. The stock of foreign debt at Brazil's financial and non-financial companies almost doubled to $169.9 billion at the end of last year from $90 billion at the end of 2008. NDFs, which are settled in dollars, have become a popular currency hedging instrument among companies with a big chunk of revenue and expenses being denominated in currencies that - like the Brazilian real - are not fully convertible. Companies are also increasing demand for other type of hedging instruments, such as interest-rate swaps and commodities futures, to cushion their businesses against sudden changes in the cost of borrowing or raw materials, although at a slower pace than with NDFs, Zenaro said. Link this Share this Digg this Email Reprints

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