26 de agosto de 2015 / 18:48 / en 2 años

CORRECTED-Real slump bites Brazil's CSN, others despite debt hedging efforts

(Corrects to say Hypermarcas repurchased bond due in 2021, not perpetual bond in paragraph 22)

By Guillermo Parra-Bernal

SAO PAULO, Aug 26 (Reuters) - While many of Brazil’s largest companies have grown savvy about hedging their debt against big currency swings, an increasing number could feel the heat from the real’s plunge to a more than 12-year low due to poor planning and rising debt, bankers said.

Debt refinancing and hedging costs are rapidly rising as Brazil’s economy falls into recession and local banks pare back credit. The real, the world’s worst-performing major currency this year, according to Thomson Reuters calculations, slipped below 3.65 to the dollar on Wednesday.

Companies such as steelmaker Cia Siderúrgica Nacional SA and General Shopping Brasil SA are already suffering after borrowing heavily in global markets. The 38 percent decline in the real over the past 12 months has forced them to downsize operations as debt-servicing costs soared.

Bankers say debt exposure to foreign currencies looks manageable for most companies, which are increasingly using derivatives to help shield their balance sheets from sudden interest-rate or currency fluctuations.

Still, some wonder how long hedging will keep companies safe as the currency continues to slide.

Analysts point to state-controlled Petroleo Brasileiro SA , the world’s most-indebted oil producer, airline Gol Linhas Aéreas SA and port operator Wilson Sons Ltd , as firms that may face potential problems.

Outstanding foreign debt at companies and banks in Latin America’s largest economy reached $418 billion this year, almost three times the amount they owed in 2008.

Uncertainty over the timing of expected rate hikes in the United States and the extent of China’s economic downturn is mounting, sparking more volatility and further increasing debt refinancing and hedging costs.

“It’s not like we will see an epidemic, but certainly there are companies facing serious headwinds because of the real’s sharp drop,” said Mauricio Reggio, managing partner at São Paulo-based business risk consultancy firm ICTS Protiviti.

With the cost of hedging closely pegged to Brazil’s benchmark rate - which reached a nine-year high last month, General Shopping and others are opting to hedge interest on their dollar debt for only a year or two, bankers said.

With revenue exclusively in reais, General Shopping’s dollar debt now equals 7.1 times earnings before interest, tax, depreciation and amortization. That is the highest in a group of 90 Latin American companies with large dollar debt exposure according to data compiled by Bank of America Merrill Lynch.

A banker familiar with General Shopping’s situation said that selling assets at this point “could barely cover a year of the company’s interest bill, which makes me believe that talks with creditors may not be far away.”

The story of CSN, as Cia Siderúrgica is known, illustrates the peril other companies are facing.

Chief Executive Officer Benjamin Steinbruch pursued several acquisitions over the past decade that boosted debt, but did little to improve cash flow generation. He is now trying to dispose of logistics and railway operations, property and an investment in rival Usinas Siderúrgicas de Minas Gerais SA , sources told Reuters last week.

“The sale of non-core assets in a buyers’ market is CSN’s next challenge,” said Leonardo Shinohara, an analyst with HSBC Securities.

Talks between the company and creditors to extend over 7 billion reais ($1.9 billion) in debt maturing over the next two years “is on track and well advanced,” a source with direct knowledge of the plan told Reuters on Wednesday.

Both CSN and General Shopping declined to comment.


Financing conditions in Brazil could become tougher as a recession prevents companies from passing higher borrowing costs on to customers, pressing their margins, Eric Altafim, head of products at investment bank Itaú BBA SA, said.

“Conditions for refinancing in general should keep deteriorating,” Altafim said in a recent interview.

Many Brazilian companies learned from past crises to play it safe with derivatives, especially after the financial crisis of 2008, when one-way bets on the currency’s direction drove flagship firms such as Sadia SA and Aracruz Celulose SA into bankruptcy.

Seven years later, hedging has become common enough that many companies are riding out a currency swing that once might have hammered them, such as medicine and consumer goods maker Hypermarcas SA, which borrowed heavily in dollars at the start of the decade.

Hypermarcas took the “fortunate decision” to buy back part of a bond due in 2021 two years ago and eliminate its exposure to currency volatility through derivatives, Chief Financial Officer Martim Prado Mattos said on Tuesday.

The increased use of cross-currency swaps and similar instruments in spite of their high cost helped more Brazilian firms convert dollar debt into local currency risk, trimming their effective exposure by 40 percent, analysts at Fitch Ratings estimated using a sample of 63 Brazilian firms.

Transactions involving currency-term contracts, a type of hedging, rose 20 percent in the year through July, according to data from clearinghouse Cetip SA Mercados Organizados.

The number of mid-sized firms dealing with hedging is increasing. Around 10 percent of Itaú BBA’s clients seeking protection had never tried the instruments before, Altafim said.

“There’s very little room for surprises here, at least for now,” said Fabio Zenaro, head of products and business at Cetip.

$1 = 3.6250 Brazilian reais Editing by Kieran Murray and Alan Crosby

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