EADS, Safran Cut Currency Hedging in Fourth Quarter as Euro Rose
European Aeronautic, Defence & Space Co. (EAD), Europe’s biggest aerospace and defense company, and Safran SA, the region’s second-biggest maker of aircraft engines, reduced the size of their currency-hedging portfolios for the first time in a year, filings show.
EADS, the parent of Airbus SAS, said a stronger euro contributed to it cutting back on contracts to protect against swings in exchange rates in the fourth quarter. EADS lowered its hedges by $2.8 billion to $83.6 billion, while Safran reduced outstanding contracts by $700 million to $15.1 billion, earnings statements show.
“Essentially, it was a combination of the fact that there was a bit more volume of hedges maturing in Q4 than in the previous quarter, and the fact that the euro-dollar rate increased to around $1.30 from an average of about $1.25 in previous quarters,” Rod Stone, a spokesman for Toulouse, France-based EADS, said in an e-mailed statement.
The companies benefit from locking in the lowest possible exchange rate because revenue from dollar-denominated defense contracts is protected should the euro strengthen. As the euro rises, adding more hedges would mean locking in a higher rate.
The market value of EADS’ derivatives improved to negative 500 million euros ($649 million) at the end of 2012, from negative 2.4 billion euros at the end of 2011. The improvement was due to the reduction in hedge rates achieved by the company, Chief Financial Officer Harald Wilhelm said on a Feb. 27 conference call. The euro’s 2.6 percent appreciation against the dollar in the fourth quarter also boosted the value of the companies’ existing derivatives.
Safran (SAF) has an average rate of $1.29 in 2013, and has used options to reduce the exchange rate in 2015 and 2016 to $1.25 and $1.26. Safran had a notional $9 billion in so-called accumulator notes at the end of 2012, compared with $12 billion at the start of the year, filings show.
The company had increased its hedges to a 3.5-year horizon in the middle of 2012, and the end-of-year reduction reflects the return to a three-year portfolio, Catherine Malek, a Safran spokeswoman in Paris, said in an e-mailed statement.
“EADS and Safran have enjoyed an FX tailwind this year, and it looks like they crammed most of their hedging in the first nine months,” said Sandy Morris, an analyst at Jefferies International Ltd. in London.
The euro traded at $1.2963 at 5:39 p.m. in London, having appreciated from last year’s low of $1.2043 on July 24.
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