EADS Fixes Lower Euro-Dollar Rate as $5.5 Billion Hedges Expire
European Aeronautic, Defence & Space Co. (EAD), Europe’s biggest aerospace and defense company, and Safran SA (SAF) used currency hedges to lock in lower exchange rates for the next four years after the euro weakened, filings show.
EADS, the parent of Airbus SAS, said on May 15 the Blagnac, France-based company would be able to boost profitability as legacy currency contracts expired. Safran, Europe’s second-biggest maker of aircraft engines, also said last month it exploited the weaker euro to purchase longer-dated hedging contracts.
“During the first quarter, we implemented $4.9 billion of new hedge contracts at an average of $1.33, which is significantly more favorable than the average rates maturing this quarter,” EADS Chief Financial Officer Harald Wilhelm said on a call with analysts. “During the first quarter of 2013, $5.5 billion of forward contracts matured at an average of $1.38.”
Currency hedging is important to EADS and Safran because the bulk of their sales are denominated in dollars and come from outside Europe, while their costs are incurred in euros.
Safran implemented a “significant increase” in its 2016 hedging at $1.25, CFO Ross McInnes said on an April 23 earnings call. “Our target here remains to be below $1.26, which should continue to deliver some tailwind over the next few years in our foreign exchange,” McInnes said.
The euro traded at $1.2823 as of 9:07 a.m. New York time, a 6 percent decline from its Feb. 1 peak of $1.3711. For hedges entered into when the euro was stronger, that results in mark-to-market losses on the contracts.
“At the end of March, the mark-to-market for our hedge book portfolio was negative at around 2.5 billion euros before tax, compared to a negative 500 million euros at the end of 2012,” EADS’s Wilhelm said. “This movement is mainly driven by the evolution of the closing spot from $1.32 in December to $1.27 by the end of March.”
That loss “won’t affect EADS’s liquidity because the company doesn’t collateralize forward foreign exchange contracts,” Rod Stone, a Paris-based spokesman for EADS, said in an e-mailed statement.
EADS and Safran kept the total size of their foreign-exchange derivative books little changed during the quarter, as old hedges rolled off and new ones were added. EADS reduced its hedges by $600 million to a notional $83 billion, while Safran increased outstanding contacts by $100 million to $15.12 billion, earnings reports show.
Safran has an average rate of $1.29 in 2013 and has used accumulator options to reduce the target exchange rate in 2015 and 2016 to $1.26. Accumulator notes allow the company to increase firm hedging at a pre-defined rate as long as the spot currency rate remains under a pre-defined barrier.
Should the spot rate move above the barrier, the accumulator stops but the accrued accumulation-to-date remains. If the spot rate moves back below the barrier, the accumulation resumes.
“We have continued our hedging program for 2016, and that applies as long as the euro-dollar rate remains below $1.39 for the bulk of 2014,” Safran’s McInnes said, referring to the barrier feature.
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