Over $40 Billion in Hedges Vanish From Brazil Balance Sheets

  • Companies are unwinding real shorts as currency surges
  • Moves follow a rush to hedge last year as real collapsed

Brazilian companies that piled into hedges last year as the real posted the world’s biggest tumble are rushing to unwind those positions now that the currency’s gone from worst to first.

Beef producer Minerva SA said it eliminated all of the currency-derivatives positions it used to hedge its dollar-denominated bonds last year, after losing 426 million reais ($134 million) on the contracts in the first half of 2016. This follows a similar announcement by rival JBS SA, which at one point had $12 billion in bets on its balance sheet. Pulp exporter Suzano Papel & Celulose went a step further: It’s shorting the dollar to hedge its real-denominated debt to offset the impact of a weaker greenback on its export revenue.

The total notional value for long and short positions of over-the-counter, non-deliverable forward contracts, the most common instrument used by companies in Brazil excluding banks, plunged 32 percent to $93 billion in June, the most recent data available, from a record of about $135 billion in September, according to Cetip, which registers the transactions.

It’s a dramatic reversal for a currency that only a year ago was in a free-fall as Brazil’s economy slid into its worst recession in a century and its government was hog-tied by a corruption scandal and political crisis. Today, a new administration has stepped in and is winning back investors’ confidence that Latin America’s largest economy will soon rebound. After tumbling 33 percent last year, the currency has recouped most of that lost ground with a world-beating 25 percent rally.

“Companies seem to be comfortable with the real at current levels and don’t feel they need protection now,” said Fabio Zenaro, Cetip’s product superintendent. “They don’t see the dollar rising against the real in the short term.”

The real rose 0.6 percent to 3.1740 reais per dollar as of 3:30 p.m. in Sao Paulo.

Companies carrying large dollar-denominated debt loads take a major hit on their balance sheets when the real weakens because they have to account for changes in the local currency. On the flip side, the weaker currency also boosts the value of their foreign receivables for big exporters. Companies often try to play one against the other to balance out the impact on their bottom lines.

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