Brazil Real Losses May Reach $28 Billion, Hurt Profit

By Alexander Ragir and Fabiola Moura

Oct. 16 (Bloomberg) -- Brazilian companies may report as much as $28 billion of write-offs because of currency bets gone awry as they prepare to release third-quarter results.

Potential losses of 60 billion reais ($28 billion) threaten the solvency of several businesses after the real's unexpected 30 percent drop against the dollar since Aug. 1, said Paulo Vieira da Cunha, a hedge fund manager and former Brazilian central bank deputy governor. Banco Itau Holding Financeira SA Executive Director Sergio Werlang estimated $24 billion in derivative losses. Standard & Poor's analyst Lisa Schineller said the problem may be bigger than what companies have so far disclosed.

After a four-year rally that doubled the value of the real and sent the Bovespa stock index up 150 percent, Latin America's biggest economy has been battered by tumbling commodities and an exodus of international capital. Companies from Sadia SA to Aracruz Celulose SA and Grupo Votorantim made over-optimistic bets on the nation's currency that turned sour, adding to concerns that sent the Bovespa tumbling 11 percent yesterday.

``Management should be blamed for taking excessive risks for these currency and derivative gambles,'' Mark Mobius, who oversees about $30 billion in emerging-market equities at Templeton Asset Management Ltd. in Singapore, said in an e-mail. ``It's important for us to watch this activity very closely.''

The Bovespa index fell 1.4 percent to 36,320.55 at 10:18 a.m. New York time while the real was little changed at 2.2275 per dollar, compared with 2.2265 per dollar late yesterday.

Aracruz, Sadia

The loss estimates are emerging as Brazilian companies start reporting third-quarter results this week. Banco Santander SA cut its profit outlook for Aracruz after the world's biggest eucalyptus-pulp maker said Oct. 2 that it may post a $1 billion loss on derivatives contracts.

Sadia's third-quarter results ``can only be disappointing'' because Brazil's second-biggest food company, based in Concordia, may post a 1 billion-real financial loss from its currency derivatives and increased costs for servicing foreign-denominated debt, Itau Corretora said in a report dated Oct. 14.

Grupo Votorantim, Brazil's biggest diversified industrial group, said Oct. 10 it spent 2.2 billion reais to end loss-making currency swaps. Its pulp-making unit, Votorantim Celulose e Papel SA, said last week in a regulatory filing it will likely report a non-cash loss of 145 million reais related to derivatives, instruments whose value are based on and determined by the underlying value of another security. VCP, based in Sao Paulo, is scheduled to release earnings Oct. 17.

At least 200 Brazilian companies lost money in the currency derivatives market, Estado de S. Paulo reported Oct. 14, citing a government official it didn't name. The next day the Sao Paulo newspaper said Finance Minister Guido Mantega denied the government had such a list of companies.

`Crisis of Confidence'

In New Delhi yesterday, President Luiz Inacio Lula da Silva said ``the companies that bet and lost must cope with the responsibility,'' according to audio of a news conference on the federal government's Web site.

``There's a sort of crisis of confidence in the market about this in figuring out which companies did and didn't hedge responsibly,'' said Daniella Marques, who manages about 1.75 billion reais in assets at Mercatto Gestao de Recursos in Rio de Janeiro. ``This earnings season the companies that had strict control on their positions within their limits will benefit, and those that didn't will get hurt.''

The Bovespa stock index, the best-performer this year through June among the 20 biggest equity markets, lost half of value since its May record on concern the global credit crisis will halt economic growth and weaken demand for the nation's oil, metals and sugar. Commodities account for two-thirds of exports, according to the Brazilian Exporters Association in Rio.

Mexican Losses

In Mexico, currency-related losses also are taking a toll on companies after the peso lost 18 percent against the dollar in the past month. Controladora Comercial Mexicana SAB, a supermarket operator, filed for bankruptcy last week after saying foreign-currency costs rose ``significantly.'' Grupo Industrial Saltillo SAB, a producer of auto parts and building materials, said it took a charge of 600 million pesos in the third quarter.

Many estimates for Brazilian companies' losses are ``outrageous'' and the ``worst is over'' for bad currency bets in the derivatives market, Jorge Sant'Anna, a director at Cetip SA, the nation's clearing house for over-the-counter contracts, said in an interview yesterday.

Companies may dispute the losses, ``saying they lacked knowledge about these transactions and will refuse to pay,'' Cassio Calil, managing director at JPMorgan Chase & Co., said in an interview yesterday in New York. ``I think we will test the judicial system in the country.''

Sadia and Aracruz's announcements prompted at least 14 Brazilian companies to say they didn't speculate on the currency and only used hedging to protect against foreign-exchange swings.

`Imprudent Bets'

Vieira da Cunha, the former Brazilian central bank official who now works as a partner at New York-based hedge fund Tandem Global Partners, said yesterday that several companies may go bankrupt from losses related to foreign-exchange derivatives.

Many large companies made ``very imprudent bets on the path of the exchange rate,'' he said at a conference in New York.

Banco Itau's Werlang, a former central bank director, told Valor Economico this week that companies' losses in the derivatives market may total $24 billion, equal to less than two months of exports. Schineller at S&P said in an interview in New York that the ``size of the problem'' isn't known.

``The market will be scouring balance sheets for any unidentified losses to see if companies that said they were acting responsibly really were,'' said Eduardo Favrin, who oversees $3 billion as head of equities at HSBC Investments Brasil in Sao Paulo. ``There's no way to get around this not hurting third-quarter results.''

To contact the reporters on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net; Fabiola Moura in New York at fdemoura@bloomberg.net