Derivatives Not Dead for CFOs

LatAm CFOs still have appetite for derivatives, despite a recent high profile default and hefty losses from abuse of the product, say bankers and analysts. “You will still need to hedge, no matter what,” says the head of a major Wall Street shop’s LatAm derivatives desk. “You are going to see a little bit of back to basics,” he adds. “It’s a viable product that has been abused,” says another regional head of investment bank. “It will still be sold where it makes sense.” According to bankers, most of the companies who had derivatives positions that went bad knew what they were getting into, though some might have been burned by a preference for higher risk at lower cost. And the speed and size of FX moves simply wrong footed CFOs, even at sophisticated blue chips like Cemex. Given heightened markets volatility, there may even be more demand for derivatives, albeit under greater regulatory scrutiny and with more conservative structures. However, Comerci’s positions – which forced the Mexican firm into bankruptcy – are widely seen as poorly advised. “A few of the companies were clearly engaged in currency speculation,” says Joe Bormann, corporate analyst at Fitch, adding that some positions were asymmetric, resulting in a much higher loss for a strong USD. “A few, after taking a look, may not have actually understood the implications of the derivatives instruments they were using.” Bormann expects more losses to be made, but also gains in operating cashflow to help offset this. “Changes obviously will be made. You’re going to see more oversight by companies on their derivatives positions,” says Bormann. “Some companies will back away from derivatives positions that did not make sense, but by and large the majority of companies will continue to hedge.” Derivatives are typically used in LatAm to limit the impact of a currency mismatch.