| 10.21.13 | Multinationals' FX challenge

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October 21, 2013 Sign up for free: Subscribe | Website | Jobs | Mobile Refer FierceCFO to a Colleague This week's sponsor is MorganFranklin Consulting. SMART, ACCELERATED GROWTH What does it mean to you? What does it mean to others? Take our survey and find out. This survey seeks to discover trends and perspectives of finance professionals preparing for smart, accelerated growth. We invite you to participate in our survey series, Fast Forward: A CFO Survey for Fast Growing Companies. As a contributor, you will be invited to view a complete report of survey findings. We greatly value your input. What's New Multinationals' FX challenge Dearth of derivatives? News Scan: Fed taper; JPM settlement; another India exit; more Also Noted: Spotlight On... Eli Lilly sticks to its R&D guns, for now Why the Big 4 audit oligopoly may be here to stay; Regulators push banks to measure securities losses better; and much more... News From the Fierce Network: 1. Goldman Sachs compensation drama shaping up 2. Jamie Dimon's move at operating unit debated 3. VC firm aims for transparency Marketplace > Get Subscriptions to the Leading Finance Magazines for FREE > Whitepaper: Smarter Service: The Contact Center of the Future > Whitepaper: eBook: Technical Analysis of the Stock Market > Whitepaper: Customer Experience for Service * Post a classified ad: Click here. * General ad info: Click here Today's Top News Multinationals' FX challenge By Ronald Fink Comment | Forward | Twitter | Facebook | LinkedIn Can CFOs of big multinationals convince investors to ignore the effects of currency exchange rates on their earnings? That's increasingly a challenge these days as governments around the world try to stimulate their economies without public investment. The lack of fiscal room to maneuver leaves them with no policy choice but the monetary lever, and that means keeping interest rates as low as possible (some critics say artificially so). We aren't just referring to the Federal Reserve's quantitative easing policy. Indeed, Japan is outdoing the Fed here. And that is having knock-on effects in emerging markets. The result is a competitive effort to devalue currencies, as I wrote about in the June issue of Global Finance. And experts like University of Peking professor Michael Pettis say that is likely to continue until world trade undergoes a fundamental balancing, which neither Pettis nor other experts I spoke with expect to happen any time soon, at least not without a great deal of socio-political anguish. In any case, the effect of competitive devaluations is starting to mess with corporate earnings, as seen today in SAP's warning to investors that the euro's strength is challenging its performance. SAP says weakening emerging-market currencies as well as the dollar are expected to create a significant headwind for fourth-quarter revenue and operating profit. And CFO Werner Brandt told the FT the third quarter would have looked better had it not been for the effect of currency weakness in key markets. SAP isn't alone. As we reported last week, currency volatility also hurt Coca-Cola's Q3 results, denting Coke's revenues in emerging markets by between 6 and 9 percent. That may not sound like much, as emerging markets account for only about 19 percent of Coke's total net operating revenues. But they generate around 45 percent of its pre-tax profits. Pepsi had similar issues, though they weren't quite as acute as Coke's because Pepsi's food business is so strong. In any case, multinationals that have depended on emerging markets are in a bind. Should they spend money on derivatives to hedge despite the cost and challenges involved or should they let currencies do their thing to earnings and hope that they will eventually swing back in the other direction, as they often tend to do, at least in the long run? The latter approach has been favored in the past by companies such as Gillette and Procter & Gamble. But it requires yeoman's work to convince analysts and investors to focus on operating performance in the short term. Based on Coke's efforts last week, it seems easier to convince analysts to do that than investors. If only analysts bought more stock. For more: - see this Financial Times article - see this Financial Times blog post Read more about: Coca-Cola back to top Dearth of derivatives? By Susan Kelly Comment | Forward | Twitter | Facebook | LinkedIn Large numbers of companies don't use derivatives to hedge their financial risks, including more than half of companies with foreign exchange exposures, according to a recent report by Chatham Financial, a financial risk management consulting company. Chatham reviewed the 10-K filings of more than 1,000 U.S. corporations with revenue between $500 million and $20 billion and found that while 76 percent had exposure to FX risk, just 52 percent of the companies with FX exposure used derivatives to hedge that risk. Eighty-nine percent of the companies had interest-rate risk but well under half (just 41 percent) of the companies with interest-rate risks used derivatives to hedge them. Just over half (52 percent) faced commodity risks but only 43 percent of those with commodity exposure used derivatives to hedge. Amol Dhargalkar, managing director for risk management services at Chatham, pointed out that companies may be taking other steps to offset financial risks. "In the commodities realm, companies may be using supplier contracts as a means to actually hedge their risk," he said. "That would not be reflected in their financials." "The challenge with supplier contracts is that they tend to be somewhat short-dated," Dhargalkar said. "Suppliers aren't going to lock in your price for years and years on end." Larger companies with commodity exposure are more likely to hedge with derivatives than smaller companies; 61 percent of companies with revenue between $5 billion and $20 billion did so, versus just 32 percent of companies with revenue between $500 million and $1 billion. On the interest-rate side, companies may be adjusting their issuance. "Many companies now as volatility has been increasing in the rates market have chosen to electively expand the amount of fixed-rate debt they have, either through issuance or entering into interest-rate swaps to lock in their financing," Dhargalkar said, although he added that interest-rate risk isn't the main factor in companies' decisions about their capital structure. Chatham's research shows that 81 percent of the companies hedging cash-flow foreign exchange risks and 77 percent of those that hedge interest-rate risks use hedge accounting treatment. Dhargalkar suggested that the complexity of hedge accounting is discouraging some companies from using financial derivatives. "It has tended actually to become an impediment," he said, noting that while senior managements tend to expect that hedge accounting will be applied, some finance teams "don't know how to get good hedge accounting on an FX program." Using financial derivatives could pose a bigger challenge as financial institutions comply with regulations stemming from Dodd-Frank and Basel III. Dhargalkar said he has yet to encounter a company that plans to stop hedging as a result of the new rules, but added that the financial effect of the regulations has yet to kick in. "When we start seeing the pricing impact, there may in fact be some companies who chose to hedge less," he said. "It comes back to a cost-benefit analysis." One of the biggest challenges companies have to deal with in financial risk management is the "multidisciplinary" nature of the effort, Dhargalkar added. "Members of different parts of an organization have to come together to actually share information, to dig into what you currently have, to understand what's really driving exposures," he said. "The companies that do this best, in our view, are ones that have been able to break through those natural siloes that occur between treasury, accounting, the business units, procurement." For more: - see the Chatham release Read more about: hedge accounting treatment, Chatham Financial back to top News Scan: Fed taper; JPM settlement; another India exit; more By Ronald Fink Comment | Forward | Twitter | Facebook | LinkedIn >> Finance: Markets are watching for start of the Federal Reserve's QE taper But have they taken into account Wall Street dealers' recent aversion to taking big bets on corporate bonds, a factor that could exacerbate interest-rate volatility as the Fed pulls back? Read more >> Compliance: JPM tries to limit the fallout from any mortgage settlement The JPMorgan settlement with the Department of Justice over mortgage securities isn't a done deal. And sure enough, one sticking point is how much wrongdoing it will admit. Read more here and here >> Management: Another multinational abandons India At this rate, there will soon be no "I" in BRIC, as BHP Billiton follows Wal-Mart, Posco and ArcelorMittal in ditching projects in the subcontinent in the past few months as a result of bureaucratic snafus or other conflicts with local authorities. Read more >> Technology: The headaches of the Obamacare launch were hardly unexpected The data-integration glitches plaguing the health care exchanges were foreshadowed by Medicare's expansion in the middle of the last decade. Read more >> Technology: Weeks of work remain on the government's systems before the healthcare glitches are fixed Experts say that they know what the issues are but the government has been slow to order the necessary fixes. Read more >> Technology: Looks like the private sector may not be much better at launching new systems Intel's new processors are delayed by a manufacturing glitch, though the screw-up is considered rare for the microprocessor giant. The problem is, much is riding on the new processors as Intel plays catch-up in mobile. Read more   Read more about: JPMorgan, Intel back to top Also Noted SPOTLIGHT ON... Eli Lilly sticks to its R&D guns, for now Nowhere is the tension between long-term and short-term investment horizons more acute, it seems to us, than in research and development, especially in the pharmaceutical industry. Sooner or later, the big risky bets must pay off, as Eli Lilly CEO John Lechleiter admits. "There's no question sticking to this strategy takes measured courage because you can never really prove to anyone that the way you view your pipeline is the correct way, versus the way skeptics might look at it," Dr. Lechleiter tells the Wall Street Journal today. To be sure, the company's bets have paid off in the past. But if the new ones don't soon, Eli Lilly will be under particularly intense pressure to cut costs. Competitors like Merck have announced layoffs of as much as 20 percent of their workforces in the next two years. Read more   Yields on Treasurys have almost risen to match the average on sovereign debt outside the U.S.: >> Treasuries Lose Cachet on Lowest Foreign Demand Since '01 (Bloomberg) Why the Big 4 audit oligopoly may be here to stay: >> Beyond the Big Four—Why regulators and clients can't break the audit oligopoly (Quartz) Regulators push banks to measure securities losses better?: >> Banks Face Risk-Model Clampdown in Basel Trading-Book Review (Bloomberg) Wal-Mart tries to catch up with Amazon online, including recruiting efforts in Silicon Valley?: >> To Catch Up, Walmart Moves to Amazon Turf (NYT) Smog shuts down Chinese city of 11 million: >> China smog emergency shuts city of 11 million people (Reuters) And finally... The history of Dilbert.   Marketplace * Post listing: Click here. * General ad info: Click here. > Get Subscriptions to the Leading Finance Magazines for FREE Mercury Magazines offers top Finance titles for Free to professionals. No Credit Card Required. 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