Unstable rate and glitzy role models start hedging trend

Whenever the leu goes up one percent, local exporters lose on average EUR 25 million each month, said Mihai Ionescu, president of the National Association of Exporters and Importers in Romania (ANEIR). Whenever the RON-EUR rate plunges, importers' profits take a nosedive. This was the case for pharmaceutical firms, for example, who lost a total of EUR 50 million following the euro's hike against the leu last December and January.
Since fluctuations in the EUR-RON exchange rate are not expected to settle down any time soon this year, they will basically translate into a new series of losses for local companies unless they have the foresight to start employing some risk management strategies. Hedging is one of them and it seems to have attracted more and more attention from investors sick and tired of seeking their profits going down the RON/EUR drain.
“Since the final weeks of 2007, we have seen an increase in the number of forex hedging strategies. In January-February, the number of hedgers exceeded 30 percent, even nearing 40 percent of the approximately 6,000 active accounts we had at the end of February,” said Decebal Todarita, spokesperson for the Sibiu stock exchange (Sibex).
“The number of hedgers and speculators on Sibex is influenced by market conditions. In the first two months of the current year aggressive depreciation on the capital market led to a significant increase in the number of hedgers on Sibex. We are especially talking about portfolio hedgers, active both on the Bucharest stock exchange (BVB) and on Sibex, who employed various strategies to protect millions of euros,” said Todarita.
“Looking back at the volumes traded in 2006 and the evolution in the last two years, the sustained uptrend is obvious and is generated by a significant increase in the number of customers looking to hedge through derivatives products plus an increase in the volumes traded as companies get more and more comfortable with the products and also more knowledgeable,” said Monica Tanu, head of the derivatives sales and marketing department of ABN Amro Romania. The lender was the first to receive the central bank's approval for offering customers the chance to use full hedging capabilities from October 2005, she said.
Local companies usually decide to hedge a certain percentage of their total exposure which is on average around 45-65 percent, Tanu added.
Customers are getting more and more interested in the alternative offered by the hedging products for two reasons, she said. Firstly, because they are increasingly aware of the possibility to protect themselves against adverse market moves through hedging. Secondly, they have been drawn to hedging after getting a glimpse of what the high volatility in the last year could do to their businesses, said Tanu.
Whenever there is significant depreciation on the market, hedgers are more present, added Todarita, which means that ups-and-downs in the currency rate have considerably helped Sibex get more popular with investors.
Companies as varied as copper producer Cuprom, exporters in various fields, shipyard players and big-scale players like Alro Slatina or Rompetrol have been among the first local players to try out hedging.
Aluminum producer Alro Slatina did so and consequently, “The losses posted in the third quarter of 2006 are no longer visible this year, and risk provisions have dropped substantially in the third quarter of 2007 against 3Q 2006,” read the company's report to the BVB last year.
Alro Slatina closed two forward deals worth a total of RON 131.3 million (EUR 35.5 million), according to company statements in January this year.
The company chose to work with Deutsche Bank London, after having previously worked with commercial banks JP Morgan Chase and Morgan Stanley in September 2007. The contracts closed with the two lenders were worth in excess of RON 1 billion (EUR 270.6 million), said the company.
Analysts said local companies like Alro Slatina have multiple reasons why they choose foreign banks as hedging partners over local players.
“Hedging is a specialized business. Specialization, volumes and presence on the market lead the price for offering this service and its effectiveness. It is more likely though for Romanian companies to use international market leaders offering these services because these institutions are better positioned and probably even cheaper than local counterparts,” said Dragos Cabat, president of Chartered Financial Analysts (CFA) Romania.
“The explicit price of the derivative instruments is directly related to the respective market volatility. For example, the price of EUR/RON options will be higher than the price of options for currencies with lower volatilities,” explained Razvan Szilagyi, head of treasury sales with Raiffeisen Bank. The bank has been a provider of hedging instruments since 2003, having started with simple products, like FX forwards, and now also providing more complex products like options and interest rate hedging instruments.
Another reason why local companies sometimes choose foreign banks to work with is the amount of trust they put across.
“In the case of companies having a centralized treasury department, it is sometimes the case that they decide to close all hedging operations offshore due to the good relationship they have with the
offshore banks and also probably due to lack of confidence in the
local market capabilities,” said Tanu.
Although rising, the hedging trend is yet to become a mass phenomenon. Factors are multiple, but the one carrying most weight is local managers' education.
“The financial services market is not yet sophisticated enough in Romania. There is a need for education for company chief financial officers (CFOs), including most probably seminars, conferences and face-to-face presentations. Moreover, in an environment with low perceived volatility as it was last year (or a highly ‘predictable' and ‘favorable' evolution of the national currency exchange rate, interest rates and inflation) there has been a low incentive for companies to rely on hedging,” said Cabat of CFA.
“The derivatives market was until recently quite new in Romania and customers did not have too much knowledge about the alternatives they had versus being totally exposed to market movements. In order to see a strong development of the market we need to change the customer's level of awareness and knowledge. Also because only a limited number of banks have included a full range of derivative products in their product offer, not all local customers have access to the information,” added Tanu.
The most likely customers for hedging products are large importers of raw materials, especially commodities like oil, steel and energy, large exporters and companies with a long production cycle, said Cabat.
“Multinational companies are often hedging as their entire hedging policy is decided at global level, so the local entity has no decision-making power in this respect. The more active companies are the local ones involved in trade activities and which see that their profit is impacted not only by the way they conduct the core business but also by the movements on the FX market that they cannot control,” said Tanu.
Companies active in markets segments that are very competitive are also more proactive about entering into hedging strategies in order to protect their margins, she added.

By Ana-Maria David