Citic Pacific Sees $2 Billion Bad-Bet Hit
Citic Pacific Ltd. shares plunged 55% as the company scrambled to minimize the fallout from its admission that leveraged currency positions could lead to nearly $2 billion of losses.
On Tuesday, Citic Pacific, a Hong Kong-listed company with Chinese financial backing, said it had demoted or disciplined an unspecified number of employees from its finance department, including the daughter of Chairman Larry Yung. The company said it was in talks to sell all or part of its 56.67% stake in Dah Chong Hong Holdings Ltd., a listed automobile dealer and distributor of home products. Citic Pacific didn't offer a reason, but any deal would help it raise cash.
Earlier Tuesday, analysts continued to blast the company for its handling of the currency debacle. Most critically for investors, Citic Pacific has expressed reluctance to unwind the bad bets and realize its losses, apparently in the hopes of recouping its money should the Australian dollar rebound.
'The company doesn't have the appetite to close out right now,' said Danie Schutte, an analyst covering Hong Kong conglomerates at CLSA Asia-Pacific Markets.
Shares of Citic Pacific, a component of Hong Kong's benchmark Hang Seng Index, closed at HK$6.52 (84 U.S. cents) Tuesday, 85% off their high for the year.
According to the company, it ran afoul of currency positions placed through structured products dubbed 'accumulators.' One such product is a contract in which an investor agrees to buy a specified amount of a security or currency at a fixed price over a particular time period, subject to certain conditions. The price often represents a discount to the spot market.
So long as a security or currency is appreciating, the investor benefits by earning a yield on the difference between the fixed price and the trading value. But they can lead to steep losses on the downside when the security or currency falls below the purchase price.
Citic Pacific says it is invested in accumulators whose value is about nine billion Australian dollars (US$6.33 billion). The contracts require the company to purchase the Australian currency at a fixed price of 87 U.S. cents.
After reaching a high of roughly 98 U.S. cents in July, the Australian dollar has fallen sharply in recent months and now trades around 69 U.S. cents.
While the company's losing position could reverse itself if the Australian dollar rallies against the U.S. currency, most analysts predict a further slide, which could lead to steeper losses.
The company said it will mark to market the accumulators and other derivatives Dec. 31. It has unwound some derivatives contracts, resulting in a total realized loss of HK$807.7 million (US$104.2 million), it said in a statement. Citic Pacific has similar contracts linked to the value of the euro and Chinese yuan. The company said its trading counterparties include Citigroup Inc., HSBC Holdings PLC and BNP Paribas SA. Citigroup and HSBC declined to comment. A spokeswoman at BNP couldn't be reached.
Citic Pacific, an affiliate of China's Citic Group, operates an iron-ore mine in Western Australia, a capital-intensive project that requires that the company purchase equipment and supplies in Australian dollars. Initially, the accumulators represented a way to finance those costs, while providing a cushion against a weakening of the Australian currency. |
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