Walking the FX tightrope in Latin America
Treasurers at TechnipFMC and Tupperware Brands implemented bespoke FX hedging strategies to manage FX risk in diverse Latin America markets.
Latin American FX markets have seen intense volatility in 2022, with extensive regional FX swings against the US dollar, currency hedging has become necessary for US based corporates in many sectors. Speaking at the 2022 Global Treasury Americas Miami, treasurers at TechnipFMC, a technology provider to the energy sector and Tupperware Brands, a manufacturer of kitchen and home storage products, discuss their strategies in mitigating currency risk in Latin America.
With manufacturing plants in South America for domestic and international production and almost a fifth of their annual revenue from the region, Tupperware and TechnipFMC face a currency mismatch in revenue and costs, leaving them exposed to variability in profitability if regional currencies fluctuate against their functional currency, the US dollar. This means employing diverse and effective strategies in each sub-market within the continent.
For instance, with a manufacturing unit in Brazil, Tupperware Brands has a significant cost base in Brazilian real for goods to be sold in international markets and as the company also holds multiple design and utility patents for its products, its Brazilian subsidiary has to pay royalty payments to the holding company in a controlled intercompany transaction, adding a nexus of complexities to managing FX risk.
“The forex exposure for many of our entities in LATAM is mainly USD associated with intercompany transfer pricing agreements. We mitigate both the balance sheet and the forecasted obligations.” said Patrick Baumann, VP treasury at Tupperware Brands at the 2022 Global Treasury Americas Miami conference.
The company currently uses a decentralised hedging program under which it hedges its FX exposure directly at the subsidiary level. In other words, its BRL-functional subsidiary receives revenue and pays royalties in Brazilian real, resulting in a net short USD hedging position at the subsidiary level.
On the other hand, while TechnipFMC faces a similar position as it also operates a manufacturing facility in Brazil which exports products for foreign markets, its net exposure in Brazilian real keeps resulting in a net short notional position of BRL 380 million at the end of the first quarter as compared to a net long notional position of BRL 1.3 billion at the starting of the year.
Reducing notional exposure
Meanwhile, Tupperware Brands holds a long US dollar FX hedge position in Mexico, a region which represents not just a tenth of its annual sales but also a key manufacturing hub of its products.
With sufficient liquidity and smooth access to capital markets, treasurers are able to steadily carry hedging activities in Mexico. However, Baumann told delegates about how notional exposure can be reduced by using accounting treatments of intercompany loans.
“One of the responsibilities of the Treasury team – in any organization – is to assess the inter-company loans and the respective designations. If the company determines these loans are long-term in nature, and the company has neither plans to repay nor anticipates any in foreseeable future to change the structure, the associated forex impact might be removed from the income statement and recorded in equity in the same manner as translation adjustments, upon consolidation.” Baumann said.
Managing capital & cashflow
On the other hand, the sharp devaluation of the Argentine peso versus the US dollar has had serious ramifications for businesses across Latin America and treasurers have shifted their focus from just managing FX risk to safeguarding capital and cash flow.
But in a hyperinflationary environment, such as in Argentina, managing liquidity via hedging will anyways result in devaluation. Baumann explains that although the functional currency of the subsidiary in Argentina is in US dollars, most of the assets including cash & cash equivalents will be in Argentine pesos and to hedge forward transactions will cost an enormous premium over the spot rate.
Meanwhile, activities like transfer pricing and intercompany loan transactions have been an effective tool for companies like Tupperware Brands to extract cash from such geographies.
Patrick Baumann and Fred Schacknies were speaking at the EuroFinance Global Treasury Americas Miami conference on May 24th 2022