One Company Is Making a Killing on Brazil's Sinking Real - Bloomberg Business

29/09/15 11:31

One Company Is Making a Killing on

Brazil's Sinking Real
Gerson Freitas Jr
September 28, 2015 11:00 PM BRT
Updated on September 29, 2015 10:34 AM BRT

Employees work at a JBS SA meat processing plant.

Photographer: Diego Giudice/Bloomberg

Global beef king now makes more money on derivatives than meat
Strategy costs 4 billion reais a year, twice JBS's 2014 profit
Tucked away in an industrial neighborhood in Sao Paulo, six members of JBS SAs sprawling meatpacking
empire are making a fortune on the collapse in Brazils currency. The group may only account for 0.003 percent
of JBSs 215,000-strong workforce, but its on track this year to generate more profit than the beef, poultry and
pork operations combined.
The risk-management team, as the group is called, has been mounting one of the largest currency-hedging
positions for any non-financial company in the country. And with the real down 36 percent against the dollar
this year, Credit Suisse estimates JBSs profit from derivatives will swell to 15 billion reais ($3.65 billion) for
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the full year. The strategy, while paying off now, isnt without risk. Had the meatpacker been caught on the
wrong side of the trade, the losses could have wiped out most of its cash holdings, financial documents show.
JBS is best known to the outside world as the company that gobbled up Pilgrims Pride as part of a $20 billion
acquisition spree, but inside Brazils financial circles, those currency bets have earned it another nickname: The
hedge fund that sells meat. What stands out about JBSs derivatives position isnt just the size -- $12 billion in
bets against the real -- but also the rationale behind the wager. JBS says its simply protecting against declines
that can bloat the size of its foreign debt when measured in local-currency terms. To some outside observers,
thats a curious argument for an exporting company that gets 80 percent of its revenue in dollars. They say that,
given the massive size of the program, it looks a bit like currency speculation.
It seems like an aggressive strategy, Viccenzo Paternostro, an analyst at Credit Suisse, said from Sao Paulo.
JBS has many assets in dollars, with big operations in the U.S., Europe and Australia. It doesnt need to hedge
everything in dollars. It could hedge only the Brazilian part.
The Brazilian brothers who run the company, Wesley and Joesley Batista, made a name for themselves by
betting big, often by taking over unprofitable producers and loading up on debt as they transformed the oneshop butcher founded by their father into the worlds largest beef producer.

Long Journey
Back in a May interview at the companys Sao Paulo headquarters, Wesley Batista made a prescient prediction
that foreshadowed the companys foreign-currency tactic. While analysts at the time were forecasting the real
would only slip about 6 percent by year-end, Batista, the companys chief executive officer, had a muchgloomier outlook and anticipated a long journey ahead for the currency. Behind the scenes, JBS was at the
tail-end of boosting its derivatives position by about 50 percent compared with December 2014, financial
records show.
Since that interview, the real has plummeted 26 percent, extending its year-to-date selloff amid a recession,
plunging commodities prices and a corruption scandal that has left President Dilma Rousseff fighting for her
political survival. JBSs shares have surged 49 percent this year, a rare bright spot in Brazils market rout.

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JBS is spending about 4 billion reais in interest a year to carry its derivatives positions -- twice everything it
earned in 2014, analysts from Credit Suisse and Bradesco BBI estimate. Its hedges include $5.5 billion of
futures traded at the Sao Paulo exchange -- almost double the position it had at the end of 2014 -- and about
$6.3 billion in non-deliverable forwards, which trade over the counter, financial records show. The rest is held
through swap contracts.
We definitely dont believe in natural hedges because you cant guarantee that revenues and margins will
remain constant in dollar terms, Chief Financial Officer Jerry OCallaghan said. We consider our strategy to
be a prudent one and not at all speculative.
For Brazilian firms that piled on $270 billion of foreign debt during the boom years of the past decade, the right
currency-hedging strategy can make or break a company. As the real tumbles, the value of foreign debt when
converted into reais balloons on the balance sheet and can cause leverage levels to breach bond covenants and
companies to suffer credit-rating downgrades. It also makes interest payments costlier for companies whose
revenue is largely in reais.
JBS estimated in its latest financial statement that derivatives losses in the third quarter could have totaled as
much as 9.3 billion reais had the real rebounded 25 percent.

Dangerous Hedges
JBS is probably operating a lot like a hedge fund, said Reginaldo Galhardo, a foreign-exchange manager at
Treviso Corretora de Cambio in Sao Paulo. But while playing with hedges can be dangerous, he said JBSs
team is more sophisticated than most of its peers. JBSs controllers have their own bank, he points out. Its
chairman is former Central Bank President Henrique Meirelles, who is from the same rural state as the Batista
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family.
Analysts are largely positive on JBS, too. Gabriel Vaz de Lima, an equity analyst at Bradesco BBI in Sao Paulo
said I like the strategy, and Catarina Pedrosa, a Sao Paulo-based analyst at Haitong Research, said the hedging
lowers JBSs risk.
JBS can always adjust its strategy as the trend changes, Pedrosa said.
Back at JBSs headquarters, just off a main highway that meets up with the nations biggest beef-shipping route,
the six-member risk team had another good day on Monday. The real weakened 3.3 percent to 4.1096 per dollar.
It proved to be the right decision because the real fell this year, said Credit Suisses Paternostro. But had the
exchange rate climbed to 2 reais, it would have been very bad for the company.

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