Citic groups agreed to inject $1.5bn into Citic Pacific and assume responsibility for foreign exchange contracts that could have cost the Hong Kong-listed company billions of dollars.
Citic Pacific revealed on October that it faced mark-to-market losses of HK$10.4 billion and HK$5.1 billion ($1.88bn) from hedging contract to Australian dollar exposure. To eliminating any further losses from this exposure, Citic Pacific has struck agreement to sell the majority of the contract to Citic Groups. In return, Citic groups will get $1.5 billion (HK $11.625 billion) convertible bond that will be automatically converted even if it’s run out of money.
Citic Pacific bought AUD forward contracts for October 2010 at $0.87 as a hedge for outlays in connection with its iron ore business in Australia. After that the contracts’ value collapsed to $0.65. But the contracts are being transferred to Citic Group and viewed as real hedges and qualify for hedge accounting. This means the company doesn’t have to mark-to-market and put the gains or losses through its profit and loss account. The potential downside is unlimited as long as the company keeps the contracts until October 2010.
The Total losses of these trades is HK$16.8 billion ($2.2 billion), including the mark-to-market losses of HK$10.4 billion and HK$5.1 billion and an already realized loss of HK$1.3 billion.
Citic Group has $5.2bn in cash and other liquid assets, while total consolidated assets reached $181bn at the end of last year.
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Sources :
- FT.com: Moody’s lowers Citic Group rating, November 18 2008 17:18
Finance Asia: Bailout ideal for Citic Pacific, less so for shareholders, November 14, 2008
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