Aracruz gambled away more than US$2 billion on derivatives

Posted: 6 January 2009 in Aracruz, Brazil

In December 2008, Bloomberg reported that Aracruz’s losses on currency-derivatives amounted to US$2.13 billion.

On 24 November 2008, Aracruz held a Special Shareholders Meeting “with the participation of representatives of 96.5% of its voting capital. The meeting was called to discuss a proposal for filing a responsibility lawsuit involving the company’s former CFO, Isac Zagury.”

While it’s nice to see that they are holding people responsible for this mess, they are only doing so because the value of the Brazilian real collapsed against the dollar. Presumably the board and the shareholders knew about the derivatives investments, but weren’t complaining as long as they were making money.

Meanwhile, the company faces a Class Action in the US District Court in Florida. Southem reports on this as follows:

This Class Action is being undertaken in the name of the company’s shareholders who acquired American Depositary Receipts (ADRs) and/or shares issued by Aracruz between 7 April and 2 October 2008, a company statement said.

“The purpose of the Class Action is to obtain indeminification for losses arising from the alleged violation of U.S. capital market regulations, as a result of the foreign exchange derivative transactions carried out by the company,” the statement said.

Six members of Aracruz’s board have resigned, along with a member of its Tax Committee.

It’s difficult not to feel a sense of schadenfreude about all this, even though the social and environmental impacts of Aracruz’s operations are far worse than the financial mess they’ve got themselves into. At least the financial crisis has stopped the company’s expansion plans.

Here’s the Bloomberg article in full:

Aracruz Fails to Settle $2.13 Billion Derivative Loss (Update6)

By Carlos Caminada and Laura Price

Dec. 12 (Bloomberg) — Aracruz Celulose SA, the Brazilian pulp maker that posted $2.13 billion of currency-derivatives losses, failed to reach an agreement with banks to settle the wrong-way wagers.

Talks with lenders will continue, Aracruz said today in a statement to Brazil’s securities regulator, without stating if a new deadline was set. The Aracruz, Brazil-based company didn’t identify the banks or terms being discussed. Lenders had extended until yesterday a Nov. 30 deadline to reach an accord.

Aracruz, the world’s biggest eucalyptus-pulp maker, has been buffeted by the real’s 34 percent decline against the dollar since Aug. 1. The company had bet the currency would continue a winning streak after doubling in the four years through July. Failure to reach an agreement probably means Aracruz will need to sell assets and seek capital from investors, said Rodrigo Lopes of Banif-Nitor Asset Management.

“This puts the company in a very tough position,” said Lopes, who helps manage 400 million reais at the Sao Paulo- based fund manager, which doesn’t own Aracruz shares. “They would need to solve this as quickly as possible, but apparently talks may drag on until next year.”

Aracruz rose 3 centavos, or 1.6 percent, to 1.91 reais in Sao Paulo trading. Before today, the shares had declined 85 percent this year.


Aracruz received a proposal from 10 banks to renegotiate the losses from currency contracts, Valor Economico reported today. The banks offered to allow the pulp maker to pay the debt over seven years with interest equal to 7 percentage points over the London interbank offered rate, known as Libor, Valor said.

Aracruz and other exporters were caught by surprise as the Brazilian real and other emerging-market currencies slumped in past months after the global credit crunch led investors to seek safer assets and exit emerging markets. The real led losses among the 16 most-traded currencies in the past three months.

“The feeling that Brazil was untouchable created a hype,” said Mario Paiva, a strategist at Liquidez Corretora, a currency derivatives brokerage in Rio de Janeiro. “The companies were comfortable taking on this risk because they were sure the real would trade stronger.”

In Other Countries

Similar wrong-way wagers were posted by companies from Mexico to South Korea. South Korean display-screen parts maker Taesan LCD Co. collapsed in September after bets on the won soured.

Mexican cement maker Cemex SAB may report a $431 million loss from derivatives for this quarter, Morgan Stanley analyst Nicolai Sebrell wrote in a note to clients today. Mexican supermarket operator Controladora Comercial Mexicana SAB filed for bankruptcy in October and said last week that claims from foreign-exchange contracts rose to about $2.2 billion following the peso’s 19 percent slump this year.

In Brazil, foreign-exchange speculation cost at least eight of the largest companies $5 billion. About 500 businesses in Latin America’s biggest economy could be hurt by currency derivatives, Maria Helena Santana, president of the country’s securities commission, said last week.

Aracruz, Sadia SA, Brazil’s second-largest foodmaker, and Grupo Votorantim, Brazil’s largest raw materials-company, originally used the contracts to secure profits from exports. As the real approached a nine-year high earlier this year, they began speculating that the currency would continue to appreciate.


Aracruz, the world’s biggest producer of pulp from eucalyptus trees, said Sept. 25 that Chief Financial Officer Isac Zagury resigned. The company reported a week later that losses on currency bets surpassed the value of 2007 sales.

Concordia-based Sadia posted a 544.5 million-real writedown for the third quarter on Oct. 29, fired Chief Financial Officer Adriano Lima Ferreira and was left with $2.4 billion worth of contracts at the end of September.

Sao Paulo-based Votorantim spent 2.2 billion reais to settle all currency wagers with banks.

The losses have also derailed Votorantim’s plan to take over Aracruz through its Votorantim Celulose e Papel SA unit, Brazil’s third-largest pulp and paper maker. VCP was seeking to merge operations with Aracruz to grab a third of the world’s eucalyptus-pulp market.

Aracruz on Dec. 4 denied reports that it received a new offer for the 28 percent stake Votorantim wants to buy.

  1. […] pulp downtime topped 2 million tonnes in late 2008“, RISI, 8 January 2009. [3] “Aracruz gambled away more than US$2 billion on derivatives“, PULP Inc, 6 January 2009. [4] See, BioRegional MiniMills (UK), for more information about […]

  2. […] In December 2008, when the company was called Aracruz Celulose, the company shocked its shareholders by posting a loss of US$2.13 billion. […]

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