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Tuesday, December 6, 2022

Devaluation: International Breweries Lost N9bn to FX Hedges in Q2

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The impact of the recent naira devaluation is just beginning to hit the books of Nigerian companies as International Breweries has reported that it lost N9bn in hedges it entered into in the second quarter (Q2).

In May 2020, the company took out a new hedge instrument to protect the volatility of foreign exchange (FX) movements on the outstanding loan balance.

“The Company has entered into non deliverable forward contracts to mitigate the forex risk on the contractual interest and principal repayments,” the firm said.

The Fair value loss on cash flow hedge instrument amounted to N9.04 billion in the quarter, from nil position a year ago.

International Breweries has an FX loan balance of $278 million on its books, which was obtained in 2018 with maturity date of May 2021.

The Central Bank of Nigeria (CBN) earlier in the year, moved the official rate of the naira to N360 per dollar (USD) from N306.

On the 3rd July the CBN further announced that the minimum bid threshold for the SMIS window has been increased to N380/USD from N360/USD.

Many Nigerian firms utilize the secondary Market Intervention Sales (SMIS), window to bid for FX to settle obligations.

International Breweries says effective Q2 2020, as part of its risk management strategy, the company decided to adopt cash flow hedge accounting for hedges taken out to mitigate particular risk associated with the cash flows of recognized assets and liabilities and highly probable forecast transactions.

Derivatives such as the FX forwards contracts the firm entered into are initially recognized at fair value on the date the derivate contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in the cash flow hedge reserve within equity.

Gain or loss relating to the ineffective portion is recognised immediately in profit or loss, within other gains/(losses).

The loss from the hedges helped to widen the firm’s total comprehensive loss for the period to N18.37 billion as revenues fell 11.6 percent from a year ago.

Ugly Chart

International Breweries share price is down 70 percent in one year. The stock closed trading at N3.40 on Friday.

Nigerian beer makers have generally had a hard time in the past year, as the macro environment deteriorated, leading to cratering share prices.

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