Wall Street Journal | February 4, 2011 | David Roman
— Hedges around EUR5 billion a year through forex derivatives
— Hedging principally relates to repatriation of cash from subsidiaries
— Aims to neutralize forex impact on repatriated cashflow over 18 months
— High-risk taking in forex markets out of the question
MADRID (Dow Jones)–Telefonica SA’s (TEF) net profit was boosted last year by a bounce in the value of the Brazilian real against the euro, but recent bouts of weakness in the European currency have also pushed up overall debt, according to Chief Financial Offer Santiago Fernandez Valbuena
“In terms of bottom line, the best thing for us is to see a weaker euro,” Valbuena told Dow Jones Newswires in an interview Thursday. “However, that makes debt more costly. Due to our financing needs, as of September debt was EUR1.9 billion higher [than in June] only because of the euro effect.”
Madrid-based Telefonica, which reports in euros and will release full-year results Feb. 25, gets just below half of its revenue from the euro zone, mostly from its Spanish and German subsidiaries, but also has significant operations outside the euro zone — the U.K.’s O2 contributes over 10% of revenue, with 17% from Brazil, 3% from Mexico and 20% from other Latin American countries.
Strength in emerging-market currencies in 2010, at a time when the euro was under pressure from sovereign debt concerns in countries like Greece and Portugal, translated into higher revenue when converted back into euros by the parent company. Last year, both the Brazilian real and the Mexican peso gained around 13% against the euro.
On the debt side, Valbuena said, the opposite applies; 70% of Telefonica’s debt is euro-denominated, but 10% to 12% is in sterling and the rest in U.S. dollars, Brazilian reals and other currencies, including the Mexican peso and smaller Latin American units.
Telefonica, one of Europe’s largest companies, has a market value of EUR84 billion and EUR54.5 billion worth of outstanding debt. That puts it among the world’s top five non-financial companies by size of debt.
Telefonica’s large footprint also adds to the complexities when it comes to repatriating cash to the parent. Valbuena said the company hedges a large part of such flows — around EUR5 billion per year — through forex derivatives including swaps, options and, to a large extent, non-deliverable forwards in Latin currencies like the real and the peso.
Valbuena said the objective is to neutralize the foreign exchange effect on the repatriation of cashflow for the next 18 months.
“What we hedge is cash flow, not asset value,” he said.
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