Forum Archive Index - December 2001

[donkeyboy <donkeyb1@excite.com>]

no veiwpoint - you are still wrong

the FX loss has to be looked at from the top line - not the bottom line.

SAN policy is to hedge the years estimated revenue roughly 20%, 3 years out,
50% 2 years out, 100% for the current year.

In SAN case (2000 annual report pg 42) they had $338.6m of FX forward
contracts open as at 08/2000- approx 90% of 2000 sales. They reported that
they had a paper loss of $58.5m - remember this is August 2000 - over 1 year
ago - as the currency was 0.4267, down 20% from 0.5182 for that year. Ths
means in the 2000 year SAN incurred and reported off FX losses of approx
$50m that year. This doesnt go thu the i/s as the losses are not realised -
however the contingent liability was there for everyone to see. The
contingent liability is now $13m. This means that from 08/2000 to 08/2001,
SAN FX losses actually improvedby about $3m.

However we also know that SAN is likely to have approx $350m of forward FX
in at 0.41 or thereabouts. if the currency improves SAN will make a poltice
of cash, if not the currency detoriates then SAN will incurr further losses.

These cashflows are the result of a POLICY - a policy avoids discretionary
changes by mangement and directors. (there were no material related party
transactions in the 2000 year - when the majority of the losses were
incurred - JG Todd in a director of the ANZ and has notified that all
transactions between SAN and the bank would be relevant). Discretionary
hedging decision blew up Fisher and Pakyel, and Natural gas. the directors
of SAN are not expert FX guys - and am sure that you have heard the saying
that betting on FX is like betting on two flys - so their policy neutralises
at least some of the risk inherient to FX at the time the expenditures and
management decisions are taken. Sometimes this works, sometimes it doesnt.
But at least they are not betting the business on FX movements.


the question is now is $42m a lot to lose - my opinion is not really is you
remember the FX loss was incurred during the 20% depreciation of the NZ
currency during 1999/2000 and if you remember than the loss is more a
opportunity cost of not participating fully in that depreciation. I think
that it would have taken very big balls indeed to mve away from the boards
establish policy to taking active bets of the currency during that time.

You make reference to Gaynors critism - frankly I dont have much time for
Gaynor - his comments on Eire and NZ and future growth shows he didnt have a
clue about the impacts of low corporate tax, membership of the EU, EU
subsidities, and the benefits of having half your population based in the
US, who were desperate to find access to the EU, his comments of TEL
privatisation and how we were all ripped off - raise your hand if you picked
the TELCO bubble - the beginning or the end?, his comments of FR and the
purchase of TRH when he says if I buy an asset for $100, borrow $90 to pay
for it - then I have only paid $10. I dont believe Gaynor could analyse his
way out of a paper bag if he had to look forward - and his backward looking
analysis is pretty shoddy as well.

Gaynors problem with SAN appeared to be with the way that Eric Barrett
answered his questions at the AGM. Eric is not a good public speaker and if
you have ever seen Gaynor in action - he is not looking for an answer, he
just likes to ginger up the CEO's in a public forum. However Eric is very
good one-on-one and a manager I have a lot of faith in. Given Gaynors media
ego, I doubt that he bothered to read the annual reports or even to speak to
Eric on an individual basis - the truth and proper analysis gets in the way
of a good story - but I dont believe a company should get persecuted because
the CEO needs a dose of toastmasters or because the commentators cannot read
a balance sheet.

finally I understand your point that zero sum game in hedging is because one
persons gain is another person loss. However this is too narrower veiw and
probably only applies to a speculator, in which case it is also true for any
asset transaction. If I buy a house and turn it around and sell it for more,
then the first seller lost. 

However this takes no concern of how risk adverse someone may be, the
ability to avoid a huge loss if the FX rate goes the other way (check out
what happened to enron - it effectively gave its creditors an option to
close their whole business down if its bets didnt work out), liquidity
situation - ie where the bank may require a hedged contract to finance a
project, planning under certainty rather than uncertainty - there are many
non-cash areas of value that can be created via hedging, and other value
(both cash and non-cash) that is created outside the hedging contract.

as an observation it is funny how the game theorist's jargon has entered the
market - you gotta remember its all how you define the game.

cheerio





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