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 In a likely sign of things to come from a number of companies this
results reporting season, Ford Motor Co on Friday said it was taking
a pre-tax charge of $800 million for its Venezuela business.
It blamed Venezuelan exchange control regulations that have
restricted the ability of its operations in the country to pay
dividends and obligations in U.S. dollars. Ford also said that it
was unable to maintain normal production in Venezuela with the
availability of vehicle parts constrained.
Also on Friday, diaper and tissue maker Kimberly-Clark Corp said it
took a fourth-quarter charge of $462 million for its Venezuelan
business. That was after it concluded that the appropriate rate at
which it should be measuring its bolivar-denominated monetary assets
should be a Venezuelan government floating exchange rate - currently
at around 50 bolivars to the dollar - rather than a fixed official
rate of 6.3 to the dollar that it had previously been using.
Kimberly-Clark blamed increased uncertainty and lack of liquidity in
Venezuela for the move.
Venezuela President Nicolas Maduro said on Wednesday he was shaking
up the complex currency controls in the socialist-run country, where
dollars are sold on the black market for about 184 bolivars to the
U.S. dollar instead of the country's three-tiered exchange rate
system that has ranged from the 6.3 official rate to two other
rates, currently at about 12 and the one at around 50.
Those latter two tiers of the system would be merged, he said,
though it is not immediately known at what rate that would happen.
Maduro also announced that another new rate would be introduced into
the system to offer dollars via private brokers to vie with the
black market rate.
The latest moves may catch some companies flat-footed - particularly
regarding the size of the hit they may have to take to their
earnings as they revalue assets at a much weaker bolivar exchange
rate.
"They may be surprised by the magnitude of the move but not by the
direction," said Marc Chandler, global head of market strategy at
Brown Brothers Harriman & Co. "But many shied away from hedging in
the past because it is very expensive.”
ISOLATING VENEZUELAN BUSINESS Companies often need approval from
Caracas to raise prices amid soaring inflation. Sometimes that
approval is delayed or the price hikes don't keep pace with a
12-month inflation rate currently at nearly 64 percent, threatening
losses because of a mismatch between costs and revenue.
Before the move by Maduro, some well known U.S. companies, including
Procter & Gamble, General Motors, Baker Hughes Inc and Brink's had
already reported financial hits related to the bolivar over the past
year.
“A wide swath of multinational companies with large operations in
Venezuela will suffer from having to hold currency that is stuck in
the country and depreciating in value," said Erik Gordon, professor
of law and business at the University of Michigan.
For Ford, conditions are so tough in the South American country that
it also announced on Friday that it will make an accounting change
that will allow it to isolate the rest of the company from its
Venezuela operations. "In future periods, our financial results will
not include the operating results of our Venezuelan operations," it
said in a corporate filing.
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Bob Willens, a veteran accounting expert on Wall Street, said other
companies might follow Ford's lead. "Who wouldn’t want to
deconsolidate a Venezuelan subsidiary?” he asked.
Cleaning and household products maker Clorox last year decided to
exit Venezuela altogether. CEO Don Knauss told analysts in October
that Venezuela's government was slow to approve price increases and
when it did they were not as high as promised."We saw no hope that
we could create a sustaining business in that country," Knauss said
during an October conference call.
Overall, foreign companies have an estimated $16 billion in
outstanding dividends listed on their balance sheets that they have
not been able to return to headquarters, according to Caracas-based
research firm Ecoanalitica. The actual value of those assets could,
though, be considerably less, depending on the exchange rates.
At the end of the third quarter, for example, American Airlines
Group Inc, had $721 million held in the Venezuelan currency, at a
weighted average exchange rate of 6.41 bolivars to the dollar.
Theoretically, if the airline tried to repatriate all of that money
into dollars at the current black market rate of 184 bolivars per
U.S. dollar as quoted by the website dolartoday.com, it would only
receive about $25 million.
"For a business like American Airlines, they have a bank account
full of worthless monopoly money, and the only way it is worth
something is if they can get an exchange," said Russ Dallen, head of
Caracas Capital Markets in Miami. "But the government doesn’t have
any dollars to exchange, in size. They can’t pull out because not
only will they not get the dollar at the original rate promised but
the Venezuelan government said they would take the travel routes and
never let them back into the country if they did.”
American Airlines did not return messages seeking comment.
(Writing by Tim McLaughlin; Additional reporting by Svea Herbst,
Daniel Bases, Bernie Woodall, Brian Ellsworth and Gertrude
Chavez-Dreyfuss; Editing by Martin Howell)
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