Rupee and Real, Weakened After Fed's Signal on Bonds,
Translate Into Higher Costs to Repay Debt, Buy Jet Fuel.SÃO
PAULO—The expected end of the Federal Reserve's era of easy money has hit currencies in emerging markets from the rupee to the real. And that is hurting corporate profits from Bangalore to Brazil.
Consider the case of Brazil's Gol Linhas Aereas
Inteligentes, GOLL4.BR -1.62% the country's secondbiggest airline. About 60% of its costs, such as jet fuel, are in dollars, while revenue is in reais. The real fell as much as 15% after the Fed in June signaled that it would be ending its bond-buying program; as of Tuesday, it was down 9.5% year to date.
The cost of filling up one of Gol's Boeing jets has soared to about 70,000 reais from about 50,000 reais two years ago, the airline said.
The weaker real was the biggest factor in the company's second-quarter net loss of 433 million Brazilian reais
($190 million), the company said. Latin America's biggest airline, Latam Airlines Group, also blamed the real for its
$330 million loss in the second quarter.
Gol said the problem isn't so much the currency's weakness as the wild swings seen in recent years. The
currency's volatility "makes long-term planning more difficult," said Chief Executive Paulo Kakinoff.
Other companies in Latin America and Asia are also feeling the pain, and they are trying an array of approaches to mitigate some of the damage.
One of the most common problems is dollardenominated debt. As global demand for commodities boomed, even companies without dollar revenue decided to take advantage of the accompanying strength of local currencies and amassed millions in dollar debt.
Peruvian Coca-Cola bottler Corporación Lindley SA in
April issued $260 million in 10-year bonds, increasing its dollar-denominated bondholdings to $580 million. Lindley is "exposed to currency risk related to its debt obligations that are predominantly denominated in USD," said Fitch
Ratings. Lindley partially mitigates those risks with currency hedges.
On the other side of the Pacific, many Asian firms are also struggling after borrowing cheap dollars during the boom. Indian companies have a combined $100 billion of unhedged foreign debt, according to data from Indian ratings firm Crisil, an affiliate of Standard & Poor's. A
19% decline in the rupee since May has increased the cost of repaying those debts in local currency terms.
Reliance Communications Ltd., 532712.BY -0.67% one of the Asian nation's largest telecom companies, has $3.83 billion in unhedged foreign debt. The company, which has about $200 million of unhedged debt due to be
repaid this year, said it didn't hedge because that would have been too costly.
Fitch Ratings expects the company to repay its debt, but at the cost of curbing planned expansion.
Indosat, ISAT.JK +0.60% also a leading telecom firm, has almost $1 billion in offshore debt, which it took out to fund equipment purchases when U.S. rates were much lower than Indonesia's.
"Obviously, currency factor is a concern," said Stefan
Carlsson, Indosat's chief financial officer. Indosat may book currency-related losses but will be able to repay its borrowings, he added.
Even companies with significant dollar revenue are groaning under their debt load. The huge Brazilian statecontrolled oil company Petróleo Brasileiro SA, Latin
America's most indebted company with about $76 billion in foreign-currency debt, had financial losses of 3.55 billion reais in the second quarter as the cost of holding dollar-denominated debt rose. It had posted net gains of
1.8 billion reais just two years earlier, when the real was strengthening. The company adopted a new accounting trick to spread out the cost of the surging dollar, halving its debt costs in the second quarter. By marking