Citic Pacific Slump on Possible $2 Billion Forex Loss

Citic Pacific Slump on Possible $2 Billion Forex Loss

Oct. 21 (Bloomberg) -- Citic Pacific Ltd. tumbled the most in 18 years in Hong Kong trading after predicting HK$15.5 billion ($2 billion) in losses from unauthorized currency bets.

The unit of China's biggest state-owned investment company dropped as much as 47 percent to HK$7.70 at 11:14 a.m. local time. The company ousted Financial Director Leslie Chang and Financial Controller Chau Chi Yin and said yesterday in a filing its parent would help to arrange a $1.5 billion loan.

``The company may face bankruptcy if it doesn't secure the loan from its parent as banks probably won't dare to lend money to it under the current credit crunch,'' said Liu Yang, managing director at Atlantis Investment Management Ltd., which oversees about $2 billion in China assets. ``The incident shows the company has real problems in risk management.''

Citic Pacific's bet that the Australian dollar would rise incurred losses as the currency tumbled about 30 percent against its U.S. counterpart from a 25-year high reached in July. This may be the biggest derivatives loss reported by a Chinese company, almost four times the 2004 sum incurred by China Aviation Oil (Singapore) Corp. betting on jet fuel.

The shares drop, the most since 1990, cut the company's market value to HK$17.3 billion and takes the year's loss to 82 percent.

Ratings Cut

Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc. cut their ratings on Citic Pacific shares to ``sell'' or ``underperform.'' All of them also cut their target prices.

Citic Pacific's potential loss would beat other wrong bets by Chinese companies. China Aviation Oil triggered Singapore's biggest derivatives scandal after revealing a $550 million trading loss. Liu Qibing, a Chinese government trader, made wrong copper bets resulting in an estimated $300 million in losses in 2005.

Citic Pacific bought currency contracts to fund an A$1.6 billion ($1.1 billion) iron ore mine in Australia, the company said yesterday. The hedging transactions weren't approved by the company's Chairman Larry Yung, the company said.

A loss of HK$808 million has been incurred from terminating some leveraged currency contracts, and an additional HK$14.7 billion in losses are possible, Citic Pacific said yesterday.

Strike Price

The possible losses are based on an exchange rate of 70 cents to the Australian dollar, $1.35 to the euro and 6.84 yuan to the dollar, it said. The outstanding Australian contracts, for monthly delivery until October 2010, have a weighted average strike price of 87 cents to the Australian dollar, it said.

The Australian dollar traded at 69.65 U.S. cents at 12:17 p.m. in Sydney.

``Citic had only A$1.6 billion in capex requirements, however, it is now interested in more than A$9 billion,'' Anil Daswani, a Hong Kong-based analyst at Citigroup, said in a report. The ``cowboy hedging policy sees Citic sitting on unlimited potential losses,'' Daswani said.

Senior management at Hong Kong-based Citic Pacific were not available for further comments today. The company didn't say which banks sold the currency contracts. Yesterday it said it knew of the exposure last month.

Earlier Disclosure

``The board should have disclosed what they knew, when they knew it,'' David Webb, a former independent director at the city's stock exchange and a shareholder activist, wrote on his Web site yesterday. ``It cannot have taken six weeks to understand the basic financial parameters of the contracts the company had signed and the magnitude of money at risk.''

Citic Pacific's Chairman Yung was ranked China's fifth- wealthiest person with $3.7 billion, according to Hurun Inc.

Citic Pacific on Aug. 28 said its first-half profit fell 12 percent to HK$4.38 billion as material costs rose and part-owned Cathay Pacific Airways Ltd. posted a loss. At the end of June, the company had net debt of HK$31.2 billion as well as HK$30.2 billion in cash and available committed loan facilities.

The global credit crisis has increased volatility in stock, commodity and currency markets this year, causing foreign- exchange losses for companies from Brazilian pulp producer Aracruz Celulose SA to Maruti Suzuki India Ltd., the nation's biggest carmaker.

BLOOMBERG