U.S. companies can avoid slow torture of Venezuela devaluations by taking one big hit

Tue Feb 17, 2015 8:09am EST
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By Dena Aubin

NEW YORK (Reuters) - American companies tired of seeing their earnings badly hurt by Venezuela’s crumbling bolivar currency system, can - with the stroke of a pen - get rid of much of the problem.

But it means writing down the value of their Venezuelan businesses to nothing or next to nothing. And that can come with a big one-time charge.

Ford Motor Co, wrote off its entire investment in Venezuela last month when it took an $800 million pre-tax write down, the company said in response to questions from Reuters. That means no matter how much worse things get in Venezuela it shouldn’t have to take further impairment charges.

By taking the hit all at once, it allows Ford to avoid the drip-drip of losses from Venezuela that have hurt the earnings of some of the biggest American companies in the past year. It also means the automaker keeps a foothold in what was once a promising market - unlike some other U.S. companies who have fled the country altogether.

The slow torture of operating in Venezuela led PepsiCo to report last week a $105 million charge to remeasure assets at its Venezuelan operations. PepsiCo also prepared investors for more charges, saying it was "watching developments closely" to see if more currency changes are needed.

Diaper and tissue maker Kimberly Clark in January said it took a $462 million charge for revaluing Venezuelan assets. And it isn't only American companies that are taking a hit - a similar revaluation on Monday led Spanish telecoms company Telefonica SA to cut the value of its net assets in Venezuela by 2.84 billion euros ($3.23 billion).

The Venezuelan problem was fully illustrated on Thursday night when the nation’s government disclosed a new free-floating exchange rate, which began trading at a rate of 170 bolivars to the dollar and moved to about 174 on Friday, very close to the black market rate, of about 188. The new rate is more than three times an auction rate of about 52 bolivars that it replaced, representing a massive effective devaluation of about 70 percent.

The government also has a fixed official exchange rate at 6.3 bolivars and another auction rate at 12 bolivars, but it allows only limited transactions at those levels.   Continued...

A cashier counts Venezuelan bolivar notes in a state-run supermarket in Caracas January 9, 2015. REUTERS/Carlos Garcia Rawlins