Barclays, Deutsche Bank and Citigroup lost money on currency hedging products they sold to a client for an acquisition that fell through, the latest example of the damage spread during the worst stretch for deal making in years.
Prosus, best known as the largest investor in Chinese internet giant Tencent, agreed in August 2021 to acquire India’s BillDesk, an online payments platform, for 345 billion rupees, equivalent to about $4.7bn at the time.
To protect the price against swings in the rupee, Prosus bought derivative contracts from the banks that allowed it to lock in the exchange rate ahead of the deal’s closure. Prosus had the flexibility to get rid of the hedge for no fee if the deal didn’t close.
Use of these types of hedging contracts are common in cross-border mergers involving different currencies. But they can backfire on banks when deals fall apart. That happened last month when Prosus’s bid expired as the market turmoil dragged down technology company valuations. The banks were left exposed to a depreciation of the rupee, according to people familiar with the deal.
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Each of the banks provided $1bn or more of currency hedges for Prosus, according to people familiar with the matter. That resulted in losses of about $100m for Barclays and $90m for Deutsche Bank, some of the people said. The Citi loss couldn’t be learned.
The size of the losses meant that the banks could absorb them without the need to single them out in their third-quarter results, according to people familiar with the matter.
Banks have been caught off guard this year on deals, a corner of their businesses that generate hefty fees when times are good but that can generate large losses when the economic landscape changes.
A collection of investment banks lost more than $600m on debt backing the purchase of Citrix Systems, one of the largest US leveraged buyout of the year after it was sold to investors at a steep discount in September.
In the marquee deal of the year, Morgan Stanley, Bank of America and Barclays committed to help finance Elon Musk’s takeover of Twitter. The aim was to sell the debt to bond and loan fund managers to avoid the risk of holding it on their balance sheets. But current weak demand for this type of credit has meant the banks need to hold all $13bn debt backing the deal to avoid taking a loss on the holdings.
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Barclays lost a chunk of money — about $100m — from the sale of a similar hedging product last year, according to people familiar with the matter. It had sold the derivative to buyout firm Advent International and its partner Singaporean sovereign wealth fund GIC to help the bidders hedge their exposure to the Swedish krona as a result of their $8bn deal to acquire Swedish Orphan Biovitrum, or Sobi, a biotech company.
Advent and GIC withdrew their offer in December. Deutsche Bank and Morgan Stanley also sold similar contracts to Advent and GIC, losing about $20m each, according to some of the people.
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This article was published by The Wall Street Journal, a fellow Dow Jones Group title