Macquarie Group Ltd. says it’s facing losses of tens of millions of dollars after currency derivatives trades with Italian builder Cimolai SpA went awry.
(Bloomberg) — Macquarie Group Ltd. says it’s facing losses of tens of millions of dollars after currency derivatives trades with Italian builder Cimolai SpA went awry.
The firms began entering into foreign-exchange trades with each other in 2017 but the relationship foundered in September when Cimolai failed to make payments tied to the transactions, according to a Dec. 14 claim lodged by the Australian lender in London. The Sydney-based bank canceled the deals and claims it’s owed a ‘termination payment’ of $49 million.
“Cimolai has failed to pay to Macquarie the termination payment amount,” according to the bank’s claim. This failure “caused Macquarie a loss in the same sum.”
A growing number of finance firms are pursuing Porcia-based Cimolai for millions of dollars they claim they are owed from derivatives linked to the euro-dollar exchange rate, which fell to its lowest level in about two decades in September. The family-owned construction company itself claims to have been battered by about €300 million ($320 million) of losses on the trades — some of which it alleges were sold without the knowledge of its board — and has sought protection from its creditors in Italy.
Spokespeople for Macquarie and Cimolai declined to comment.
Macquarie’s $49 million claim is the largest among the finance firms so far, according to a Bloomberg review of court filings. Brokerages JB Drax Honore, Ebury Partners Ltd., Ballinger & Co. and GPS Capital Markets Ltd. have alleged that Cimolai owes them about $34 million combined. Deutsche Bank AG, NatWest Group Plc and Morgan Stanley have also signaled their intent to sue.
Such a loss could blemish results at Macquarie’s trading business, which has — like its Wall Street rivals — otherwise thrived on the back of global economic instability. The firm generated A$644 million ($445 million) of revenue from trading in foreign exchange, interest rates and credit during the six months through September, a 71% increase on a year earlier, according to company data.
The products at the center of the dispute are so-called targeted accrual redemption forwards, or TARFs, linked to the euro-dollar exchange rate. These are complicated FX contracts that have spawned multiple legal disputes between banks and family-owned corporations that bought them.
According to Macquarie’s claim, a 2018 document allegedly signed by Cimolai Chairman Luigi Cimolai warned of the risks that come with TARFs. They offer “limited upside” with “unlimited downside,” and losses can be “magnified” when the trades use borrowed money, according to the claim.
“The maximum loss can be very large,” according to the claim.
An Italian court in Trieste has granted Cimolai protective measures against the firms that sold it derivatives while it works on its restructuring plan. The company, which has hired Wall Street firm Lazard Ltd. to help overhaul its finances, has until the second half of February to submit a proposal.
–With assistance from Katharine Gemmell.
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