P&G 'burned' by interest rates

April 13, 1994|By New York Times News Service

Procter & Gamble Co. said yesterday that it would take a $102 million after-tax charge against its third-quarter earnings as a result of having been "badly burned" in two derivatives contracts.

The contracts, which soured as interest rates rose, were entered in hopes of "managing" its interest rate exposures, said Erik G. Nelson, senior vice president and chief financial officer at P&G.

The chairman and chief executive of P&G, Edwin L. Artzt, said in a statement last night that the company was considering legal action against Bankers Trust New York Corp., which designed the derivatives.

Meanwhile, however, P&G's own treasurer has been put on "special assignment," the company said yesterday. Raymond D. Mains, who, until yesterday, was vice president and treasurer, has been replaced by Clayton C. Daley, who had been vice president and comptroller.

A spokeswoman for the company would not comment on whether the news on Mr. Mains constituted a demotion; she also would not say whether any Procter & Gamble executives had been dismissed.

A derivative is a contract that is linked to, or "derived," from an underlying financial market, such as the market for currencies. American corporations use them for various reasons, including reduction of risk when they translate earnings in their foreign subsidiaries to dollars.

Bankers Trust, in its own statement last night, said it had entered into "a number of leveraged derivative transactions" with Procter & Gamble, several of which brought profits to its client.

Further, the bank said, the two interest-rate swaps that led P&G to take the one-time charge against earnings had been entered into "after extensive discussion of the risks" with P&G executives, who "expressed a bullish view of U.S. and German interest rates" at the time the contracts were entered.

But those interest-rate bets turned out to be wrong, and, by Bankers Trust's account, the bank "strongly and formally recommended" that P&G begin getting out of the contracts when interest rates began to rise sharply in March. "Senior officials rejected these recommendations," Bankers Trust said in its statement.

While analysts who follow P&G did not find a $102 million charge to be catastrophic for a $30 billion company, they expressed concerns that the news could be a harbinger of problems among other companies that have taken positions in complex financial instruments.

"I think it's the tip of the iceberg," said Joseph H. Kozloff, a consumer products analysts at Smith Barney Shearson.

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