City & Business: Memo to Gestetner: I told you not to swap

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The Independent Online
ONLY three weeks ago I was banging on about the dangers of geared swaps and predicting that sooner or later a company would be ruined by this particularly deadly species of derivative investment. On Friday Gestetner, the office products company, sheepishly admitted it had been burnt to the tune of pounds 6.1m. Not a mortal wound, but enough to wipe a third from annual profits.

It was the usual story. The deal, as presented by NatWest, looked wonderful to the Gestetner finance director. He could borrow fixed at just 4 per cent. The only catch would come if money- market rates rose above 7 per cent. Then Gestetner would be clobbered with disproportionately high penalties. But the director - this was in the autumn of 1993 - couldn't imagine rates rising that far in a month of Sundays. He saw the deal as a wonderful opportunity to lock into cheap finance.

The swap was approved by the management finance committee, headed by said finance director. The decision didn't even go as far as the board. When the company finally twigged the danger it was in, it rushed into a second derivative investment to hedge itself. But, unbelievably, a miscalculation by someone in the treasury department then compounded the error.

David Thompson, chairman of Gestetner, cheerfully dismisses the episode as 'an expensive lesson' and attributes the double error to 'sod's law'. And he tells me the finance director responsible, Stephen King, still has 'the full confidence of the board'.

Some Gestetner shareholders may join him in laughing the thing off as just one of those things. Others, I suspect, will see it as a case of sloppy controls and alarming complacency.

Whichever, no director in the land should go another week before scrutinising the activity of the company treasury department. They must reveal what the worst case outcome of any derivative transaction could be.

I bet Mr King is not the only finance chief to be seduced by the prospect of apparently cheap finance; nor to have been wrongfooted by a rise in interest rates. He is certainly not the only one to have kept his board in the dark.

There is more grief to come. Watch this space.