country risk management in dynamic economic environments
TRANSCRIPT
© E. I. du Pont de Nemours and Company
Country Risk Management in Dynamic Economic Environments
ICTF Credit Symposium Berlin, Oct 19 2015
Miguel Beneito
International Credit & Growth Manager
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Agenda
• Country Risk today
• Impact on Business and Credit
• When is the right time to act?
• Mitigation Actions
• Conclusions
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Today’s realities: Currency Volatility and Risk
3Credit & Country Risk Management
Source: Bloomberg Finance L.P.
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Today’s realities: Corruption Perceptions
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A world map of the 2014 Corruption Perceptions Index by Transparency International which measures "the degree to which corruption is perceived to exist among public officials and politicians". High numbers (blue) indicate less perception of corruption, whereas lower numbers (red) indicate higher perception of corruption.
Source: Transparency International
Credit & Country Risk Management
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5Credit & Country Risk Management
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Country Risk Management
Impact on Business & Credit
Credit & Country Risk Management
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Country Risk Components
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Country Risk includes one or more of the followingrisks:
• Political risk is defined as probability of occurrence of political events that will change the prospects for profitability of a company, whether positively or negatively
• Currency risk is associated with fluctuations in the exchange rate, impacting companies positively or negatively
• Liquidity risk focuses more specifically on the country’s short-term financial strengths and weaknesses. It gauges any potential imbalance between resources and obligations that can lead to a credit crunch
Anyone of the risks can trigger off other risks
Credit & Country Risk Management
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Currency Risk: Past 12 month EUR/RUB
Currency fluctuations have the potential to impact earnings in a variety of ways.
Budget is Developed
PO’s are developed using future Exchange Rates assumptions
The future is never as certain as the past
Costs are incurred
Raw Materials, manufacturing, warehousing, etc.
Costs are incurred in various currencies based on location
Prices are Quoted
Agreement on price is reached with a customer
Prices could be quoted in the customer’s local currency, or other currency
Invoice is Created
The customer may be invoiced in their ‘quote currency’ or their price may be converted to local currency for the invoice
Payment is Received
Customer pays their invoice
Payment is typically received in the customer’s invoicing currency
Results are Reported
All cash flows are translated into EUR for Reported Earnings
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Source: Bloomberg Finance L.P.
Credit & Country Risk Management
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Sales to Cash Process
PriceList/
ContractProposal
CustomerOrder
AR (B/S)
InvoiceIn LC.(P&L)
CustomerPays
ProductShipped
Cross Border
Repatriation
Local CurrencyDeposit
Pre-Transaction
Risk
Transaction Risk
TransactionRisk
RemeasurementRisk
TransactionRisk
Margin Risk
ShippingDelivery
Risk
Economic RiskCompetitive Threats
Bank Risk
Country Risk
Risk Management : SBU & Corporate
Credit Mgt,Insurance
Contract terms, invoicing currency, payment terms, rebate and discount policy,
incoterms, payment methods.
Hedgingavailability &
cost oflocal financing
Conversion to USD, repayment
of loans, dividends etc..
Counterparty
Management
Risk Management Tools
Credit Risk
Business/CorporateRisk Management
Currency Risk: Business Impact
Credit & Country Risk Management
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Liquidity Risk (MosPrime 1 year)
Borrowing costs to trade partnersSource: Bloomberg Finance L.P.
Credit & Country Risk Management
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Example of relationship between interest cost and payment terms, assuming a tax
gross-up of 30%.
Working Capital cost in high-risk countries
-2% 30 60 90 120 150 180
5% -0.60% -1.19% -1.79% -2.38% -2.98% -3.57%
10% -1.19% -2.38% -3.57% -4.76% -5.95% -7.14%
15% -1.79% -3.57% -5.36% -7.14% -8.93% -10.71%
20% -2.38% -4.76% -7.14% -9.52% -11.90% -14.29%
25% -2.98% -5.95% -8.93% -11.90% -14.88% -17.86%
30% -3.57% -7.14% -10.71% -14.29% -17.86% -21.43%
35% -4.17% -8.33% -12.50% -16.67% -20.83% -25.00%
40% -4.76% -9.52% -14.29% -19.05% -23.81% -28.57%
LO
CA
L I
NT
ER
ES
T R
AT
E
PAYMENT TERMS IN DAYS
PTOI MARGIN IMPACT
ESTIMATED PTOI MARGIN IMPACT OF TERMS
Credit & Country Risk Management
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Country Risk Management
When is the right time to Act ?
Credit & Country Risk Management
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Some Leading Indicators:
MONITORING Risk: AMPLE PUBLIC INFORMATION IS AVAILABLE
Credit & Country Risk Management
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Liquidity Risk: Sovereign Credit Default Swaps (5yr)
Source: Bloomberg Finance L.P.
CDS are derivative instruments to trade interest rate differentials
Credit & Country Risk Management
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Liquidity Risk: Probability of Default based on CDS
Source: Deutsche Bank Research
Credit & Country Risk Management
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Liquidity Risk: Probability of Default based on CDS
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Source: Deutsche Bank Research
Credit & Country Risk Management
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Country Risk Management
Mitigation Actions
Credit & Country Risk Management
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High-Risk Country Credit – Tips and Bits (1)
• Re-classify commercial Risk to next level of risk
• Change government related business to high risk
• Change slow paying and medium risk customers to high
• Change low-risk customers to medium
• Monitor customer payment variations particularly to the liquidity chain effect
• Understand customer’s billing chain and debt maturity to identify early warning of liquidity issues
• Review individual customers risk (apply specific risk management adapted to customer situation, review changes to risk profiles
• Encourage shorter payment terms with early payment discounts or cash in advance to mitigate the risks
• Reduce size of orders (less risk clearing multiple small invoices)
• Re-assess local bank risks for payment instruments used by customers
• Select pre-approved local banks (investment-grade banks) for risk discounting purposes
• Discount high-risk receivables through avalized or guaranteed financial instruments where appropriate
18Credit & Country Risk Management
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• Implement Collateral Tools and Monitor Payments
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Collateral / Credit
• Promissory notes, better if endorsed by a bank
• Bank guarantees, Standby Letter of Credit
• Third party guarantees, Pledge on customer assets
• Full credit assessment for all customers before next shipment
• Barter if cash unavailable
• Customer risk re-evaluation 2-3 times per year (selectively)
• Zero tolerance to Past Dues
High-Risk Country Credit – Tips and Bits (2)
Credit & Country Risk Management
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Country Risk Management
Summary
Credit & Country Risk Management
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Conclusions
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• Do your homework:
1. Create Country Risk Classification(relevant to your company’s business)
2. Decide when Country Risk is High(do not wait for agencies to tell you)
3. Execute High Risk Credit actions
• Update your Credit Policy with High Risk Country guidelines
• Update governance as needed to ensure smooth execution
• Work closely with local staff, Business, Treasury
Credit & Country Risk Management
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QUESTIONS ?
22Credit & Country Risk Management
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THANK YOU
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