FXRegionalRisk Management

Rescue Mission: Saving Trapped Cash in Depreciating Currency Markets

By June 10, 2021No Comments

For projects in volatile economies, creative thinking from treasury could be critical.

Profit is not a profit until it’s back in the US. That reality for many multinationals formed the backdrop at a recent NeuGroup meeting for treasurers of large-cap companies where members shared their approaches on how to react when a country’s economic environment takes a problematic turn.

  • Emerging market nations including Argentina, Turkey and Brazil dominated the conversation, as their currencies carry risk of intense devaluation, exacerbating regulatory rules that can trap cash within their borders.

Work-arounds. One member said his company’s solution to trapped cash is an intercompany loan system within a given country. This can be a gamble, as depreciation could cause a blowout in a project’s WACC (weighted average cost of capital).

  • As the cash sits in a depreciating currency, WACC for the project can be thrown out of kilter. But at least you are using cash more effectively within the country and reduce the need for additional cash injections.

Buy, buy, buy. In one case, a treasurer was surprised by the business leaders in a region flaunting EBITDA figures at the start of a project, when the profits may take a 30%-50% haircut. One treasurer said that in one of the regions with a depreciating currency, his firm has covered sizable foreign exchange exposure with what he called “unconventional, material hedges.”

  • In this case, the member said he had to be creative to retain value in the region and resorted to buying commercial property and apartment buildings—at blue-chip prices.
    • The organization even explored wineries, airplanes and other hard assets, but some were unable to scale with the company’s needs.
  • “Everybody in [these regions] knows this game,” he said. “When you expect a devaluation coming, all your customers will prepay you. We’ve had strict rules about them paying us in advance. It’s something you have to do, since everyone is after hard assets.”

Don’t play with fire. One treasurer said that if he had been brought on to a project in one of these countries earlier, he would have advised against doing work there.

  • Ultimately, it is the decision of the business whether to enter, stay or do business in a particular market, but if treasury is involved earlier, it can raise awareness of the true risks and costs of doing business there..
  • “We just don’t want excess cash in a place we’re not sure if we’re getting our money back,” he said.
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Justin Jones

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