00;00;02;18 - 00;00;29;04
Unknown
How do you manage cross-border investment projects that involve a large and potentially long-lasting currency mismatch? And what's the outlook for the multi-currency world? Welcome to CurrencyCast! My name is Agustin Mackinlay, I’m the Senior Financial Writer at Kantox and your host. In this episode, we have the pleasure to welcome José Carlos Cuevas, Partner at Crowe and Board Member of ASSET
00;00;29;04 - 00;01;21;16
Unknown
And IGTA. Pleasure to be here with you. Jose Carlos a warm welcome to you, and thank you for joining us in this episode of CurrencyCast. Thank you. It's a pleasure. Right. Jose Carlos could you start by introducing yourself to our audience please? Okay. Listen. Hi. I started in a well-known Big 4 audit firm, Coopers & Lybrand at that time, right now PriceWaterhouse Coopers in accounting and tax services. Afterwards, you know, I spent I think 12 years, I moved to treasury and became Country Treasurer for Spain at Peugeot Citroen, taking care of the industrial on commercial activities of the
00;01;21;16 - 00;02;16;15
Unknown
group. Afterwards, they “invited” me back to move to Paris and I decided to change and to look for a different company. I started working for Alston during eight years. I became Regional Treasurer Europe based in the ‘campagne’ around Paris, but most of time travelling and taking care of the different activities regarding liquidity, FX, financing and globally speaking cash management. And afterwards, you know that Alston Energy was acquired by GE, by General Electric. I moved to GE taking a quite similar role you know, taking care of the energy part as Regional Treasurer for Europe. And after two years and being
00;02;16;15 - 00;02;47;09
Unknown
based in Budapest, I received an offer coming from a Spanish-listed company, a 1 billion company, Duro Felguera, and they asked me to accept the role of CFO and you know Senior Vice President of Corporate Affairs or something like that. But at the end of the day CFO, I was taking care of a quite difficult situation as far as the company was in full distress, with a high indebtment.
00;02;47;12 - 00;03;40;07
Unknown
So many projects ongoing and in difficulties. So I had the responsibility of leading a capital increase during that time, and after three years I moved to, and you know, with a successful capital increase, I was old money and I needed to move. And EY asked me to join the restructuring and liquidity department taking care of working capital, restructuring and refinancing and many other things. And after five years you know I left x for coming from Crowe to create and to lead the, you know, what we call transformation and turnaround that is really, okay listen when you are in trouble in any kind of trouble linked to liquidity
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Unknown
issues, I take care of that. And this is what I am doing right now, I’m leading that department taking care of FX, liquidity and distress globally speaking. Absolutely. So really an interesting CV because you've been involved in the Treasury and Finance operations both on the operational level and on the consulting side. Is that right? So that leads us to our first question, which is, which involves cross-border investment and infrastructure projects.
00;04;17;04 - 00;04;47;04
Unknown
Tell us, the perception is different when we discuss, say, a simple commercial transaction in the context of the currency risk, but the perception of a large, long-lasting investment project is that it's something really different. Before tackling the FX angle, guide us into the world of those cross-border international investment projects. You know is,
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Unknown
I fully agree that in fact, and regarding European and especially Spanish corporates, we are very focused on projects abroad because most of the infrastructure projects and most of the energy projects, globally speaking take place abroad. And we need to start managing and taking care of issues regarding exotic currencies and countries in which, to be honest with you, the legal framework is not exactly the European one.
00;05;20;24 - 00;05;44;27
Unknown
So altogether, you know, it is true that the perception when we talk to commercial teams and you hit the point I mean, when we talk to commercial teams, everything is lovely. And the problem starts when commercial guys try to explain the contract to finance guys. So finance guys who used to take the contract and we see risk everywhere especially in terms of,
00;05;44;28 - 00;06;09;26
Unknown
of course the country, of course the counterparty risk. Because most of the time we don't have tracking with these clients and we see that there can be a default or we can be in delay regarding collections. And you know, at the end of the day, all these projects, we are in full competition with other corporates and in all these projects, the price and the conditions offered to the client are key.
00;06;10;03 - 00;06;55;19
Unknown
But most of the time we are, let's say, under pressure and with a very tight margin. So if you have any kind, any delay in collections the cash impact could be negative, you will be in full exposure in different currencies and it will be a disaster for the output of the project. So, you know, taking care of all these projects in different countries, in countries in which you don't feel at home to be honest, and with other banks with most of time instruments that are really you know, that show the lack of trust between the parties. Because letter of credit, ask for finance, a buyer’s credit you implement it because you don't trust absolutely that the other party is going
00;06;55;19 - 00;07;16;21
Unknown
to pay to you on time. You know at the end of the day you put together the country risk, the counterparty risk and the FX and it is difficult. And especially with huge projects with a few tickets you know because in this project you don't have, let's say, monthly collections and linear collections. You have big tickets.
00;07;16;24 - 00;07;44;27
Unknown
And if you are in trouble with one of these big tickets… You're in serious trouble. Exactly. The cash impact will be terrible. Everything will be delayed. Your, you know, your suppliers, your global activity. You would obtain penalties. So at the end of the day, is a mix, is a mess just managing all together and to be honest with you, is a very risky on finance side,
00;07;45;04 - 00;08;08;06
Unknown
is a very risky situation. We prefer, you know, projects at home and with domestic banks, domestic clients and so on. But unfortunately, we need to do that because the market is there. Of course. Yes. Well, now Jose Carlos let’s tackle the FX angle with a little bit more detail. At Kantox, we are fans of the notion of what we call the FX risk map.
00;08;08;08 - 00;08;38;02
Unknown
So, for example, taking a transaction we will see the pricing risk and then the transaction risk, the accounting exposure and all of that. Describe to us if you could, the FX risk map of a large cross-border investment project. I understand that there is that time lapse, right, between the moment the bid is submitted and the moment that is approved or rejected.
00;08;38;05 - 00;09;28;17
Unknown
Tell us a little bit more about this. Exactly I mean, the big problem is that we are talking about big projects in which most players, most of the players involved have different interests with very, let's say, strong pressure in terms of pricing. And finally, you need to build one only bid with all the different parties together, different currencies and you should meet the bid that will be firm. And you need to keep this price, getting some time up to awarding the project. And the problem is imagine, I mean most of the time, I remember in wind projects, in energy in which you have the cash in one only currency and
00;09;28;17 - 00;10;02;00
Unknown
the final bid needs to be sent in one only currency. But the sourcing was in five different currencies, you know, the domestic one U.S. dollar, the Canadian dollar, euro. So at the end of the day, you need to put together all these exposures. You need to put together all these cash groups. You need to choose one exchange rate, and okay what happened? You put the bid and you know, theoretically the total tender period will be roughly one or two months, not true!
00;10;02;01 - 00;10;35;20
Unknown
Finally, you are talking about four, five, six, seven months. During this time you are in volatility and the other, you know, the other potential,let's say cover, you can take is okay I will cover this risk, I will enter in an option or I will try to manage a multicurrency offer, not always accepted. But you can buy an option and the problem is that finally will be a cost and everybody needs to accept that if you don't award the project, you will lose this amount.
00;10;35;22 - 00;11;09;00
Unknown
So finally you know, the biggest problem, the main problem with a cross-border infrastructure bids is the time that you need to manage between the firm in price and this final award of the offer. So you know, this is the main problem, three-four months in which you are in full volatility you need to cover and to hedge all the different risks, including the political risk. And nothing as you can do more than spending money and buying an option that is not always cheap.
00;11;09;02 - 00;11;47;15
Unknown
So this is the main problem. And you know finally, and this is a good point as well, you know, you need to deal with all the different players inside your organisation. And they need to be fair with you, they need to put an acceptable, a reasonable price. And the problem is that most of the time commercial guys and people in your own company, they want to award the project, that's all. And afterwards, the problem with the total cost that will be on your side as finance. Right yeah, you just described of course the perennial problem of the other currency mismatch right?
00;11;47;15 - 00;12;11;27
Unknown
You fund assets in a hard currency but these assets are going to produce cash flows perhaps in a not such a strong currency. But you describe something that is interesting, that is often forgotten. There's a governance angle to all of this, right? The relationships that you have to manage and all the different stakeholders.
00;12;12;01 - 00;12;43;16
Unknown
Is that right? Right. I mean, and the way you talk about the stakeholders, you have your own in-company stakeholders. But you have as well banks, you know, public institutions like the export and credit agencies that play a big role on that. And of course, you know, your client and all your suppliers. You know, imagine when I was part of Duro Felgueras CFO, you know, clients used to be big corporates, very big corporates, bigger than you by far.
00;12;43;18 - 00;13;14;25
Unknown
And the problem is that your suppliers were, you know, enormous. I mean, you are in touch with very big corporates supplying combined cycle turbines and so on. You know, and finally, you have no possibility to put pressure on that side. I mean, you are in the middle, you are like a kind of sandwich. And at the end of the day, you need to accept everything, taking all risk and trying to pray for, let's say, nothing bad happens, that is not always the case.
00;13;14;27 - 00;13;45;16
Unknown
Now Jose Carlos we are interested more and more, I have to say, at Kantox about Latin American currencies and the immediate thing that comes to mind is the sometimes very, very significant interest rate differential between, say, the dollar and the euro on the one hand, and say Mexican peso, Brazilian reais and others on the other hand.
00;13;45;23 - 00;14;20;18
Unknown
Now at Kantox, we’ve developed lots of solutions to try and sometimes take advantage, sometimes protect companies from those interest rate differentials. And these solutions are developed in terms of pricing, hedging, FX swaps and others. How do you go about and manage the problem of sizeable interest rate differentials between Latin American currencies and, say, the euro?
00;14;20;21 - 00;15;01;03
Unknown
Yeah, you know, one of the just briefly talking about the differences we find in terms of the cash management liquidity with these kind of operations. And it's I mean, on the one hand you have a very expensive cost of funding at domestic level in LatAm. And it's the case, I mean, even if you talk to the same bank in LatAm, pricing is double if you compare with Europe. So at the end of the day, you need to look for a good way to fund this project without entering domestic deals
00;15;01;03 - 00;15;34;14
Unknown
that will be extremely expensive. This is the first topic. So one solution can be, of course, implementing a cash pool and funding the subsidiaries in LatAm from your headquarters in Europe or in other regions that we can afford the cost. The problem is that you know the cross-border cash pool between LatAm and Europe is not efficient. So the main problem you have is you need to implement the cash pool,
00;15;34;16 - 00;15;59;19
Unknown
it will be efficient to do it regionally but cross-border with Europe, neither with US dollar and euro, so is quite difficult. So first thing you need to try to fund your subsidiaries at an acceptable price and this means not getting in touch with domestic banks because if not, the cost will be terrible. So this is the first barrier that you need to cope with.
00;15;59;22 - 00;16;33;29
Unknown
Second, you know, transactionally it’s not SEPA, is not Europe, is not as easy as managing a credit transfer between Germany and Spain or France and Germany. No, nothing to do. I mean, you will need to take care of the different, let's say, clearing houses, the corresponding banks, the flow between different countries when you send money. And chasing where is the money because finally is not automatically managed like in SEPA countries.
00;16;34;06 - 00;16;57;25
Unknown
So, you know, it's much more complex either in terms of instruments, I mean, in terms of cash management the debit and credit transfer. Or in terms of clearing houses. So my first advice, and this is what happened, you know, because finally you only learn when you make a mistake. And the problem is that, you know, you cannot implement a very big project,
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Unknown
if it's the first thing you do in the country. I mean, so you need to learn, you need to start in a new country, especially in LatAm countries with, let's say, medium-sized or small projects. You need to understand how it works. You need to understand how the banking system works, and the clearing houses work. Afterward, you will be able to understand the whole picture and implement big projects.
00;17;21;07 - 00;17;44;25
Unknown
But most of the time what we do is okay. I have to work on a lovely €1 billion project that, you know, the disaster can be huge and it will jeopardise the company situation. And then you can be in trouble because of a big project in a country that you don't know. So this is the second point.
00;17;44;25 - 00;18;13;06
Unknown
I mean understanding the legal framework in terms of liquidity, cash management, central bank and so on. And last but not least, the political risk. The political risk, to be honest, when we implement cross-border projects in, let's say, not first level countries in terms of risk, you know that on the one hand profitability of the project will be higher for sure. But the risk, the country risk, will be higher as well.
00;18;13;13 - 00;18;34;03
Unknown
So hedging the risk is possible but is not for free. I mean you need to get in touch with insurance companies, you need to get in touch with banks to hedge the FX risk. And last but not least, with the export credit agencies, the financial institution, public institution that are able to do that. But once again, not for free.
00;18;34;06 - 00;19;06;15
Unknown
Jose Carlos we’ll discuss political risk in a couple of minutes. But I think we have already lots of learning here to absorb from what you said. I really like that idea of not going straight for the billion project, but learn by doing maybe on a lighter scale at the beginning. And then you go on as you learn. Before discussing in more detail,
00;19;06;15 - 00;19;32;22
Unknown
right, political risk. Such an interesting topic. Let me ask about your views on Latin American currencies. And when I say this it’s not really about the forecast for exchange rates. It's mostly, as you said, the institutional aspects, the liquidity conditions, the availability of instruments to hedge and so on and so forth. What's the outlook in your view?
00;19;32;22 - 00;20;14;24
Unknown
Of course, it's such a big continent, right, there are going to be many different situations. Yes. You know, to be honest, the first starting point on my side used to be, you know, landing at country level with a partner. Partner, that in my understanding used to be a nice better half if you look for a financial partner. I mean for instance with you, for instance with a foreign bank, with someone that will be together with you to understand how everything works and will help you to understand how to hedge the different risks.
00;20;14;26 - 00;20;44;11
Unknown
This is the first point. And in fact, you know, understanding how to manage an operation or a project in a country is not only understanding the legal framework and the political risk. It is understanding the habits, it’s understanding how banks work there, it’s understanding what happens if you have to claim for something or you have a problem with a specific bank.
00;20;44;14 - 00;21;16;10
Unknown
If they accept a phone call, if they need something written. It's, you know, it’s understanding the files they can receive and, you know, the format of the file. So for all that you need, let's say, a partner close to the market and with experience in the market. So it's true that not only with you but with many other players you feel comfortable and you want to adapt and you know, you have someone to talk about the different problems and to get an answer.
00;21;16;12 - 00;21;56;25
Unknown
If you try to do it by yourself, and discover over the field how to proceed, I’m not optimistic at all there. Really interesting. Jose Carlos, let's discuss a little bit in more detail political risk. You just said some really interesting, you made some interesting remarks there. Such an important topic if you think in terms of corporate valuation. Of course, companies are going to be active on the contracting side in some countries, on the selling side in some others.
00;21;56;25 - 00;22;31;17
Unknown
So there is no way to avoid the issue of country risk, such a hot topic. And for treasurers, of course, it involves problems with cash repatriation, maybe changes in business models to adjust to the currency risk, accounting, other elements there. Let's discuss definitions and measurements broadly, Jose Carlos how would you define country risk? It's a good question.
00;22;31;19 - 00;23;03;06
Unknown
I mean or is it important in your work? That is the sense of my question. No, of course. I mean, when you talk about the political risk from a finance point of view. And no, I mean, don't talk about standard definitions of whatever. What you put together are many things. I mean, maybe you are talking about political risk, but at the same time, you are talking about counterparty risk.
00;23;03;08 - 00;23;49;18
Unknown
You are talking about regulatory risk in terms of, you know, domestic clients are very protected or if, you know, if foreign companies are not as protected as expected and so on and so forth. But what is clear is the, you know, you need to first of all, to do your own homework. I mean, your own homework is preparing a realistic cost score about the project in which the commercial team that used to be close to the client and they need to understand and being, let's say, realistic about what will be the client’s answer if something happened.
00;23;49;20 - 00;24;16;20
Unknown
They need to prepare a real cash curve in terms of collection. And you need to do the same internally with the suppliers and with the different players in terms of cash out. With this cash curve, that should be close to not the best case, of course, and neither a regular case. It will be, let's say, quite close to the worst case to see what happened,
00;24;16;27 - 00;24;41;10
Unknown
if things are slower than expected. With all that, if you see that you feel… Sort of a worst-case scenario planning, right? Yeah, exactly. I mean it's not a mitigation plan is what happens if things are not as expected. I mean: they’re worse than expected but it's not enough to claim to say, okay, I stop the contract. And nevertheless you can do that.
00;24;41;16 - 00;25;16;15
Unknown
I mean, you can stop the contract, but you can only stop the contract if you are cash positive. If you are cash negative, if you have spent a lot and you haven’t collected, you cannot stop the contract. Because you are in a cash negative position and it will be losing money. So first of all is preparing, this cash curve, knowing and placing different milestones and different collections, doing the same with the cash out, and feeling comfortable with this cash curve. If you feel comfortable with this cash curve, you stress this curve and you say okay listen I can survive with all that.
00;25;16;15 - 00;25;42;01
Unknown
It will be the best mitigation plan to take care of political or whatever risk. I mean, being realistic, giving acceptable and trustable cash curve and saying afterwards okay the company can survive with that. Because you will be ready for the worst case, afterwards everything that will happen will be better, good or fantastic. We will see.
00;25;42;04 - 00;26;09;27
Unknown
You know, maybe it's very prudent but to be honest, a real case is that when you try to put the let's say the contract case, with all the milestone collection and payments and so on, and you get this cash curve, it will never happen. It will be worse, things are always worse than expected, its true. But that's always, always in big projects its like that.
00;26;10;03 - 00;26;42;26
Unknown
If you have a margin, assignment margin of 70% EBITDA, be sure that it will be 20%. I said that. Yes. Really interesting. And it's nice to see that you take that empirical approach and correct me if I'm wrong, but if I understand your words correctly, you say put more emphasis on cash flow calculations and projections than on discount rates, theoretical projections.
00;26;42;26 - 00;27;20;05
Unknown
Is that right? Exactly you hit the point. Okay. And let's talk about those discount rates. Do you use any of those measurements like surveys from the V-Dem in Sweden, the World Economic Forum or the Hermes country risk reports? Or do you go about and take a look at, say, credit default swaps, sorry, credit default swap CDS or the country risk analysis of the Moody's, the Standard and Poor's and their features?
00;27;20;07 - 00;28;03;28
Unknown
What is the view that you take when you need to go about and come up with those discount rates? You know, just to measure the risk, and talking about the specific countries, to be honest with you, what we used to do when I was part of the corporates I told you about, is using the let's say the risk managed by the OECD and finally the one accepted by this S&Poor’s credit agencies and the public institutions. Why? Because at the end of the day I mean if you need to talk to your board and you need to explain and to justify why you are doing
00;28;03;28 - 00;28;26;21
Unknown
something in a country, you will look for, let’s say, the best case scenario and the best report in line with what you have done. But it you finally need to take a decision, to be honest, the best way to proceed is taking the report and the country risk calculation provided by the export credit agency that is working with you.
00;28;26;21 - 00;29;06;05
Unknown
Because at the end of the day, first of all, if they don't accept the risk and they put trouble on there, they see that it cannot be accepted, you are not going to get the project. This is the first point. And secondly, they used to be right. I mean, when we talk about the Spanish risk for instance some time ago, and they used to tell me okay is not acceptable that we have a Spain the same risk that some Latin countries. Listen, at the end of the day it was true. We had a similar risk, it is true that that now is better, but at that time it was, let's say, not far from real case. And reality is like that,
00;29;06;05 - 00;29;29;20
Unknown
the public institutions, the export credit agencies and the different OECD institutions used to be quite close to the real risk of each country. Afterwards, you need to share something to the board, you will have a hundred reports and so many places to tell you about the risk, and you will choose the best one in line with your own purposes.
00;29;29;22 - 00;30;17;25
Unknown
But I prefer just to use a report more in line with the real case and the real operation. Absolutely. Jose Carlos, let’s discuss a little bit the, another notion that is close to our heart, the multi-currency world. A recent Bank for International Settlements paper mentions the surprising fact that local currency bond markets are developing at a quite an extraordinary and surprising pace in some countries, not everywhere. But say in China and India, the Philippines and Thailand and close to home here in Poland, but also in places like South Africa and Brazil.
00;30;17;25 - 00;30;50;22
Unknown
Is that an encouraging sign? Yeah, you're right. And in fact, this is in some countries, South Africa is a good example you know, it’s true that developing these markets and getting active bond in market in some specific countries is really important. Because it's the only way to try to cope with these high pricing of funding in all these markets.
00;30;50;24 - 00;31;16;22
Unknown
So I think that developing a very active, let’s say, secondary market and primary market in terms of bonds, is good news because it's the only way to fund different projects and to get local funding. Is not taking in consideration the problem for the cross-border funding. And what we talked about before in terms of cash pool and so on. If not is quite impossible
00;31;16;24 - 00;31;55;07
Unknown
just financing a project in specific countries like the one we talk about. So I think that this is something, but this market conditions, this competition, and you know is the trend of the different players right now. I mean, I think that Europe and other regions are not, let's say, a lovely market because it's a very mature market. And right now other markets they are starting developing their own running capacities, their own finance in domestic capacities.
00;31;55;07 - 00;32;27;07
Unknown
And this is good news. So, you know, when we say maybe a good target for our infrastructure company is a country in which they need energy or they need the railways or whatever. Yeah, I agree. But you need to take in consideration if they have a domestic funding market to give you to issue a bond if you can… You know, and this is good and I think it's good news to us getting all these new possibilities to fund domestically different projects.
00;32;27;09 - 00;32;53;26
Unknown
Absolutely. Now, Jose Carlos we're running a little bit out of time, but I cannot resist to ask you a question on this de-dollarization talk. We are a little bit sceptical in the sense that almost all trades in the 7.5 trillion/day currency markets have the U.S. dollar on one side. So we’re a little bit sceptical.
00;32;53;26 - 00;33;23;05
Unknown
But we do like the fact that, in line with what you just said, that there is more and more especially things to automation, right, to automated tools such as multi-dealer trading platforms, more use of currencies such as the Canadian dollar, the Singapore dollar, the Norwegian Crown, the Swedish krona, the Korean won and all that.
00;33;23;08 - 00;33;52;12
Unknown
Do you have a view on this de-dollarization talk? I think, you know, to be honest, for a treasurer, I think it's good news. It makes our life easier. I think that globally speaking for macroeconomics is not that good news. And I think that it will, on a macro point of view, it will be a problem for some countries that will lose instruments to manage their own problems.
00;33;52;14 - 00;34;22;28
Unknown
But, you know, the de-dollarization practice is something that in my understanding, maybe wrong, cannot be stopped for big multinationals and big corporates with presence and projects everywhere, it’s good news in my understanding. And because once again, because it makes our life easier and finally we can take care of this risk, you know, let's say in a more efficient way,
00;34;23;00 - 00;34;54;28
Unknown
and without a complexity that is difficult to manage in big corporates. Absolutely and is what we call embracing currencies. Right. Sell in more currencies, sell in the currencies of your customers, buy in the currencies of your suppliers, and reduce costs and it’s going to be a win-win situation. Jose Carlos Cuevas, Partner at Crowe and Board Member of ASSET, we've covered a lot of ground. We started this conversation with cross-border energy and investment projects.
00;34;55;00 - 00;35;48;09
Unknown
We then went on to a lengthy discussion of country risk and you gave us an empirical view of what we need to know about our country risk. We then just concluded with some comments on the multi-currency world we live in. Is there something you would like to add? I think one only thing. First of all, I enjoyed these these 25-30 minutes with you because in reviewing all the complexity of the crossborder operations it's fun and interesting. You know, and after talking about all that you know, you notice that the corporate treasurers with multinationals acting and being active in different countries and different regions, you know, the complexity of the
00;35;48;09 - 00;36;22;09
Unknown
job and the risk they are taking, and how they are able to manage all that, it’s surprising. You know, so I think it’s a value-added for our profession when you see that human need to manage liquidity in huge projects and multiple countries. I hope, you know, I think it will add to our profession and the company is some value added. Because most of the other departments, they think that treasurers are the ones who pay and that's all.
00;36;22;11 - 00;36;41;25
Unknown
And it's not the case. We are the ones who manage risk. All right. So Jose Carlos Cuevas again thank you very much for joining us today on CurrencyCast. And we'll see you next time. See you soon. Many thanks for your time.
