That Latin America is no Europe is both good news and bad news. It’s good news in that it’s not stuck in the muck of the economic doldrums; and despite the Fed’s taper shenanigans – first the talk of, and then the actual taper – hitting the region, it’s mostly in a growth mode. But it’s bad in that it does not have the sophisticated financial solutions for pooling and repatriating cash. But in a session at the NeuGroup’s September Assistant Treasurers’ Group of Thirty, one member explained how his company is approaching this challenge and what solutions banks may have to help.
First, there are really only a couple of bad options for bringing money home. In spite of there being a room full of very smart people, no suitable options emerged for repatriating cash from either Argentina or Brazil. Of the bad options, one was to utilize a bond swap. The downside of this approach, which is significant, is that there is a lot of administration, typically a 50 percent haircut taken. Add to this the risk of personal liability to local executives should the local authorities decide there is something illegal about the maneuver. Members only cited BNP Paribas and Raymond James as providers of this service.
The second bad option is to buy an equity certificate as a means to facilitate an offshore share buyback. One company in the group has had an interest in this approach but has not completed its research. But now its interest might be over: another member looked into the solution but couldn’t get past the tax department who concluded it would be equivalent to a taxable dividend and would trigger negative responses from local regulators (probably the guys waiting to put executives in jail).
Kinda-sorta good options
Two good options (arguable) just mean sucking it up and keeping the money where it is. These can be filed under “Make the most of the money in-country.” One member said her company had been accelerating some of its capital expenditures to utilize its cash, which is also a hedge against inflation. The other obvious option is to seek prudent investments for the cash, but little is available that qualifies as prudent.
The product that was favored most is known as a CDI (certificate of deposit inter-bank), or local CD. “US banks trying to build business in Latin America like this product the most,” this member noted. However, there is downside, which is the risk with the banks. “Banks pull out of markets, have deposit caps, and may require you to lend money out to specific entities,” she said.
Looking ahead, there is little reason to believe capital restrictions will improve much in Argentina or Brazil. Many companies have concluded there is no point in entering these markets if you can’t get your money out. But some industries, such as agriculture and farm equipment manufacturers see too much opportunity to pass it up. For them the best strategy is to keep their options, if they can find any good ones.