Cross-Border Risks and Country Risk: Strategies and Solutions (Carlos & Tina)

2. Goal / Agenda • Awareness of Cross Border Risks (Carlos) • The Costs of Country risk (Carlos) • Practical strategies / No uniform way to define (Tina) • Possible solutions (Tina) • Actionable items (Tina) • Q & A

3. Sovereign Risk • Country Risk Awareness of Cross Border Risks Types of Risk

4. Sovereign and Country Risk Assessment • ICTF - Economist Intelligence Unit (EIU) Reports • Economic office in foreign country or U.S embassy • S & P, Moody’s or Fitch Ratings • CIA, IMF or US Commerce Department • Insurance Company, Bank Country Ratings, Risk Reports • In-House experience • Copy of import license – know all details, time restraints • Traveling to Market place

5. Sovereign Risk Awareness of Cross Border Risks

6. Sovereign Risk • Captures the risk of a country defaulting on its commercial debt obligations • The measure of default risk when lending to the government of a country

7. The Consequences of a Default

8. Rating by AgenciesInvestment Grade Moody's S&P FitchRating description Aaa AAAAAAPrime Aa1 AA+ AA+ High grade Aa2 AAAA Aa3 AA− AA− A1 A+ A+ Upper medium grade A2 A A A3 A− A− Ba1 BBB+ BBB+ Lower medium grade Ba2 BBB BBB Baa3 BBB− BBB−

9. Rating by AgenciesNon-Investment Grade; aka High-yield Bonds; aka Junk Bonds Moody's S&P Fitch Rating description Ba1 BB+ BB+ Non-investment grade Ba2 BB BB Speculative Ba3 BB− BB− B1 B+ B+ Highly speculative B2 B B B3B− B− Caa1 CCC+ CCC Substantial risks Caa2 CCC Extremely speculative Caa3 CCC− C Default imminent with little prospect of recovery Ca CC C

10. Rating by AgenciesDefault Moody's S&P Fitch Rating description C D DDDIn default DD D

11. The Economist Intelligence Unit • Country Risk Rating • A to E (E = Worst) • Country Risk Score • 0 – 100 (100 = worst) Top 5 countries in each Country Risk Rating

12. Rating DefinitionsInvestment Grade Moody's S & P Fitch Credit worthiness Aaa AAA AAA An obligor has EXTREMELY STRONG capacity to meet its financial commitments. Aa1 AA+ AA+ An obligor has VERY STRONG capacity to meet its financial commitments. It differs Aa2 AA AA from the highest-rated obligors only to a small degree. Aa3 AA− AA− A1 A+ A+ An obligor has STRONG capacity to meet its financial commitments but is A2 A A somewhat more susceptible to the adverse effects of changes in circumstances and A3 A- A-economic conditions than obligors in higher-rated categories. Baa1 BBB+ BBB+ An obligor has ADEQUATE capacity to meet its financial commitments. However, adverse economic Baa2 BBB BBB conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet Baa2BBB BBB its financial commitments. Baa3 BBB− BBB−

13. Rating DefinitionsNon Investment Grade Moody's S & P Fitch Credit worthiness Ba1 BB+ BB+ An obligor is LESS VULNERABLE in the near term than other lower-rated obligors. Ba2 BB BBHowever, it faces major ongoing uncertainties and exposure to adverse business, financial, or Ba3 BB- BB-economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitments. B1 B+ B+ An obligor is MORE VULNERABLE than the obligors rated 'BB', but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments. B2 B B B3 B− B− Caa CCC CCC An obligor is CURRENTLY VULNERABLE, and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments. Ca CC CCC An obligor is CURRENTLY HIGHLY-VULNERABLE.

14. Rating Definitions Default Moody's S & P Fitch Credit worthiness C C The obligor is CURRENTLY HIGHLY-VULNERABLE to nonpayment. May be used where a bankruptcy petition has been filed. C D D An obligor has failed to pay one or more of its financial obligations (rated or unrated) when it became due.

15. Sovereign Defaults over time: 1820-2003 Europe Latin America WW I WW II and Great Depression

16. Sovereign Defaults: 2000 - 2014

17. Country Risk Awareness of Cross Border Risks

18. Country Risk • Country risk covers the downside of a country’s business environment including legal environment, levels of corruption, and socioeconomic variables such as income disparity.

19. Country Classification

20. Country Risk Elements • Differentials in Inflation • Differentials in Interest Rates • Current Account Deficit • Public Debt • Terms of Trade • Political Stability and Economic Performance

21. Differentials in Inflation During the last half of the twentieth century, the countries with low inflation included Japan, Germany and Switzerland, while the U.S. and Canada achieved low inflation only later.

22. Differentials in Interest Rates • Interest rates, inflation and exchange rates are all highly correlated. • The opposite relationship exists for decreasing interest rates – • Lower interest rates, which tend to • Decrease exchange rates.

23. Current-Account Deficits The current account is the balance of trade between a country and its trading partners, reflecting all payments between countries for goods, services, interest and dividends. Deficit in the current account cycle:

24. Public Debt Countries will engage in large-scale deficit financing to pay for public sector projects and governmental funding. While such activity stimulates the domestic economy, nations with large public deficits and debts are less attractive to foreign investors.

25. Terms of Trade A ratio comparing export prices to import prices, the terms of trade is related to current accounts and the balance of payments.

26. Political Stability and Economic Performance Foreign investors inevitably seek out stable countries with strong economic performance in which to invest their capital. A country with such positive attributes will draw investment funds away from other countries perceived to have more political and economic risk. Political turmoil, for example, can cause a loss of confidence in a currency and a movement of capital to the currencies of more stable countries.

27. Most and Least Corrupt Countries Source: 2014, Transparency International

28. Highest and Lowest Risk Countries Source: July 2015, Political Risk Services (PRS)

29. Country Risk Model The Cost of Country Risk

30. Sample: Country Risk Scoring Model

31. Practical strategies

32. Research & Define Your Risks • Measure Level of Risk in Your Portfolio • Forecast the What If’s Research Forecast Measure

33. Country Risk Assessment Measure: • % of high risk dollars AR outstanding in your portfolio • Concentration: • # of customer • Amount to any one customer • Alternative sales of cargo – Other Markets • Transit point options • “Market disease” risks in the country of destination • Specialty items or private labeling & specs • Inflation • Foreign exchange volatility • Non transferable currencies, Convertibility • Duty changes • Geo political stability – coup, uprisals • Man Power and expertise needed to do special handling, i.e. OFAC license, research of executives, regulations, legal contracts, etc. • Prioritization of your product from the stand point of the foreign government

34. Country Risk Assessment • Forecast: • Anticipated growth • Elections – outcome – political stability risk • Contagion • US dollar reserves • Possible crisis – Oil price crash • Future risk & Change in trends • Safety • War, strikes, business and bank closures and disruptions • Tariff, Duties, Controls and Ban Increases • Protectionism

35. How High is Your Corporate Risk Appetite? • Drivers: • Ownerships of your company • Sales • New growth into new countries • Higher profit margins • Seeing changes in payment patterns • Getting squeezed out by competition in the ‘safe’ markets • Dash for the Cash Delays • Continuous Improvement • Measure Your Risks – Is High Risk Your Norm? • What Can You Afford: • Delay in cash flow • Borrowing base • Bank Covenants • Bad debt reserve

36. Possible solutions

37. Mitigate Your Country Risks • Comprehensive A/R Insurance: • Insolvency • Country • What is Corporate Policy for Uninsured Sales? • Eximbank • Forfaiting • Credit Terms / Control of Cargo / L/C Confirmations • Limit Risks in a Transaction • Foreign Exchange Hedging • Legal Contracts: • Foreign country considerations • Court of law or wild, wild west • Level of corruption factors • Foreign attorney • Incoterms • Cross Company/Country Guarantees if Parent/Affiliate is in Low Risk Country, Standby L/Cs • Owners Personal Guarantees, Liens on Property, etc.

38. Actionable items

39. Cost and Risks of the life of a transaction

40. Expenses of Doing Business • Incoterms • Mode of Transportation • Credit Terms • Bank Charges • Country Risk Protection (Insurance of Cargo, A/R Coverage, Expense Deductibles, FX Contract) • Transit Days • Interest Expense (A/R Interest, Inventory Interest, Transit Days) • Forwarders Fees • Courier • Embassy • Agency Fee for Country Inspection • Product Claims

41. Country Risk Pricing Cover Your Costs Through Proper Pricing: • Country insurance, Eximbank, Forfaiting • A/R Interest to Cover Delays in Payment • Terms – Higher the Risk, Higher the Profit • Bank Charges • War Chest Fund Accruals • Country risk premiums • “Deductibles” and expenses funds • Weight in country risk, scoring model • Insurance claims – waiting period (270, 360, etc.) • 90% vs. 100% loss (10% build fund?)

42. Summary • Never a Boring Moment • Be Able to Act Quickly • Alternatives • Stay on Top of Your Customers When Due • Communications • You and your customer • Sales • Operations and transportation • Stay connected with agents, banks, ICTF, etc. • Risk Factor Acceptability • Travel is best education • In today’s challenging financial environment, question International slow pays carefully to determine what is causing the delay. Is it the customer, lack of capital, currency, or country?