Attendees of the successful FCIB Global Conference held in Coral Gables, FL, from Nov. 12-14, were able to acquire a lot of information and share in the knowledge of featured speakers and panelists. In one session at the conference entitled, “Analyzing Latin American Financial Statements – Evaluation and Interpretation,” useful information was provided for credit executives who are currently selling or thinking about selling in the future to companies in Latin America.
David Marsh, International Credit Manager for Novus International Inc., moderated the session. He has extensive experience selling into Latin America and noted his company’s sales in that region were at the level of about $75 million per year. He pointed out his company has credit applications in both Spanish and Portuguese, the native languages of the region. There may be more than one set of books kept by companies so it’s important to know the purpose each set is kept, such as for tax records. Marsh said he doesn’t usually get overly concerned about companies that have a high debt burden. “I don’t get excited if total debt is more than two times net worth,” he said. The reason for this, he noted, is that in Latin America, the equity market is very limited. “Not a lot of companies are using the equity market to raise capital.” He also pointed out that determining cash flow is more difficult from the financial statements of Latin American companies. “You must ask the financial directors pointed questions.”
Another important piece of advice on interpreting financial statements offered by Marsh was, “Read the footnotes carefully and ask questions.” And, underscoring his recommendation to personally visit customers in Latin America, Marsh said, “You can’t do that from your desk.” He noted that large tax bills are not necessarily something to be concerned about with companies. “Latin American governments want companies to survive and they work out arrangements with companies on the payment of current and delinquent taxes.” On another matter relating to company debts, Marsh noted that it’s important to determine what triggers default of company guarantees. For example, he said if a company is guaranteeing the debt of related companies, find out what happens when those related companies default on their debt. Another tip Marsh gave regarding financial statements was to look for advances to owners. He pointed out it was important to spot them in financial statements because money going out of a company to its owners does not help it build up its assets. “You don’t want to find out the owners take out advances that they’ll never pay… draining the company.”
The final advice Marsh gave, similar to the view of many international credit professionals who sell into Latin America, was to understand the culture there. “Be flexible,” Marsh said. “That’s a way of life in Latin America. Work with your customers. Make arrangements as long as there’s something in it for you. You’ve got to visit your customers to get to know them.”
Pablo Siade of Euler ACI Servicios, a panelist at the session, also offered some advice about selling into Latin America. Some of his advice paralleled what Marsh said, such as the importance of visiting your customers and the fact that many companies keep multiple sets of books. “We have to keep in mind that it’s a frequent practice in Latin America.” Siade pointed out there were two categories of credit risk posed by companies. One is financial risk, relating to a company’s financial policy, its profitability and country risk. The other is business risk, relating to the type of industry of the customer and the management quality of the company. “Most of the companies in Latin America are family-run businesses.” He noted that the best bet, from a business credit perspective, was to try to seek out companies that have been in business for a while. “Look for companies with a longer track record—they’ve overcome boom and bust business cycles.” As for the fact that some companies don’t show all financial activity on their financial statements, Siade said, “Some companies are reluctant to show everything because of kidnapping threats or for taxation purposes.”
Source: Tom Diana, NACM staff writer