By: Dariella Gentile
In my article from April of this year on the New Challenges of CFOs, I commented on analyzing the convenience of the payment schedules established in the current long-term debt, since for a good number of companies the projections of the EBITDA did not consider the impact on cash generation, due to factors such as the rise in energy prices, higher logistics costs and high world inflation. Today, in addition to what was mentioned above, we are facing a situation of an increase in interest rates of magnitudes that we did not anticipate.
As an example, in this table we can see the evolution in the last 4 months of the monetary policy rates of the US, Peru, Colombia and Chile and the trend observed is similar in practically all the countries of the LATAM region:
|Reference rate||Apr. 30/2022||Sept. 09/2022||Increase in Basic Points|
|FED (upper limit)||0.50%||2.50%||200|
|Central Bank of Peru||4.50%||6.75%||225|
|Bank Rep of Colombia||5.00%||9.00%||400|
|Central Bank of Chile||7.00%||10.75%||375|
With a financial increase that ranges between 200 and 400 basic points, and estimating that as long as there are no clear signs of a decrease in inflation, the increases in rates will continue, the situation deserves special care. To put things in perspective and as an example: in an annual average debt of USD 10 million, the incremental financial cost of a financing taken in the current month versus the month of April of this year, could fluctuate between USD 200,000 and USD 400,000 additional annual payments, magnitude that will depend on the term of the obligation, currency, country of location and the particular situation of each company, as well as the treasury conditions of its financial providers.
Having said all of the above, I offer the following suggestions to anyone considering a long-term structural debt strategy:
- Companies that require a re-profiling of debt should try to replace only the capital amortizations corresponding to the remainder of 2022 and 2023, probably contemplating a larger than normal single payment at expiration (balloon installment). This will allow them to improve cash flow in these challenging years, and give them time to assess whether something different and more comprehensive needs to be done towards the end of 2023.
- In relation to new structural financing to finance investments in fixed assets, it would be better to take shorter terms than the projected cash flow indicates, again contemplating a balloon installment for the expiration of the facility, with the intention of being reprofiled once expiration, preferably with the same financial institution.
- And in general, in a scenario like the current one, it is very important to negotiate prepaid loans or, at least, with descending prepaid commissions as the life of the loan progresses, in such a way that there is a greater margin of action for a later substitution of the debt, in better conditions of interest rates.
In summary, there is no single formula for managing these challenges, because much will depend on the special conditions of each company, but what is certain is that the rise in interest rates is a priority issue that must be on the agenda of all companies, with the definition of a clear strategy, in coordination with related financial entities.