I was asked to focus on assessing risk in Latin America at a maritime conference, but the presentation applies universally!

1. Introducing nfospectrum
Maritime Week Americas 2018 – Panama
Assessing Risk in Latin America
By
Felix Yamasato
felix@infospectrum.net
+1 203 667 1082

2. STRENGHTS?
Key competitive advantages
– Unique or lowest-cost resources
– Scale of operations; diversification
– Product range availability
– Financial prowess
– Market share
What do they do better than anyone else?
• Price or value proposition
• Transparency in dealings
• Reliability of delivery
• Credit availability
What do people in their market see as their strengths?
• Try to understand the “why”

3. WEAKNESSES?
Are their competitors doing any better than them? Why?
• What could they improve?
• What should they avoid?
• What are people in their market likely to see as
weaknesses?
• What factors lose them sales?
• Perceived as Financially weak?

4. THREATS?
• What obstacles do they face?
• What are their competitors doing?
• Do they have a weak balance sheet that may affect their cash-
flow in the medium term?
• Could any of their weaknesses seriously threaten your
receivables?

5. But how about accounting standards in
LatAm?
• They differ from country to country
• Accounting profits vs. cash flow
• Cash flows are much less likely to be manipulated
• Window into the “raw” profitability of the business
• Window into how cash is raised and used to grow or
maintain the business

6. Understanding your counterparties’ culture
(Everywhere, not just LatAm)
• Knowing more about their operations
– Risk takers = Speculators vs. Risk aware/averse = Operators
– Operating structure vs. Financial structure
» Do they agree?
» Why? Or Why not?
» Do they support each other?
– Concentrated vs. Diversified
» Customer/market concentration = risk takers
» Diversified customers/markets = risk aversion
– Financial strength
» Strong = risk averse
» Weak = risk takers

7. Using Financial Analysis to Determine Risk
Culture
• Strong (unleveraged) balance sheet = risk aversion
• Weak (overleveraged) balance sheet = risk takers
– Why? Because the company is shifting risk to debt holders
– And when the market goes against them (and it always does!), the risk
spills to all of its counterparties

8. But How Do You Measure Over-
leverage?
• It depends on cash flow margins!
• Why?
– Small margins disappear when debts come due or interest rates rise.
– Interest coverage ratio (toughest test)
• Free cash flow divided by interest expenses
– A ratio below 3 is speculative
» Interest rates rising from 5% to 7% = 40% increase in interest
charges
» Interest rates rising from 4% to 6% = 50% increase in interest
charges
» Interest rates rising from 3% to 5% = 67% increase in interest
charges

9. The 3 Streams of Cash Flow
• Cash flow from operating activities
– Underlying profitability of the business in its latest period
• Cash flow from Investing activities
– Capital expenditures (e.g. vessels, buildings, etc.) and divestitures
• Cash flow from financing activities
– Debt issuances (long- and short-term)
– Debt repayments (long- and short-term)
– Dividend payments

10. Best Cash Flow Metric
• Free Cash Flow
– Operating cash flow minus
• Capital expenditures (needed to maintain or grow operations)
• Dividend payments (owners’ take)
• Forward Free Cash Flow
– This uses forecast operating cash flow minus
• Future capital expenditures and
• Future mandatory dividend payments

11. Cash Flow Proxies
• Net profits (or losses) + net change in working capital (NCWC)
– Working capital surplus = cash outflows
– Working capital deficit = cash inflows
– NCWC = Net change in current liabilities minus net change in current
assets
• EBITDA (earnings before interest, taxes, depreciation and amortization) +
NCWC

12. Thank you!
Felix Yamasato
felix@infospectrum.net
+1 203 667 1082

13. Disclaimer
This presentation is not intended to form the basis of a decision to purchase of products and services, or securities, or any other investment
decision and does not constitute an offer, invitation or recommendation for the sale or purchase of products and services, or securities, or
any investment decision. Neither the information contained in this presentation nor any further information made available in connection
with the subject matter contained herein will form the basis of any contract. This presentation does not purport to be comprehensive or to
contain all the information that a prospective delegate, business partner, lender or investor may need. The information contained herein is
based on currently available information and sources, which we believe to be reliable, but we do not represent it is accurate or complete. The
recipients of this presentation must make their own investigation and assessment of the ideas and concepts presented herein. No
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