There are 3 things to watch out for if you lend to a business that has operations in other countries.
- If you are lending to the business for the first time, can you ensure that the funds you lend won’t find their way to the foreign operation? If not, you might find that your lending is used for assets in another country that you can’t get access to should the lending not repaid as agreed. There is no easy way to prevent this but it’s helpful in such cases to assess the strength of the local operation’s assets and cash flows to determine whether the debt could be repaid from that source, should the foreign operation fail.
- In what currency does the business receive its revenues? If there is a chance that your own currency (the one in which the debt is denominated) will strengthen against that foreign currency in the future, the real value of the scheduled repayments will be higher for the business than it anticipated and may cause some cash flow issues for it. Depending on the size of the debt and the frequency of repayment, it might be possible to arrange forward exchange rates to fix the value of the repayments for the near future at least.
- Related to that point is the question of transfer and convertibility risk. If revenues and cash flows are generated in another country’s currency, you would need to be concerned about whether the forex market in that country is sufficiently robust to ensure that the currency can be easily converted to the currency in which repayments have to be made. If it’s not, the obvious result is that you won’t get your debt repaid. This commonly happens in Africa when local currency can’t be exchanged for US dollars because the dollars are just not available in the market. It happened to SABMiller in South Sudan a while ago that the local operation there couldn’t pay for its imported supplies because there were no US dollars in the local forex market due to the civil war. Eventually, the brewery there was closed down. Transfer risk occurs when a country prohibits the movement of money across its borders by shutting its forex market. If that happens, repayment of your debt is questionable, certainly in the short term.