In our previous podcasts, we have talked about energy issues, supply chain problems and the ongoing impact of Covid. We now focus on how the world is being affected by the conflict taking place in Ukraine.
Are businesses going to suffer from the impact of this crisis and if so, how, which sectors and where? How can companies deal with raising inflation rates? Is this the time to refinance or look for alternative sources of capital, before interest rates rise to levels that we have not seen for at least 15 years?
Your host, Rebecca Harding from Saltwhistle Communications talks about these issues in our latest podcast with Rainer Koellgen, Senior Advisor at PP&C Independent auditors based in Brazil, who is German and works in Europe, the USA and South America. He is an expert in turnaround, structuring and organisational change. Rebecca is also joined by Martin Trott, a Partner at Rawlinson & Hunter and an insolvency practitioner at R&H Restructuring, based in the Cayman Islands. Martin has vast cross-border experience, having worked with corporates in the UK, U.S., the Far East, and Europe.
In our previous podcasts, we have talked about energy issues, supply chain problems and the ongoing impact of Covid. We now focus on how the world is being affected by the conflict taking place in Ukraine.
Are businesses going to suffer from the impact of this crisis and if so, how, which sectors and where? How can companies deal with raising inflation rates? Is this the time to refinance or look for alternative sources of capital, before interest rates rise to levels that we have not seen for at least 15 years?
Your host, Rebecca Harding from Saltwhistle Communications talks about these issues in our latest podcast with Rainer Koellgen, Senior Advisor at PP&C Independent auditors based in Brazil, who is German and works in Europe, the USA and South America. He is an expert in turnaround, structuring and organisational change. Rebecca is also joined by Martin Trott, a Partner at Rawlinson & Hunter and an insolvency practitioner at R&H Restructuring, based in the Cayman Islands. Martin has vast cross-border experience, having worked with corporates in the UK, U.S., the Far East, and Europe.
Rebecca Harding
Thank you for joining us for this Nexia Turnaround Restructuring and Insolvency podcast series, we will be exploring global issues that affect the world economy. I'm your host, Rebecca Harding and I'll be joined by a selection of experts from around the world, in firms that are all part of the Nexia International Network, and all of whom are leaders in turnaround, restructuring and insolvency. Nexia International is a leading global network of independent accounting and consulting firms. All of the experts appearing on this show can be contacted by the Nexia International website. Thank you.
Hello and welcome to this podcast episode. The news is jam packed with problems and has been with months.
In our podcasts we have looked at energy issues, supply chain problems, the ongoing impact of Covid and now the world is facing the conflict between Russia and Ukraine.
Are businesses going to suffer from the impact of this awful conflict, and if so, how, which sectors and where? Are the demands on business overall going to prove too great?
I’m joined today by two Nexia experts to explore these issues. We have Rainer Koellgen, who is Senior Advisor at PP&C Independent auditors. He lives in Brazil, but is German, and works in Europe, the USA and South America. He’s an expert in turnaround, structuring and organisational change. We also have Martin Trott, who is a Partner at Rawlinson & Hunter and an insolvency practitioner at R&H Restructuring. He lives in the Cayman Islands. He has lots of cross border experience having worked with corporates in the UK, the US, the Far East, Europe and of course, the Cayman Islands.
Rebecca Harding
Hi, Rainer. Hi, Martin. How are you? You're doing well?
Martin Trott
Yeah. Hi. Very good. Thanks. pleasure to join you today.
Rebecca Harding
Yeah, it's great to see you both. So I mean, we've done various podcasts over the last couple of months, we've been looking at COVID, we've looked at energy, we've looked at supply chain issues and now we've got all these issues in the Ukraine and the news is exhausting. I think for everybody at the moment, there's so much happening, and so many different types of problems. But we talked about people, and we talked about individuals and countries, but what about businesses? I mean, everybody's more international now. Can we talk about them? I mean, are we going to be seeing lots of businesses going under as a result of all these different issues? What do you think? Rainer? I mean, what do you think?
Rainer Koellgen
Rebecca, I don't think that overall, a lot of businesses will have really problems and issues that will lead to an increased percentage of insolvencies, just because of the war between Russia and Ukraine. However, that is not saying that companies will not face difficulties over the next couple of months quarters and maybe two or three years. But that will be because what we're seeing already is an increase in commodity prices, both for the agricultural sector, but also for mining and energy, commodities, which have risen over the last eight, nine weeks, I don't know 15 - 20% probably and this will lead to more inflation and more inflation will drive a faster rise of interest rates from the central banks than people expected, just a couple of months ago. So and the rising interest rates, will lead to higher cost of capital, and more difficulties for companies to get funding and pass on the inflation increase to the customers.
Rebecca Harding I can see that, what about you Martin? What do you think? Are we going to be seeing more insolvencies?
Martin Trott
Rebecca, I gave up trying to predict rising insolvencies many, many years ago! It's very, very difficult to tell, because there's so many, the world is now so much more globalised, than it ever was and there's so many factors that go into pressures on businesses, but the fact that all these issues that are coming out of Russia and Ukraine are so soon off the back of the global pandemic, I think is a major issue. As Rainer says the rising cost of capital, the increases in cost of living, and therefore, which is putting, which is pushing inflation up, which is going to push up interest rates, means that for a long now more, than ever, there's going to be a lot of pressure on businesses and finances to meet these increased costs of capital. So as a result, I do think we will see an increase in insolvencies and we're certainly starting to see that in the Caribbean region.
Rebecca Harding
And what about I mean, with COVID? You mentioned COVID. So we've had all the economic stimulus packages that have that everybody was sort of depending on for a while, while that was going on, obviously, they will kind of gone recently in all the different countries across the world. Do you think that's going to have an impact in making things more difficult for people? And the reality of COVID sort of starting to come through? What do you think?
Rainer Koellgen
I think it will add to the problems that we're already seeing because the entire packages that governments, I don't want to say, handed out, but really offered and provided and that people and companies make use of, they increase the level of public debt, in at least the northern hemisphere substantially. And I don't know what finance ministers put in terms of midterm interest rates on that package that they really borrowed over the last two years, two and a half years. But they're going to be impacted by raising interest rates, which make it more difficult to repay the debt. So I don't really know it's not going to be a good that we have this. So it's just an accumulation of various negative impacts COVID to start with, and the supply chain disruptions between especially Asia and the US and Europe, as a result of COVID. And now, the war between Russia and Ukraine driving commodity prices up again, that's all not positive and it confronts a situation where public debt is already at a high level.
Rebecca Harding
And I suppose the interest rates for individual businesses, being a business myself, you know, we've got so used for so long, having really low interest rates, haven't we? I mean, it's been many years now. So do you think people have the provisions in place to deal with those interest rates that you know, going up so rapidly?
Martin Trott
Yeah, you're absolutely right. Rebecca, yes, there's so there's a whole generation of businesses now out there that have enjoyed historic low interest rates for the past 10 to 15 years, and now we're entering into a cycle where interest rates are going to move up across many jurisdictions around the world. And businesses are going to have to plan for that. And make sure that as well as those businesses in the consumer product sector, for example, that may have been benefiting from more than other sectors from the fiscal stimulus's that governments have introduced to economies around the world are going to have to cope with that, but also cope with rising interest rates and having proper forecasting and proper planning, is going to be key.
Rebecca Harding
I mean, do you work with loads of funds, don't you because you're in that very horrible place, the Cayman Islands. You're nice and warm with your palm trees out your window, which I'm not going to talk about. But you see a lot of sort of fund investments and things like that and what do you, do you think money's going to start coming from different places? Are people going to be more inventive in terms of where they're getting their funding?
Martin Trott
No, don't believe what you read in the press about the Cayman Islands Rebecca. We are all very nice out here!
Rebecca Harding
I personally think I should come and investigate it!
Martin Trott
That's right. One of the drivers for not as many insolvencies as possibly people think, is that is the access to different financing structures. The Cayman Islands and other Caribbean jurisdictions are used for domicile and financing structures, being a tax neutral jurisdiction and we see the rise in the fund structures and fund setups are ever increasing in these jurisdictions and that's as a result of access to cash and money. There are funds and other non-traditional lenders out there, who are sat on cash that they are ready to deploy. And so companies and clients that were used to traditional bank lending, as an example, should definitely consider other forms of financing and to consider private equity, private debt, should consider funds as alternative forms of financing.
Rebecca Harding
That's really interesting. I mean, are you seeing sort of results of the whole sort of Ukraine conflict in your area? Are you seeing that affecting what you're doing on a day-to-day basis? Rainer?
Rainer Koellgen
Yeah, I'll say this in several aspects. I mean, you see it in Europe. Last time I've been in Germany was three weeks ago. When you take a train from Berlin somewhere west to like Dusseldorf, Cologne or Frankfurt, and other large cities. The train is packed full of Ukrainian refugees, which is really heartbreaking to see the conditions they arrive in Berlin, which is the closest large city to the Polish border. So that's one thing. The other one is, you see this in businesses because a lot of German companies or European companies have some form of relationship either customers in Ukraine or Russia or suppliers. And I just want one example here, a company that is active in heavy machinery equipment, manufacturing, they had some service technicians in the city of Murmansk, which is on the Kola Peninsula in Russia, that's where the Russian fleet for the North Sea is located when the war broke out, so they have difficulties getting their people out of Russia, which took, I think, five, six days getting them through China and the US, back to Europe. And then they also have cancelled orders for deliveries. So.
Rebecca Harding
It's very difficult. But I mean, you're in South America and you've got quite big food agricultural elements in South America going on. Do you think that as both Russia and Ukraine play important roles in the global agri, agro industrial sort of supply chains, do you think there's going to be a shift in business? Or do you think there's just going to be a terrible shortage and bread will become a luxury food item.
Rainer Koellgen
There will be, before there is the shift in the business structure or the value chains in the agro industry, which will take usually a year or two to manifest themselves, there will be a shift in prices, which we already seeing. Both Russia and Ukraine are large exporters for fertilisers and I think the price increase for fertilisers has been about 40%, since the war started and that has an impact, for instance, on countries like Brazil and Argentina. So, this will drive the prices for soy and other commodities which are grown here and that, in effect will drive prices for basically all the other food items across the world. And the other thing is both Ukraine and Russia are also big market participants for wheat, especially going to European countries and Northern African countries. And the prices for wheat have also risen. So I don't want to say bread is becoming a luxury good but when you consider that the raw material prices of usual roll, is like 40%. So if you have an increase of 20%, on 40%, it's almost a 10% price increase you're going to see in the supermarket for your brand.
Rebecca Harding
Quite noticeable, isn't it? But it's interesting, you're talking about the sort of trade moving to different parts of the world? I mean Martin, from your point of view in the funds context, are you seeing a shift to where the wealth is coming from? Are there changes that you're seeing as a result of all this?
Martin Trott
Two the areas that we're seeing it, one at a local level, we're seeing the same thing, as Rainer mentioned, which a lot of people are experiencing, which is the consumer prices going up the cost of fuel at the pump, etc. And it's driving the debate on alternative renewable energy. And pushing that forward. So one of the benefits that may come out of this is less reliance on fossil fuels, and more reliance on renewables, which is great, we are being in a in a place where the sun always shines, and the wind is strong, we should be using those sources far more than fossil fuels. So that sort of local level, which I think everyone's experiencing, at an international level, the main impact of the Ukrainian situation is on the sanctions, and we are having to deal with the sanctions that have been imposed by the US, UK and Europe, in particular, and tread extremely carefully around anything that involves Russia. There are Russian investors, for example, in funds that are located here in Cayman and there are conversations that are having to be had by investment managers and fund administrators around how to deal with sanctions, when you have, even at a level where you've got a Russian individual who has a Russian passport, who may not be sanctioned at all, just by virtue of the fact that he's Russian. We're having to think very carefully around, for example, what to do with distributions to investors, if you've got that situation. So that's where we're seeing it, sanctions is obviously extremely, extremely you have to be extremely careful when we're dealing with sanctions given the criminal consequences for breach of sanctions. And so that's largely the impact we're seeing at international level.
Rebecca Harding
That's really interesting. And in terms of where the money's coming from, because what I always notice is, within Europe, we think about ourselves so much, we tend to be quite self-centered, I think in just looking at what's going on in Europe and so thinking it's the centre of the world and yet you know, as Reiner always says, to me, there's like 1.4 billion people over in Asia and having worked out there, I know, they don't even think about us. So do you think this is a massive opportunity for them? To actually gain some trade from what's going on in Europe? I mean, it's not their argument. it's not to do with them. So they can actually use this opportunity, either with putting wealth into, you know, funds that you deal with Martin, or winning trade. What do you guys think about that? Rainer?
Rainer Koellgen
I think that the, let's say midterm consequences, not for the next, I don't know, 12, 18, 24 months. But probably over the next 3, 4, 5 years, what we will see is that countries like the BRICS countries, Brazil, India, China, South Africa, and Russia, as part of BRICS, not to forget, they're taking on the political decision side right now, already a more independent stand. I don't want to say against Europe or the United States, but they're just making clear, okay, this is not our issue and our problem, this war between Russia and Ukraine. And when I talked to people in Brazil or the other day, I talked to one of our clients, one of our colleagues, sorry, in the Middle East, they definitely see a shift from, let's say, the northern hemisphere, European North Atlantic relationships and view how the world should look like and how it has been functioning for a long time, towards other centres, I don't want to say a multipolar centred world, it's not clear yet but it's definitely changing and population distribution, and the future population growth over the next 30 years, which mainly will happen in Africa and some parts in Asia, but definitely not in Europe or North America, will drive this. And if businesses in Europe have been, let's say, focused more on the European, North American trade relationships, you better start thinking about other parts of the world, which are growing faster, and in a more reliable way, over the next couple of years and decades.
Rebecca Harding
That's really interesting. What about you, Martin? What do you think about that?
Martin Trott
Yeah, I agree. I mean, every situation creates opportunities for other countries, and some of these countries that historically have been referred to as emerging markets are no longer emerging markets, they are fully fledged participants in the international community. And we're seeing in the Caribbean region, we're seeing a rise of the Latin economies and a lot more structures that involve South American investors, South American money and we've always historically had very strong connections to the US and to the Far East. A lot of the distress that we've seen a lot of the insolvencies over the past two years, have been largely out of the Far East. As a result of some of the economic issues China has been facing, particularly in the property market. So yeah, I mean, I think all these situations what as bad as they are, they do present opportunities for others, and therefore, you know, clients in terms of accessing in terms of dealing with rising interest rates and accessing the markets, clients should definitely look at other markets for alternative forms of financing.
Rebecca Harding
That's, really interesting. So, I mean, that leads us on to my final question, which would be what's your top tip for businesses? I mean, you know, we're sitting here going, where do we start? So much to deal with? So I mean Martin, what would be your top tips for a business? At the moment?
Martin Trott
Definitely talk to your advisors. Involve your advisors in decision making, no, in all seriousness, it’s vitally important, more so than ever, to be focusing on forecasting and focusing on business plans and making sure that you're incorporating rising interest rates and rising commodity prices into your business plans because it's coming, and we're seeing it now, it's only in the short to medium term, those costs are only going to increase. And therefore, forecasting and seeking advice on ways to manage your business and to focus on your costs, I know a lot of businesses that we come across have been doing that as a result of the pandemic. So this would just be an extension of that sort of focus on the cost of the business. But that's vitally important in a situation where we're facing these increased interest rates.
Rebecca Harding
Right, and what about you, Rainer? Do you have any tips for business that will help?
Rainer Koellgen
In addition to what Martin already said, talk to your advisor, I mean, make sure that not only your advisor, but your own, I mean, if you're the owner of a business or with your management team, if you haven't done already go back and start revising your midterm planning like three, four, five years out. And make sure that you're not only planning for rising interest rates, like okay, it's right now a little bit above zero in Europe what you pay. But go to, I mean, go to levels like 5, 6, 6.5, 7%. which most people will probably say nope. But just I mean, do yourself a favour and do some scenario planning, because that's probably what we're going to see if inflation will keep at, will stay at the level that we currently have. I know that the European Central Bank is hesitant to start raising interest rates. But you can only do that so long until then the population starts, I mean feeling uneasy of the money being really worthless, 10% less, after a year. So this is one thing that I would advise and the other one is keep a focus on your cash situation. If you haven't done so, already during the pandemic, take a look at your cost structure. Because I mean even in considering times with low interest rates, cash is important and if interest rates will be rising, cash will be more expensive. And thirdly, would be really midterm, five to 10 years, if you haven't tried to figure out, if you can do business with what Martin said, worthy emerging markets and another full fledge X emerging markets take a look at expanding beyond, maybe the regional footprint you have right now.
Rebecca Harding
That's such great advice from both of you thank you so much, for all the things you talked about today. So interesting, and really helpful as well. helpful advice. So thank you very much, guys. I hope you have a good day. All right, nice to see you both.
Rainer Koellgen
Thank you, Rebecca, Bye Bye
Martin Trott
Thank you
Rebecca Harding
Thank you so much for joining us. This podcast was brought to you by the Nexia Turnaround Restructuring and Insolvency business group. The group was formed to bring together financial, legal and operational expertise from across the Nexia network, to support global clients and international business at times of operational challenges and financial distress.