What is different about corporate treasury in Latin America? According to Mariano Tannenbaum the list is a long one. In this article, he describes what it is like being a corporate treasurer in this notoriously diverse and complex region. He then explains how he and his team at Arcos Dorados were able to establish an almost completely centralised treasury function covering all 20 Latin American markets.

Ask Mariano Tannenbaum what is different about treasury in Latin America and the treasurer of Arcos Dorados begins to roll off a long list that includes everything from the region’s infamous regulatory complexities to the treasury recruitment market. One immediately wonders, whether it would have perhaps been quicker to have asked what is similar.

Arcos Dorados is the world’s largest McDonald’s franchisee. Headquartered in Buenos Aires, the capital of Argentina, the company has exclusive rights to own, operate and franchise McDonald’s restaurants in 20 countries and territories across Latin America and the Caribbean. Since 2011, the company has been listed on the New York Stock Exchange (NYSE: Arco). For the 12 months ending 30^th March 2015, the company’s revenues reached $3.5bn.

There is one salient distinction, however. Press him and he will tell you it’s the rapid mutability of markets in this corner of the world. “Latin America is much more volatile compared to Europe or North America,” explains Tannenbaum (an observation he is certainly qualified to make having worked in all three aforementioned regions). “Things can change here dramatically from one day to the next and exchange rates move much more than in other regions. But at the same time, it is also much more fun working in this region.”

The golden arches

Arcos Dorados might not be immediately familiar to readers in other parts of the world. Its business certainly needs no introduction, however. A New York Stock Exchange (NYSE:ARCO) listed firm, headquartered in the Argentine capital Buenos Aires, the company is the master franchisee for McDonald’s restaurants in 20 countries across Latin America and the Caribbean.

Tannenbaum has been working at the company since 2008 and his role has grown considerably during this time. Beginning with pure cash management, he now also oversees the company’s insurance, financial planning, risk management and capital markets operations. If you think he has a lot on his plate now though, this is mere small fry compared to the task that confronted him when he first took up the job.

Before he’d barely managed to get his feet under the table at Arcos Dorados, he was given a target that up until that moment many people thought was near-impossible to do in Latin America: successfully build a functioning centralised treasury operation covering an area ranging from northern Mexico down to the southern tip of Argentina.

Vital experience

More about that in a moment. First, it is worth mentioning that this was not the first time that Tannenbaum had been involved in the building of a treasury department. That initial experience actually came in his very first treasury job after being hired by the Swiss multinational Tyco.

Tannenbaum recounts that the break came while he was studying for his Masters at London Business School (he had returned to academia after a spell post-graduation working for Argentina’s Ministry of Economy in the capital researching mergers and acquisitions (M&A) and privatisation – the latter very much a hot topic at the time). It was a job interview that first got him thinking about a career in corporate treasury. “During my MBA I was invited to an interview with General Motors (GM),” recalls Tannenbaum. The director who interviewed him, it turned out, was an inspiring individual who, after spending the day with Tannenbaum introducing him to the company’s various financial functions, had convinced him that treasury was the place to work.

Although GM ultimately decided not to hire MBA candidates for that particular role, Tannenbaum had obviously made a strong impression on the interviewer. Not long after, he was contacted by the same person, now working for security systems multinational Tyco International, about a treasury vacancy. “Tyco was building an entirely new treasury structure, and he convinced me to go and work with him on that – first in the US and then in Switzerland,” he says. It didn’t take long for Tannenbaum to realise this was exactly the right profession for him. “I decided to go and right away I loved it,” he exclaims. “What I like about treasury is the view it gives you of a company. You are in the middle of everything.”

Down south

During his time at Tyco, he had learned what it took to build a new treasury structure and discovered he had both a taste and aptitude for the work. Building a new treasury in Europe is one thing though, doing the same in Latin America is, as Tannenbaum will tell you, something else entirely.

In late 2008, right when most of the financial world were contemplating the frightening new financial realities that manifested in the wake of Lehman Brothers, an unexpected opening back in Buenos Aires led to Tannenbaum and Tyco parting ways. The company he went to – Arcos Dorados – had begun operating in August 2007 when it acquired most of McDonald’s operations in Latin America and the Caribbean in a buyout transaction led by the company’s controlling shareholder, Woods Staton, who is also the company’s current CEO and chairman. When Tannenbaum arrived, work was already underway on building a first-class treasury department that could provide services to the newly established multinational company. It really was starting from scratch. “There was no treasury function here before that, of course,” Tannenbaum says. All that they had to build on was the decentralised legacy model McDonald’s had before in which cash management, borrowing and investment were conducted locally in each country. “We were just a subsidiary of the McDonald’s Corporation and so we had been reporting to Group Treasury in Chicago. So after Arcos Dorados was created there was a need to create a corporate treasury function, and the intention was to build one with a very centralised structure.”

Knowing Latin America though he was never under any illusions about the challenge facing him in overseeing this project. The motivation for establishing centralised treasury activities is easy to understand. In most cases it means greater process consistency and efficiency, which in turn gives rise to greater treasury control. It also enables the central purchasing of financial services and bank relationship management. Most treasurers then, as benchmarking studies consistently reveal, prefer a centralised set-up where one is feasible.

But Tannenbaum must have wondered, initially at least, whether one would indeed be feasible in these markets. After all, he knew from experience that building a central treasury can be extremely complicated, even in Europe where there are fewer legal, tax and regulatory discrepancies to navigate and, of course, a single currency across 19 markets.

As we have already learned though, Latin America is very different. Even the things that are relatively straightforward in Europe or the US can prove to be real hurdles in these markets. Finding and recruiting experienced treasury staff was the first one they would need to clear. Although there are obviously many multinational companies operating in Latin America, Tannenbaum explains, most of them are headquartered in other regions. This means the pool of professionals with extensive treasury experience is not a particularly large one.

“The other corporates who have headquarters here in Argentina, Brazil or Chile – we compete for the same resources and there are not as many treasurers here as there are in the US or in Europe,” he says. “You need to phone a lot of people. Luckily we have an excellent team here, but they didn’t have corporate treasury experience initially. That was why Arcos Dorados looked internationally for a group treasurer as they were unable recruit one here.” Then, even if that first hurdle can be successfully negotiated, there was the question of how a highly centralised treasury set-up in Latin America would operate in practice. How would the markets with strict capital controls in place – like Venezuela and Argentina – fit into a centrally controlled FX risk management strategy? In what currencies is it possible to hedge and what currencies is it not? And how would treasury keep on top of multitude of complex and rapidly changing national tax regulations?

Putting these factors together it is really quite incredible what was ultimately achieved in the building of this treasury function. Over the 20 Latin American markets in which Arcos Dorados operates they have only one country treasurer in Brazil (which requires country support due both to its size and regulatory complexity). The rest is run entirely from headquarters in Buenos Aires by Tannenbaum and his team, a feat which he is understandably very proud of. “A lot of people thought that was not possible in this region,” says Tannenbaum. “But we did it.”

Centralising also allowed the company the opportunity to scale down their banking relationships significantly. When Tannenbaum took charge of treasury at Arcos Dorados, the company was working with around 50-60 different banks across the region, a number which has now been reduced dramatically. Following an RFP issued shortly after Tannenbaum joined, the company now works with just ten banks in total, predominantly international institutions able to offer the kind of pan-regional support a highly centralised treasury needs. “All the main banks were interested in gaining our account,” he says. “We are a unique company: a Latin American company with a presence in 20 markets. There are not many companies like that in Latin America.”

Everyday volatility

These days, the challenge for Tannenbaum is no longer building a centralised treasury operation in Latin America, rather it is the day-to-day running of one. In good times this is not straightforward in this region, but when market conditions take a turn for the worse – as they did in fact do recently – the job can become extremely testing indeed. “This year didn’t start well for the region,” he confides. Top of a long and growing list of concerns is the foreign exchange markets, in particular the strengthening greenback. As the US recovery solidified in the early part of 2015, the dollar appreciated against all the Latin American currencies (and indeed others like the euro too, a currency which Arcos Dorados is exposed to in the Caribbean). In fact, some of the currencies to which Arcos Dorados has the greatest exposures were the worst hit during this spell of volatility. The Argentine peso, for example, has lost 27% of its value against the US dollar since the beginning of 2014.

A stronger dollar is an ominous prospect for a company that is listed in New York but whose revenues are denominated in an array of EM currencies (especially when opportunities to hedge in some currencies are limited. “We manage a lot of currencies with a lot of volatility. Of course we have a hedging programme in place but that is only for our imports, not our profits,” says Tannenbaum, adding that this is not hedged at least partly because investors who buy shares in Arcos Dorados tend to be looking for a Latin American risk.

Beyond the worsening volatility, the region’s general economic downturn is Tannenbaum’s other main concern. As a retailing company, Arcos Dorados is naturally highly sensitive to the business cycle. Revenues are generally higher in periods of strong economic growth and prosperity, and lower in periods of contraction. But knowing the region well is also an advantage for local companies. “We have been in the region for many years and we know that after tough years always come the good ones as part of the region’s volatility and we should be ready to take advantage of this,” Tannenbaum says. “It is true that Brazil had a couple of tough years without significant growth and accounts for 50% of our revenues but it is during these times that we need to strengthen our base and be ready for the upcoming recovery. While many competitors might leave the region we are here for the long term and we know how to manage this volatility.”

Fighting back

Tannenbaum knows he is powerless to affect the external conditions he is faced with. What he does hold influence over, however, is the financial resilience of the business in the face of these macroeconomic and currency headwinds. In this environment, he believes it becomes even more important to get the basics right, particularly with regard to managing excess cash and cash shortages in the business. And for that a reliable cash flow forecast is critical.

“I have been spending a lot of time on cash flow projections,” he says. Technological enhancements have helped the company’s cause in this area (treasury have just seen the completion of a new TMS provided by a well-known cloud based provider) as has the rationalisation of banking relationships. Tannenbaum is not complacent, however, and hopes to see continual improvements in this area. “At this particular time, and this year, specifically because of all the complications we are having in the region we are looking very carefully at our forecasting and I discuss that quite a bit with my team.” Deteriorating economic conditions has also meant Tannenbaum has been devoting more of this time and energy into refinancing the company. At present, the company has in issuance a $475m ten-year bond maturing in 2023 at 6.625%. The company also has on its books a separate bond of R$675m issued in 2011, that is bearing interest of 10.25% and, although denominated in Brazilian real, is payable in US dollars.

Work has already begun on refinancing the debt due to mature next year. A number of different options are being assessed and no firm decision has been made. “Interest rates are still very low in Europe and, for the time being, in the US, so there is still great appetite for the Latin American story. Of course, you always need to have a good story as a company too, but we have one of them as well.”

Taking stock

After such a testing baptism at Arcos Dorados it’s perhaps no wonder that Tannenbaum now thinks it time to take a step back and reflect on the journey. Right now, having put in place what he deems to be the correct banking structure, he intends to think carefully about how these achievements can be built upon going forward. And the football-fanatic ‘Porteño’ (native of Buenos Aires that is) draws on an analogy from his favorite sport to illustrate the point. “Now it’s time to stop the ball, look around and think carefully about the next move,” he says.

“The first four years were hectic but the company has a very good, solid financial position at the moment. I feel very comfortable with the structure we have and I think during the course of next year and the years ahead we will need to fine tune and start reviewing all the things we have done,” he adds.