Winter storms have brought so much snow to New Jersey this season that by mid-February 373,000 tons of salt had already been spread on state roadways. Compare that to the 258,000 tons used over all of last winter, and it’s clear that this season’s weather small-talk has big implications. Salt supplies in the Garden State are so low, in fact, that local officials are considering closing roadways and cutting bus routes unless they can get more quickly. But as it turns out, buying salt is not as easy as it sounds.
Cut to the sleepy coastal town of Searsport, Maine, where salt supply giant International Salt has a 40,000 ton surplus of road salt already sold to the state of New Jersey, just waiting for someone to pick it up and ship it back. In what appeared to be a turn of good fortune, the Anastasia S., a high capacity shipping vessel, had been sitting in Searsport since unloading its cargo in mid-January, and was soon to depart for Port Newark. But when New Jersey officials began the process of contracting the Anastasia S. to deliver the badly needed rock salt, they ran up against a 400 year-old road block.
The Jones Act, passed in 1920 in the wake of World War I, crystalized a practice dating back to the 1600’s requiring shipments from one US port to another to be delivered by ships with an American crew under an American flag. The Anastasia S., it turned out, was from the Marshall Islands. Transportation officials scrambled to apply for a waiver to the Jones Act, but by the time the application was submitted, the vessel had sailed. Desperate to move the salt from terminal to turnpike, New Jersey officials found an eligible barge with a 9,500 ton capacity and contracted it to make the 5 roundtrips required to deliver all of the sorely needed salt.
The problem of accessing resources is not unique to New Jersey, or even the industrialized world. In fact, this problem is compounded in emerging markets where economic, political and physical infrastructure is often ill-equipped to handle growth. One approach to this problem is promoting local economic development through access to small-scale financing. This practice, known as microfinance, was pioneered in 1976 by Muhammed Yunus through the Grameen Bank. At its inception, microfinance was a relatively small, salt of the earth industry that attracted primarily non-profit organizations. Today there are well more than 10,000 microlending institutions in the world, a growing number of which are tapping the international capital markets and receiving investments from US and European investors. While investor appetite for exposure to emerging markets continues to strengthen, the logistics of investing in emerging markets, much like buying salt in New Jersey, is not as easy it seems.
Take a fund with US investors interested in investing in a microfinance institution in Uganda. The fund can either invest in US dollars, in which case the microfinance institution must repay in US dollars and bear the risk of depreciation in the local currency, or it can invest in Ugandan shillings and have its investors bear the currency risk. This risk exists to some degree in all FX transactions, but with established currencies come established hedging mechanisms, and thin markets in emerging currencies means an even thinner market for hedging risk in those currencies. Several years ago, Chatham Financial decided to channel its experience helping mainstream financial markets hedge risk into helping navigate the risks inherent in emerging markets.
One key difference in managing emerging currency risk is that much of the currency in question simply cannot be hedged, or else doing so would be too expensive to make it viable. Recognizing the challenges of hedging emerging market currencies, Chatham’s approach has focused on managing foreign currency risk. For funds that invest in emerging markets, this means facilitating the loan process and executing hedges when possible, but more often Chatham’s role is in identifying and quantifying risk when hedging it is not an option. Chatham can help measure the amount of exposure a fund may be taking on, identify counterparty risk, determine how much a fund stands to lose by going unhedged, identify other possible alternatives to traditional hedging, and in instances where a fund plans to go completely unhedged, help select which currencies to invest in. Chatham also works with development finance institutions to invest in intermediary funds, or design and create new funds. All of this equates to market participants knowing where and how much risk they face in emerging markets, and what options and alternatives they have when it comes to hedging that risk.
Unfortunately for the state of New Jersey, Chatham doesn’t yet offer advisory on maritime law affecting the transportation of road salt along the Eastern seaboard. Hopefully the worst winter weather is behind us, along with the need for that 40,000 tons of quick melt, in which case Garden State Transportation officials may find themselves wishing they’d bought a rock salt option instead. But when it comes to investment in emerging markets, Chatham is here to help identify and mitigate risk to keep capital flowing to salt of the earth lenders in markets where the impact of this capital is felt most strongly. If you want to know more about Chatham and our work in emerging markets, or foreign currency risk in general, give us a call at 610.925.3120 or email us