Nodal Logistics and Custo Brasil Harvard Case Solution & Analysis

Nodal Logistics and Custo Brazil

Introduction:

The report presents a case about Nodal Logistics Corporation (NLC); a New York based Real Estate Investment Trust (REIT), which focuses on industrial warehousing and logistics property acquisition in high density markets. The company is considering to diversify its operations into new emerging markets so the board decided to invest in Brazil. The potential investment requires to execute the contract in Brazilian Real; which gives rise to substantial exchange risk for Nodal Logistics.

Problem Statement

The management of Nodal Logistics is concerned about the adverse impact of exchange rate fluctuations on the cash flows of the company and is also considering to adopt an appropriate hedging instrument in order to reduce risk to an acceptable level.

Case Analysis

The report contains a detailed analysis of the opportunities that can be achieved from entering into a new emerging market. Further, it also includes the risks Nodal Logistics may face in entering into new market and the strategies which Nodal Logistics may adopt in order to reduce risk to an acceptable level. The major areas covered include the following:

  • Interest of Nodal Logistics in entering into Brazilian market
  • Special challenges Nodal Logistics may face in entering into new market
  • Currency risks associated with Brazilian project
  • Methods that should be considered
  • Expected proceeds from various hedging alternatives
  • Comparison and recommendation

Interest of Nodal Logistics in entering into Brazilian market

Nodal Logistics is interested in entering into new market because the company had already enjoyed successful investments around the world. This made it possible to diversify its operations over 15 countries, with a portfolio of around 140 million square feet and also serve around 3,000 customers worldwide. Hence, the company also considers to invest in Brazilian market because it will give an additional opportunity to Nodal Logistics to enter into new emerging market for the first time and to enjoy the same steady growth as it enjoyed previously.

Further, Brazil is one of the major trade and commercial hub which provides an opportunity to Nodal Logistics to enter into the largest market; which will benefit it to diversify its operations and enjoy long-term competitive position globally.

Special challenges Nodal Logistics might face in entering into new market

Investment in new emerging market would enable Nodal Logistics to face financial and operational risks. Financial risk arise from exchange rate fluctuations, the company was previously managing its foreign currency risk by dominating all industrial leases in US Dollars but this is not the case for such an investment in Brazil where Nodal Logistics is required under Brazilian Law to execute all real estate contracts under Brazilian Real, so organization will continually be  subjected to face financial exposure risk of exchange rate fluctuations. This may give rise to exchange gain/ exchange loss, which can substantially threaten the cash flows of the organization.

Nodal Logistics is also subjected to some operational risks that the company might face difficulty in managing its operations. Further, the rents earned over the years in foreign currency like Brazilian Real had to be converted back to US Dollars each and every period to meet REIT requirements for profit distribution, which might raise difficulty for the company in remitting funds to United States because foreign companies investing in Brazil are required to register themselves with the Central Bank in order to apply for the right to remit funds to a Non-Brazilian country in the form of dividends and shares.

Currency risks associated with Brazilian project

Foreign transactions raises the risk of exchange gain or exchange loss which can adversely threaten the cash flows of the organization. Nodal Logistcis might face two types of currency risks; first one in the execution of initial contract and the second one is the remittance of returns over the life of project. The project requires an out flow of $45 million, which is a huge outflow and any adverse changes in exchange rate fluctuations can significantly impact the cash flows of the company, so it would be beneficial for the company to adopt an appropriate hedging technique in order to reduce the risk to an acceptable level. Further, the project is expected to generate regular cash flows into local currency, which can be converted in US Dollars for its distribution to shareholders later on. So, it indicates that the organization shall continually adopt appropriate hedging techniques to manage its currency risk.

The Brazilian Real has been appreciating against US Dollars for more than 5 years (2002-2007), which is an excellent sign, especially for our series of cash flows which are expected to be generated over time. If the Real enjoyed the same steady growth against US Dollars in future years also, it will increase the overall cash flows of the company and more funds will be........................

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Just when John Penman thought handling Logistics Corporation (NLC or "treatment") was ready to move to Brazil, a new obstacle has been thrown in his path. Only a few days ago, December 11, 2007, he finally got permission from the executive board of the American companies to invest $ 45 million in 800,000 square feet of industrial real estate projects in S Paulo, Brazil. But that was before the phone yesterday from the legal department. Lawyers to appeal has received confirmation from its S-Paulo-based associate in Brazilian law, commercial real estate contracts must be denominated in Brazilian reais. One of the main operating practices treatment that were so important to her international success was to write all of the industrial real estate agreements in U.S. dollars. This created a serious problem, since most industrial lease ranged from as short as five years, more than 12, and it was a long time exposed to the Brazilian currency. John now had to delve into the numerous strategies and derivatives, which could allow the company to manage foreign exchange risk, otherwise, the deal was dead.
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by Michael Moffett Source: Thunderbird School of Global Management 11 pages. Publication Date: November 15, 2008. Prod. #: TB0049-PDF-ENG

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