Until recently, US banks commonly hit roadblocks when financing deals for government-owned Brazilian companies importing US goods and services. Whether it was an airport looking to import surveillance cameras or a state-owned university trying to buy computers, US banks would scramble to find Brazilian guarantees simply because of the US Export-Import (Ex-Im) Bank’s unwillingness to support such transactions.
“We ran into problems with certain (trade finance) deals because we were not able to provide financing without a (US- government) guarantee,” said Charlene McKoin, vice president, structured trade finance at Bank of America. “Although we were able to obtain a Ministry of Finance guarantee (from Brazil), this was not acceptable to Ex-Im Bank. We ended up going to Banco do Brasil and asking them to guarantee…but they can’t guarantee everything.”
To the relief of bankers like McKoin, that dilemma was resolved late last year, when Ex-Im announced that it would provide short-, medium-, and long-term financing in Brazil’s public sector for the first time in over a decade. The bank, which already supports private sector financing for US exports to Brazilian corporations and banks, will now back US companies selling goods to government entities and private sector projects guaranteed by the state.
What this means, says Allegra Biery, vice president of trade finance at The Northern Trust Company, is that both US banks and exporters focused on Brazil will now be exposed to a whole new world of financing. “It gives us more flexibility to do deals that would have been uncompetitive or undoable in the past,” added McKoin.
The decision followed Ex-Im Chairman and President James Harmon’s visit to Brazil in October, when he met with Brazilian President Fernando Henrique Cardoso and other top officials to discuss ways to boost commercial exchange between the two countries.
In a separate, but equally important, decision, Ex-Im Bank in December also approved an increase of up to $1 billion in its credit limit for six Brazilian banks financing purchases of US goods and services, including Banco do Brasil, Banco Itau, Banco Frances e Brasileiro and Unibanco.
Both of Ex-Im’s decisions are in line with US efforts to support the economic recovery of Brazil, which last year received a $41.5 billion loan package from the International Monetary Fund and other multilaterals.
“In early October people were looking to see what sort of support the IMF was going to give Brazil,” said Biery. “After that, Mr. Harmon’s trip to Brazil and Ex-Im’s announcement that they would support US exports to Brazil by providing credit that was not otherwise available further demonstrated the US support for that market.”
But clearly the real beneficiaries will be US exporters. As Harmon told the press after Ex-Im’s announcement in December, the bank’s public sector programs in Brazil “could mean as much as an additional $2 billion in business for US companies.”
And while Brazil’s recession is expected to worsen in the year to come, optimists reckon that the $2 billion estimate may hit the mark, especially considering the strong trade flows between the two countries. According to Global Trade Information, export sales to Latin America made up 20% of total US exports in 1998, with about half going to Brazil. And in January of this year, Ex-Im bank letters of interest were up 100% in Latin America year-on-year.
Brazil is currently Ex-Im’s second largest market in Latin America after Mexico, with exposure totalling $3.6 billion. “And that’s only the private sector,” said an Ex-Im Bank spokesperson. “(Ex-Im Bank’s ) portfolio with most countries tends to be a third private, a third public, and a third mixed. So it’s safe to say that this could mean another $1 billion or $2 billion in business in Brazil.”
Although it has been more than 10 years since Ex-Im was involved with Brazil’s public sector-it ceased lending to the government in 1983 after a dispute over bad loans-the bank has done some selective deals with parastatals such as Embratel, Petrobras and Banco do Brasil. That’s because these companies generated decent cash flow and could almost always access financing either locally or through the international capital markets.
But now that Ex-Im has changed its policies, it is using a much wider financing net. “We don’t have to look to entities on an exceptional basis to do business,” said Ken Tinsley, head of the bank’s Latin American division. “We can consider all public sector entities for that matter.”
As of early January, however, Tinsley said that no companies had called to participate in the program, although he did say that he expects to handle a couple of deals from Brazil’s national development bank, BNDES. “That’s where most of the potential is,” he said. “There is ample opportunity to do business (with the BNDES)-business that I would imagine the US has been losing to foreign competitors.”
Still, many bankers are taking a wait-and-see approach before applauding. Those like Fernando Melo, vice president and manager of Latin American structured trade finance at First Union National Bank, are extremely supportive of Ex-Im’s initiative but question the logic of setting up a program in an environment where US banks are reducing their emerging market exposure.
The Ex-Im typically covers up to 85% of the purchase of US goods and services, while either the bank or the borrower is required to assume the remaining 15%-Brazilian risk that even Tinsley admits not all banks are willing to take on during such turbulent times.
“For the bigger names, Ex-Im will find US banks willing to cover the 15%,” said Bank of America’s McKoin. “But in this market, it’s not probable; it will be hard, especially now.
Most banks are trying to control their exposure in Brazil.”
The Flip Side
Supporters of the program, however, say that as US lenders and exporters become more risk adverse, demand for Ex-Im bank protection should logically increase. “No bank wants to take on additional Brazilian exposure,” said McKoin. “They would want Ex-Im bank to be involved and provide the guarantee or insurance.”
A US bank, nervous about medium- or long-term exposure to a Brazilian client, will typically use Ex-Im Bank guarantees to turn a one-year deal into one with a five-year tenor, shifting political and commercial risk away from Brazil and into the US, she added.
Such was the case with Ex-Im Bank’s approval in October of Northern Trust Company’s $14.2 million credit line to Brazilian company Correio Brazileinse, which will import printing equipment made by Illinois-based Goss Graphic Systems, Inc.
“While our current policies do not permit us to take direct five-year risk in Brazil, we are able to make that loan by structuring it with a US government guarantee-so our risk is shifted,” said Northern Trust’s Biery, who worked directly on the deal.
A Win-Win Situation
No matter from what angle you look at it, say supporters of the program, US banks, companies and governments will benefit from Ex-Im’s decision to open up financing in Brazil’s public sector. “It’s a win-win situation,” said Tinsley. “Brazil is one of the largest economies in the world, the largest by far in Latin America, and there’s a lot of business to be done there, business that we have been loosing to our foreign competitors.”