- Brazil’s trade titan
Banco do Brasil, the largest financial institution in Brazil, has seen its portfolio for export prepayments more than double to US$652mn in the first eight months of 2006, compared to the same period in 2005. Repayment terms are up and pricing has fallen accordingly. GTR talks to Augusto Brana, director of international business, and Admilson Monteiro Garcia, executive manager, at Banco do Brasil.
GTR: What’s the reason for the growth
AB: It has a little to do with the competence of our bank and something to do with the market too. I’m citing these two because Banco do Brasil had very fast growth, much faster than the others I believe.
We have been taking some measures that are making our trade finance operations, among them the export prepayment business, evolve. That is, we have been more aggressive chasing companies and offering financing opportunities, and we have even made a good and unprecedented deal with the fruit farming sector.
We are reaching out to sectors that we were not catering to before. Besides, Banco do Brasil is an institution that basically everyone is a client of in Brazil. So there is this part concerning the bank itself, with greater focus, greater aggressiveness in a good sense, in regard to trade finance and foreign trade transactions, leading us to increase our trade finance figures, not only export prepayment, but also other financing lines aimed at exports and imports.
Concerning the market, Brazilian companies are going more and more international. Today, bigger companies like CVRD, Petrobras and Votorantim are investment grade, and there are many others already behaving as such. The quality of Brazilian-made products is very high. Companies like Embraer, Perdigo, Sadia, Marcopolo, Weg – all of them have an international presence, even with facilities abroad.
It’s easy to concede financing to these big companies, in other words, they have countless banks chasing them. But something we have also been taking aim at, and maybe that’s why our figures have posted so much growth, are medium-sized companies. All bigger companies have done longer-term export prepayment transactions and now we are focusing on smaller companies, not small but smaller than those mega companies.
I’m talking about the middle market. So we also focus on these companies, we have become more aggressive in attracting them, evidently increasing the focus and the array of companies that we are catering to.
I would say that these are the reasons for the enormous growth in export prepayment.
Also against a backdrop of Brazil doing well in terms of the economy, where spreads are very tight. So theoretically no one makes a lot of money anymore; you don’t have wide margins because spreads are very tight. Still, banks are very liquid and companies are exporting.
And this is another answer to you question. Given that spreads are so tight and banks are very liquid, you have to turn a profit by handling massive volumes. So there is a very abundant supply of resources and companies are taking them. And banks need to create volume in order to gain a bit more.
GTR: Brazil’s risk has been falling in the last few years. What role does this play
AB: Of all emerging markets,Brazil is the most liquid one. It is certainly a county that has pleased investors in the last few years. So with the falling risk, that certainly clears the way for investors to become interested inBrazil.
And one can see that banks that leftBrazil are coming back and some that had never worked here are coming to work directly with Brazilian companies, making supply even bigger and prompting rates to fall even more.
So it all has to do withBrazil’s risk profile, which has diminished quite a lot. Four years ago we also had presidential elections and risk reached 2,000 points and the dollar hit four reals [Today Brazil’s risk is just above 200 points and the dollar sells for 2.15 reals]. And we have had just elections this year and everything is alright. Inflation is tame, there was a political dispute but the economic part is undisputed. No one believed any changes to the economic policy would occur, which was quite acceptable to the international community, regardless of the winning candidate.
GTR: What are the main sectors benefiting from export prepayment and what are the financing terms
AB: To bigger companies, it’s been as much as seven, eight years. Smaller companies have been entitled to up to five years, between three and five years. So you have transactions from one to eight years. Beyond eight years it is very uncommon.
And we have been working with sectors such as paper and pulp, mining, steel. There is no big concentration in any sector. This is very ample; there are cases from every sector borrowing prepayment of export lines.
GTR: How much have terms increased in the last two years
AB: Some time ago the big companies would do transactions with up to five years, now we are reaching eight, as I say. Smaller companies would not go beyond three years, now we are getting to five years. So in the last three years, certainly it is visible not only the growth in operations, like I have already said, but also the increment in terms.
So the perspective is that it will further expand. Today we already have a great number of deals with seven and eight-year terms in the market.
GTR: What guarantees are demanded for these transactions
AB: This varies quite a bit, depending on the client. I would say the export receivables themselves. To some clients it’s a minimum guarantee, sometimes a bit more. There are the receivables, plants, machinery, letters of credit from other institutions, a standby from other institutions.
These types of determining factors, I mean guarantees, in bank transactions are something much too complicated to talk about because there is not one profile of guarantee for each type of transaction. It depends greatly on the client.
GTR: Elaborate on the current status of short-term lines ACC and ACE.
AB: Just so you can have an idea, in 2006 we are having an average of new transactions amounting to over US$1bn monthly. We are in October and had a bit more than US$9bn until September. This means new transactions, leading us to believe that we will reach the end of the year with something in the range of US$12bn in new financings, in new ACC transactions. (ACC and ACE, or adiantamento de contrato de cambio and adiantamento sobre cambiais entregues are, respectively, pre-shipment and post-shipment loans with up to 360-day terms.).
GTR: So this is very much in line with last year’s standings.
AB: Yes, we are keeping last year’s level, probably with a small growth, but let’s talk about maintaining the level of last year. This means this is an extremely popular line. Last year we did US$11.8bn; this year we expect it to be about US$12bn.
GTR: Does this mean there was restrained demand for long-term financing, but not for short-term credit
AB: In the last few years we have been increasing the number of transactions. This means greater pulverisation – we are catering to more clients. One could have made that US$12bn with the 20 biggest companies in the country. But if you increased the number of transactions, that is because in fact you served many more clients.
This means more companies are exporting and more companies are having access to financing. And we continue with roughly a 28% share in the export-related foreign exchange market. We are the leading bank inBrazil in this market.
GTR: What are the main differences between the prepayment and the government-funded Proex
AMG: Proex has two modalities, one of which with funding from the national treasury. Prepayment is always funded by the institution that is funding that operation. It’s always an external funding, an external issuance, that will enter the country to become working capital for these companies.
And given that it is international funding repaid with export performance, it is a cheaper and more competitive funding because there is no transfer risk when liquidating the operations. Besides, interest payments have a 15% tax exemption.
(Proex, or Programa de Financiamento s Exportaes, is a programme funded by the Brazilian government to finance Brazilian exports of goods and services in conditions similar to those available in the international market. Banco do Brasil is the only bank handling Proex and support ranges from 60 days to 10 years.)
GTR: So the prepayment is cheaper because of the export receivables
AMG: Prepayment is a type of funding that has quite a competitive cost because, among other reasons, there is no transfer risk. The resources enter the country and are given in reals to the exporter. At liquidation, the credit is received abroad and given back to the banker that funded the transaction. That is not a credit originated in reals that will be converted into dollars only to be sent abroad. The dollars stemming from the exported merchandise will not enterBrazil, but will be credited in an account outsideBrazil.
GTR: We recently talked to Aracruz, Latin America’s largest pulp exporter, and the company’s CFO claimed the company last pledged exports in 2003. Is this the norm for investment grade companies
AMG: Actually there is no pledge on exports. What does exist is an assessment of those companies’s performance, because the export prepayment is nothing more than anticipating resources to an exporter based on an expectation of future exports.
And this expectation is getting longer. But not necessarily does a pledge exist. It’s all based on performance expectation.
GTR: As companies demand longer-term support, does this mean less short-term financing
AMG: No, because these are different necessities. We have the same company taking short-term and long-term resources. It all depends on the company’s cashflow management.
Companies’s short-term needs remain and they take extremely cheap resources, the ACC and ACE, and they seek to stretch their debt. So I would say these are complementary products, not competing products.
GTR: Do you see any difficulties from exporters due to Brazil’s appreciating currency
AMG: In respect to prepayment operations, we haven’t seen any exporters with difficulty to honour payments. The non-payment ratio is close to zero and we haven’t noticed any repayment problems.
GTR: How about import financing
AMG: Similarly to what is happening to exports, there’s an abundance of funding, so market liquidity is so great that we are expanding the lines more and more, stretching terms and cheapening costs.
As for import financing, we have registered growth also in comparison with the previous year. I can anticipate that until August of this year we have done more import financing transactions than in the whole of 2005.
In other words, we’re following the same pattern of export financing given the enormous liquidity in the market.
GTR: Does the bank handle exports to riskier countries like Bolivia
AMG: Credit policies are defined by a specific directorate, a vice-presidency within the bank that assess not only the client’s risk but also a risk analysis of the entire segment and of the many countries where our clients operate. So I’d say that the final product is a combination of these risks: client, segment and country.
GTR: By how much has the cost of prepayment facilities fallen
AMG: In fact, due to the fall in prices, one of the consequences is the stretching of the terms, so you can have a better spread with longer terms. Today, for an investment grade company we are charging spreads of 0.45% to 0.8% over Libor. A non-investment grade corporate is paying between 0.7% and 2.6%. And with smaller companies in the middle market and retail segments, spreads can reach as much as 5.75% over Libor.