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The credit crisis is thrusting Brazilian trade banks further into the international market. Long-term financing is drying up. Luis Waldmann caught up with some of them in So Paulo recently.

 

The turmoil hurting lenders globally is sending Brazilian banks scouring the credit market for long-dated loans, while financing with shorter maturities is still available at higher costs. For exporters, a lower Libor rate makes trade financing cheaper than other dollar loans available in Brazil, and some importers are showing renewed interest in export credit agency (ECA) support.

“Short-term funding exists but it is more expensive, whereas long-term funding is scarce,” says Marlene Millan, director of the international department in So Paulo at Bradesco, the second largest non-state bank in Brazil. Brazilian banks borrow internationally and then lend to local exporters and importers in dollars.

The over-Libor cost of a 180-day loan rose to 30 basis point in March 2008 for Bradesco, from 10bp in July 2007 due to tighter dollar liquidity worldwide, says Millan.

One way for Bradesco to keep offering long-term financing to Brazilian exporters is by securitising payment orders from Japan into Brazil. As a result, in March 2008 Bradesco borrowed US$500mn due in six years from Bank of Tokyo-Mitsubishi UFJ at 60bp over three-month Libor. Another US$400mn maturing in seven years was obtained in December 2007.


Crunch time

For Banco Fibra, pre-export financings borrowed three years ago are being rolled over with one-year tenors, says Priscilla Lopez, head of correspondent banking at Banco Fibra in So Paulo. The bank’s trade finance portfolio was US$432mn in December 2007, from US$235mn one year before. About 90% of that is due in up to one year.

So Paulo-based Banco Pine has seen its trade finance borrowing costs rise since late 2007 due to the restrictive lending environment in developed economies, says Mrcia Pinheiro, senior manager in the international sector at Banco Pine.

Pinheiro says that basic short-term Inter-American Development Bank (IADB) trade financing rose to 1.20% over Libor in March 2008, from 0.75% in November 2007. The bank’s trade finance portfolio equals US$180mn.

In March 2008, Banco Pine borrowed US$27mn from Deutsche Bank and Cobank of the US due in three years, in a deal guaranteed by the Commodity Credit Corporation, an entity under the US Department of Agriculture.

Since late 2006, international banks have lent US$140mn to Banco Pine, including DEG in Germany and Holland’s FMO. The Brazilian bank caters to exporters with revenues over US$150mn a year.

Bradesco’s export portfolio totalled US$9.4bn in December 2007, with loans bearing one-year maturities or less making up US$4bn. Longer-term credit, which amounts to pre-export financing and real-denominated BNDES Exim and notas de crdito exporta (NCEs), equalled US$5.4bn.

The substantial fall seen in Libor still renders dollar-linked credit a good alternative for Brazilian exporters and importers, Millan says. One-year Libor fell to 2.52% in March, compared with 4.90% in September 2007.

 


Positive outlook

Good price perspectives for most commodities across 2008 will boost trade financing in Brazil, says Renato Digieri, head of structured trade finance at Banco Ita BBA in So Paulo. High prices encourage exporters and importers to borrow trade financing to expand their productions, Digieri explains.

Moreover, internationally-funded trade-related lending is cheaper than dollar loans available in Brazil, adding to the lure of trade finance, Digieri comments. However, the credit crunch in developed markets has driven up over-Libor costs, ie, the borrowing costs of Brazilian banks plus the spreads they charge from local exporters and importers, he says.

A recently-enacted tax on loans, of which trade finance is exempt, contributes to interest in short-term export and import finance in Brazil, Digieri concludes.

 


ECA comeback

ECAs are the number one alternative for Brazilian importers of equipment grappling with scarce long-term financing, says Richard Bird, head of correspondent banking and structured finance at Unibanco in So Paulo.

Unibanco is quoting international banks for a multi sourcing scheme that will allow the So Paulo-based lender to borrow ECA funds quickly through them, Bird reveals. Under a multi-sourcing arrangement, ECA funds can be drawn immediately, though agreements with individual agencies may take up to six months, Bird comments.

If anything, a restrictive market makes ECAs a good choice for importers, although their fees are still high, Millan at Bradesco comments. ECAs base their costs on OECD ratings. Brazil is graded 3, the same as India and Russia. Canada is rated 0 and Cuba is 7.

However, pre-export financing is faster and easier to obtain than ECA support, contends Isac Zagury, chief financial officer at Brazilian pulp and paper exporter Aracruz Celulose.

Zagury assessed ECAs last year but deemed their costs too expensive. Aracruz exported roughly US$1.8bn in 2007, and 70% of its debts amounts to pre-export financing due in five or six years, leaving the company unexposed to woes in the credit market, Zagury comments.

 


Rising investments

Vision Brazil Investments, a firm in So Paulo with a US$1bn agribusiness portfolio, saw foreign investments rise since the start of the US sub-prime crisis, says Amaury Fonseca Junior, a founding partner of Vision.

Vision raised US$280mn in April 2008 to invest in ethanol and cogeneration, ie, the generation of energy using bagasse, previously a leftover from sugarcane processing. One third of the profit of newer sugar and ethanol mills come from cogeneration, he says.

Vision’s loans to the sugar and ethanol sector mature in three years, while credit to soy, corn and cotton are due in up to one year. Cattle risk is offset on the Bolsa de Mercadorias & Futuros, So Paulo’s futures exchange, whereas sugar is covered on the New York Board of Trade. Risk associated with soy, corn and cotton is defused with trading companies.

 


Recovery is coming

Things will start to improve in the credit market in the second half of 2008, expects Zagury at Aracruz. He adds that the availability of credit to Brazilians has increased after iron ore miner Vale called off the purchase of Swiss company Xstrata, freeing up commitments that banks had made to this deal. The acquisition had been valued at up to US$90bn.

As for Bradesco, it is betting on import finance to boost its portfolio as an expanding economy spurs companies to invest in their plants, Millan says. The bank’s import finance portfolio amounted to US$1.5bn in December 2007, mostly short term. Brazil’s US$1.3tn gross domestic product is expected to rise 4.75% in 2008 and 3.65% in 2009, according to the International Monetary Fund.