Brazil: Export Finance Program – PROEX

At session of June 30, 2004, the National Monetary Council (CMN) decided to reshape de criteria applicable to the interest equalization system of the Brazilian Export Finance Program – PROEX, a matter dealt with by Resolution nº 3219, whose main provisions are commented on ahead.

Financing to the exportation of goods and services, including software¹, qualify to PROEX. The equalization consists of the benefit given by the National Treasury to the financer or refinancer, as the case may be, sufficient to make financial charges (interest rates) compatible with those found in the international market, it being payable with National Treasury Notes series I (NTN-I). The National Treasury’s finance agent for PROEX purpose is Banco do Brasil S.A. During the financing time, equalization is fixed and shall not exceed the rates set by the Brazilian Central Bank (Bacen).

As to exportation of aircrafts regional aviation, equalization of interest rate is to be established on a case-by-case basis depending on the characteristics of each transaction, due respect being given to the commercial interest reference rate – CIRR published by the Organization for Cooperation and Economic Development (OCDE) for the currency and timing of financing.

Equalization may be granted when: (a) financing is to be given to an importer for payment on-demand of a Brazilian exporter (exporter established in Brazil); and (b) refinancing is to be given to a Brazilian exporter. Agents accredited to give financing to importers and refinancing to exporters (finance agents) are the following: (i) Brazilian banks, including multi-service, commercial, investment and development banks resident or domiciled in the country and the Special Industrial Finance Agency – FINAME; and (ii) foreign banks, including credit or financial establishments located abroad, including Brazilian banks’ offshore branches, as well as the Andine Corporation of Development (ACD).

"Credit or finance establishment located abroad" is any establishment properly and legally organized under the laws of the country of location, in whose organization document a provision is found allowing the granting of credit as loan and subject to governmental control. Bacen may lay down restrictions to the participation of said establishments if it, at its sole discretion, finds inappropriate the credit granting procedures used in the country of origin. Credit instruments relating exports or, if applicable, the respective letter of credit may be freely traded abroad and such trading does not suspend or forfeit the right to equalization.

The principal of financing and refinancing transactions may be repaid semi-annually. That 6-month period will start counting as of the date of shipment or delivery of goods, invoice, commercial or finance agreement, or the date shipments are consolidated and/or services are invoiced. Those dates are referred to as events. Interest will accrue on the balance and will be payable every six months starting on the date of the respective event. The maximum time for consolidation of shipments and/or invoicing of services is 30 days. The date for consolidation will be the date of last event making up the consolidation. Transactions of less than 360 days are allowed provided that the principal and interest are repaid and paid, respectively, on the same date.

We will now discuss how the amounts owing for equalization will be calculated. The equalization timing will be the same as the timing for interest calculation purpose. In the event of financing to importer, for payment on demand of the exporter, or refinancing to the exporter, by a Brazilian bank, the timing shall start counting on the date of the credit to the exporter’s current account or of the respective event, whichever the latest. If the financing or refinancing is granted by a foreign bank, the timing may start counting on the date: (a) of settlement of exchange contracts for the partial export amount or of the respective event, whichever the latest; or (b) of liquidation of exchange contracts for the full export amount or of the respective event, whichever the latest, where said partial amount corresponds to 15% minimum of the export amount and provided that the equalization timing does not exceed the timing of financing granted under Resolution nº 2575 of the CMN². The calculation will be made with the debtor balance in each period, re-compounded based on the maximum equalizable timing, if applicable, using the 36,500 for division and factoring in the maximum grace period, for the principal, of six months as of the date of the respective event. In the event of transactions with tenor not exceeding 360 days, the equalization timing is established: (i) based on the maximum equalizable timing, up to the financing timing, for financing of up to 180 days; or (ii) re-compounded in two periods, the first one of 180 days, and the second for the balance of days, also based on the maximum equalizable timing and up to the timing of the financing, for financing with tenor of 180 days to 360 days. A Ministerial Act will set the maximum equalization rate for export and the maximum equalization timing. If the financing is denominated in currency other than the US dollar, the amounts will be converted into US$, at the parity on the first day of the first period of equalization, as published by Bacen.

The amounts calculated as above will be payable to the financing agents (Brazilian or foreign banks) granting financing or refinancing under NTN-I, which nominal value is restated at the FX variance. In the calculation of the FX variance, the selling rate for US at the end of the last business day of the free exchange rates market prior to the issuance and of the business day preceding the maturity, published by Bacen will be used. The issuance of NTN-I is in the form of book-entry of the respective credit rights in the name of the financing agents (Brazilian and foreign banks), in the Special System of Settlement and Custody (Selic), whereby redemptions occur. The financing agents not participating in the Selic should enter into an agreement with a participant thereof, which agreement must provide: (a) the custody service for receipt of NTN-I; (b) use of the "Bank Reserves" account for financial activities resulting from equalizations, as well as from instrument trading; (c) authorization to carry out exchange transactions and respective transfers to or from abroad resulting from the redemption or trading of NTN-I, if the non-Selic participant agent is located abroad; (d) legal representation services for the necessary arrangements with the National Treasury Finance Agent for PROEX.

The NTN-Is are issued after the financing agent or the bank appointed as the legal representative states to the National Treasury Finance Agent for PROEX that it is in possession of documents that prove that the requirements ahead have been met, in the event of financing to importer, for payment on demand of the exporter, or refinancing to the exporter, by a Brazilian bank. For financing or refinancing is granted by a Brazilian bank, the following evidence is necessary: (i) shipment of goods and, if applicable, invoicing of services; (ii) deposit to the exporter’s account of the amount in Brazilian reals equivalent to the amount financed; (iii) liquidation of the FX transaction for the non-financed portion, if any; and (iv) copy of the credit instruments connected with the exportation, properly accepted and endorsed or, as the case may be, the respective letter of credit, in the refinancing granted to exporters. In the case of financing or refinancing granted by foreign bank, the following evidence is necessary: (i) shipment of goods and, if applicable, invoicing of services; (ii) settlement of FX transactions for the full or partial amount of the exportation, as the case may be; and (iii) copy of the finance agreement entered into by the parties or credit instrument connected with the exportation, properly accepted and endorsed or, if applicable, of the respective letter of credit. Resolution nº 3219 explains it may be required in the future the presentation of other related to the credit granted in Brazil or abroad.

If exchange contracts relating the entry of the sum in foreign currency corresponding to part of the principal or of the Interest remain unsettled, the financing agent must return the amount received for the redeemed NTN-Is, pro rata to the amount in foreign currency that failed to enter the country, plus charges calculated at the Selic rate accruing since the NTN-I redemption date and the business date immediately preceding the date of the return. To that end, Bacen may charge via the Central Bank’s Entry System – SLB the amounts owing by the financing agent or, as the case may be, by the bank appointed as its legal representative.

As the Finance Agent of the National Treasury for PROEX, Banco do Brasil S.A. is tasked with: (a) receiving the goods, services and software export financing or refinancing qualification forms; (b) submitting to the Export Financing and Guarantee Committee – COFIG³, preliminarily, any request for exportation of services and aircrafts for domestic aviation; (c) presenting to the COFIG the approval forms for other export transactions which, after examination, have characteristics other than those required; (d) preparing accreditation letters for approved transactions; (e) submitting to COFIG the appeals; (f) following up on and controlling the financial and budgetary performance of the PROEX; and (g) laying down instructions about the operational processing of PROEX and giving exporters information required in the use of that Program. COFIG may set the authorities, delegate other duties and recommend procedures to Banco do Brasil S.A. When analyzing the qualification application forms forwarded to COFIG, the criteria used by this Committee will be the same as the financing conditions found in the international market.

The Ministry of Finance, Ministry of Development, Industry and Foreign Trade and the Bacen, within their respective authorities, will law down complementary rules that may be necessary in the implementation of PROEX.

Walter Douglas Stuber is an expert in Banking Law and Capital Markets, Foreign Investments, M & A, Commercial and Corporate Law, and partner of Stuber - Advogados Associados.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.