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Enron Mail |
Don Black has suggested we get you in the loop on the below issues we are
seeking answers on. We have some pending financial transactions that we would like to work through all the Brazilian mechanics before proceeding. Your primary contact down here for this issue will be Maria Ines Granado. Please provide us with your comments as soon as possible so that we do not encounter a transactional conflict. Gustavo thank you for all your work to date we will keep you briefed to make sure we have your input. Please follow up on the Tozzini issue we discussed to make a final decision on their input. Thanks MFG ---------------------- Forwarded by Michael Guerriero/ENRON_DEVELOPMENT on 08/20/99 09:40 AM --------------------------- Enron International From: Gustavo Junqueira 08/17/99 06:19 PM To: afac@tfts.tozzini.com.br cc: Andrea Bertone/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Michael Guerriero/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, D'Arcy Carroll/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Marcelo Parodi/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Scott Porter/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Maria Ines Granado/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, David S Reinfeld/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT Subject: Brazilian Regulations for Swaps & Prepays Antonio Felix, As Enron is finding several opportunities involving financial derivatives in Brazil, we would like to get from Tozzini Freire Law Firm a summarized but concise read on the "cans and cannots" of these type of transactions in Brazil. Here is my understanding of the regulations from the memo you have already sent to us regarding swaps and prepays as well as a list of the most common examples of deals that Enron would be encountering in the marketplace. I would appreciate if you could comment on what is written here and also add further information so Enron can have some sort of menu of deals of this nature that can be pursued. I would like to ask you to add your comment in this same message to make the review process a little easier. Thank you inadvance for your attention. Swaps (Pulp & Paper, Petrochem, Power) OTC Swaps The Central Bank regulates swap transactions involving local financial institutions acting either as dealers for their own account or as intermediaries to the contracting parties. When the financial institutions act as intermediaries, the agreements are in fact private agreements negotiated by two non-financial companies, but become subject to the requirements and regulations normally applicable to swaps involving financial institutions. According to regulations currently in force, such swaps can relate to exchange rates, interest rates, gold and price indices. All of the swap agreements involving financial institutions must be registered with CETIP or with another custody and clearing system authorized by the Central Bank or the CVM (Brazilian SEC). As a matter of practice, the agreements used by the banks that participate in the swap market do not follow a standard form, since normally each bank has a particular sample form with which it feels more comfortable. Derivatives In addition to exchange-traded derivatives and OTC swaps involving financial institutions, there is no legal impediment, in principle, to derivatives transactions being privately negotiated and entered into between two interested parties. As a general rule in Brazil, as long as no specific prohibition is found in the law, parties are free to negotiate agreements that best suit their interests. International Hedge Central Bank regulations authorize that Brazilian companies enter into transactions abroad, either in exchanges or having a financial institution as their counterpart, to hedge against the fluctuation of interest rates, exchange rates or commodity prices in the international markets. Such hedge transactions must refer to payments in foreign currency scheduled to be made by or to the Brazilian company in respect of commercial or financial rights or obligations, or to payments in local currency arising out of certain financial obligations subject to the variation of exchange rates and payments relating to imports, exports or local transactions involving commodities priced according to their valuation in foreign exchanges. The commercial market exchange rates are applicable to foreign exchange agreements referring to remittances of currency in connection with hedge transactions. When the underlying obligation/right is registered with the Central Bank, the corresponding hedge transaction must be informed to the Central Bank within 10 days of its execution. When there is no registration with the Central Bank, the banks executing the foreign exchange agreements relating to the hedge transaction must verify the existence of the obligation/right being hedged. Examples Commodity swap between two Brazilian companies: As per what has been said above, there is nothing that precludes Enron Brazil of entering into a swap with another Brazilian company regarding any commodity traded by Enron (Pulp, Paper, Petrochem products, Power, Gas). Enron does not need to be a financial institutions to provide swaps transactions. On the other hand, I am not sure yet on the following points: (1) Does such swap agreement should be registered with CETIP or any other clearing system to be valid under Brazilian regulations? (2) What are the taxes involved in a swap? Commodity swap between a Brazilian company and an offshore company: This kind of deal seems to be also available in the Brazilian market and the only difference from example 1 would be the fact that it must be registered with the Central Bank and it would involved transfer of foreign currency. Commodity swap between two offshore companies but involving Brazilian exports: I am not sure if Brazilian regulations would have anything to do with a transaction like this one. I would assume that a Brazilian exporter would sell to their offshore subsidiary and such subsidiary would sell to their end customer. Enron would step in and offer a swap agreement for the offshore subsidiary of the Brazilian company therefore Enron would not have any involvement with Brazilian regulations because it would not be dealing with Brazil. Prepays (Pulp & Paper, Petrochem, Power) The regulations currently in force governing export prepayments, especially Central Bank of Brazil's Carta-Circular 2624, of February 14, 1996, establish that all repayments of principal under such transactions must necessarily be made by means of shipments of the relevant exported goods. Carta-Circular 2624 allows cash remittances abroad only in regard to payments of interest under the facility. Therefore, it is not possible to structure a transaction where the repayment of principal will be made only in cash or where the borrower has the ability to choose between paying cash or exporting the goods. A transaction that involves structuring a direct loan to the Brazilian company where the value of the principal of which would be tied to the price of the relevant commodity is very difficult to be approved. Under a direct loan registered with the Central Bank the borrower may remit all due amounts of principal and interest in accordance with the schedule of payments attached to the certificate of registration. The problem with such alternative is that, although there are no express regulations preventing it to do so, the Central Bank will most probably not issue a prior authorization for such type of loan, as it only normally issues authorizations for normal loans where the principal is a fixed amount and the interest rate is either a fixed rate or a floating rate (normally based on LIBOR or US Treasury). It should also be noted that generally speaking all interest payments under such an agreement are subject to withholding tax at the rate of 15% p.a. CC 5 Account A possible alternative way to structure a prepay would be by using a non-registered loan with the Central Bank. Under such alternative, the funds disbursed by Enron under the loan would be remitted to Brazil through an international transfer of Brazilian currency, as allowed by Circular 2677 of the Central Bank of Brazil. The international transfer of Brazilian currency ("International Transfer") is a system which uses a non-resident current account in Brazil and the Brazilian interbank foreign exchange market to effect remittances of funds to and from Brazil. Under such system, a lender that wishes to disburse funds to a Brazilian borrower makes a foreign currency deposit with a bank located outside of Brazil ("offshore bank") and instructs the offshore bank to deliver such dollars to a Brazilian bank in exchange for Brazilian currency. Such Brazilian currency is then deposited in a non-resident account held by the offshore bank in Brazil and thereafter transferred to the borrower. The repayments follow the inverse procedure, i.e. the borrower deposits the amount in a non-resident account of an offshore bank and instructs it to exchange the funds into foreign currency and deliver them to the lender abroad. The main differences between the registered loans and the non-registered loans are that the non-registered loans are not subject to prior approval by the Central Bank of Brazil (and therefore not subject to scrutiny as to their minimum tenors and applicable interest rates) and the applicable foreign exchange rate to non-registered loans is the floating rate (as opposed to the commercial rate of exchange). All transfers of funds to Brazil as International Transfers are subject to a Financial Transactions Tax ("IOF") at the rate of 2% on the amount transferred, plus a bank fee that normally ranges from 0.4% to 0.6% of such amount. Any interest payments under a non-registered loan are subject to withholding tax at the rate of 15% (or 25% if the lender is located in a tax-haven jurisdiction). I don't think this type of transaction is the best way to circumvent some of the Brazilian regulations regarding prepayment given the bad press that deals via the CC 5 Account mechanism would bring to Enron but I have it addressed just in case someone does not share the same opinion. Examples Financial prepay between two Brazilian companies Not allowed unless the company providing the prepay qualifies as a financial institution as per Brazilian law. Since it will not be the case in Enron's cases, we should not focus in these kind of transactions. Financial prepay between a Brazilian company and an offshore company As it has been mentioned before it is allowed as long as Enron can structure the prepay in way where there is a pre-established amortization schedule for principal and interest. It is very hard to structure a prepay with specific split between principal and interest because the objective of the prepay is to lock on a certain volume of a product and not on a specific price. Therefore, if Enron prepays for a specific product on a floating basis the attached value of that commodity can go up or down as the market fluctuates as well as the total value associate to the deal. Such value can be either principal or interest and it is impossible to determine what it will be. Financial prepay between two offshore companies but one being a subsidiary of a Brazilian entity I think there is no restrictions in this case given the whole deal will be closed offshore and the Brazilian authorities are not going to be involved. It will most likely be a deal involving three parties: a company in Brazil, its offshore subsidiary and Enron. Physical prepay between two Brazilian companies No restrictions. Physical prepay between a Brazilian company and an offshore company No restrictions as long as there is physical deliveries. Physical prepay between two offshore companies but involving Brazilian exports No restrictions. It would also involve three parties: a company in Brazil, its offshore subsidiary and Enron. Thanks, Gustavo
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