In times of reduced international liquidity and as international bond markets slow down, Brazil faces an increase of syndicated or bilateral financings in foreign currency. Interest rates are on a high in Brazil as in most emerging economies - this also stimulates loan markets. In addition, in an attempt to stimulate capital injection and contain US dollar appreciation in the country, taxation has been reduced and regulation has been softened on foreign funding transactions.
Pre-export financing has traditionally been an important source of funding for Brazilian exporters and is regaining popularity. Such financing of exports by the importer or any third person domiciled abroad (including financial institutions) occurs before the shipping of goods or the rendering of services. The financing may be connected to exports of the borrower, its controlling or controlled companies, or companies under common control.
Since December 2012, regulation issued by the National Monetary Council limited the maximum tenure of pre-export financing transactions to 5 years, and previously such tenure limitation was temporarily as short as 360 days, which significantly reduced the use of the structure by exporters. On July 3, 2013, the limitation has been fully removed.
In relation to pre-export financing, the exporter assumes the commercial debt, which will be repaid through the export of the products sold, without the need for further financial flow in the future. The agreed interest is payable from Brazil by the exporter in goods or services, or in cash.
If the financed goods are not shipped, the debt may be repaid in cash, converted into a direct investment or an ordinary foreign currency loan. In such cases, the transaction will be normally taxed. In normal circumstances when goods are actually exported, zero withholding income tax rate over interest is granted in order to stimulate Brazilian exports, which makes the pre-export financing attractive.
As in most types of financings, for purposes of sharing the credit risk among various participants pre-export financing may be extended by a syndicate of lenders.
It is good news for both borrowers and lenders that the tenure limitation for pre-export financing transactions has been removed from Brazilian regulation. This type of structure clearly plans an important role in the huge export and commodity-based economy. For importers and lenders looking at Brazilian assets and attractive interest rates while international bond markets are slow, it is also interesting that pre-export financing has returned to the fore.
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