A little-used export financing wrap is set to boom as BNDES takes a step back from lending.
When Brazil rolled out its export guarantee program in 1979, the prospect of a wrap from a sub-investment grade sovereign, unsurprisingly, caught little interest from commercial lenders. For decades, the guarantee, which can cover up to 100% of the commercial and political risk of a financing, remained exclusively the province of state development bank BNDES.
Even when Brazil reached investment grade in 2008, the appeal of the guarantee – and efforts by Secretaria de Assuntos Internacionais (SAIN), which administers the program, to expand the offering – was muted by the global financial crisis.
"Honestly, very few people were aware of the structure. It has been handled for 35 years by people based in Brasilia that only talked to BNDES. It was not really a focus of the government to market these things," says Florence Shoshany, head of structured trade and export finance at Deutsche Bank in São Paulo.
That is quickly changing. Brazil's dreary economy – Goldman Sachs forecasts GDP will contract 1.1% this year, compared to 0.3% growth in the region as a whole – and a government bid to rein in BNDES' budget is setting the conditions for a new push.
"BNDES financing carries a much higher cost for the Brazilian government compared to a structure where the government issues a guarantee and private banks bear the costs of providing the financing," Shoshany says.
These latest factors have created an impetus for the government to brush off its export guarantee and make it more palatable to international banks. Already there is a pipeline of new transactions awaiting execution. SAIN, which is part of the finance ministry, garnered legislative backing for the guarantee program between 2012 and last year and is now applying renewed vigor to the export guarantee.
"The program has been improved recently and is looking for new players able to provide medium to long-term financing for the Brazilian exporters," says Marcelo Franco, chief executive officer of the Agência Brasileira Gestora de Fundos Garantidores e Garantias (ABGF). "Brazil needs growth, and exports mean international reserves, income and, primarily, jobs."
ABGF, which was created under the 2012 legislation, is the unit under SAIN that receives applications, assesses risk and pricing and monitors and manages transactions to full amortization. Once an application is processed, ABGF makes a recommendation to the Export Financing and Guarantee Committee (COFIG), which is comprised of members from up to seven different ministries. COFIG then decides on whether or not to sign a guarantee.
Getting the word out
SAIN hosted a meeting highlighting the guarantee to hundreds of exporters, international lenders and potential borrowers in São Paulo in April and also participated in a global export and agency finance event in March in Miami. "They're definitely in a marketing mood," Shoshany says, adding that the effort marks a shift in the agency. "There has been a change in the people within SAIN, where they've started to be much more active, coming to visit banks and coming to São Paulo."
Franco acknowledges the push to spread the news of the initiative.
"Communication has been important since the beginning of the official export credit insurance program, due to the lack of information amongst the Brazilian exporters, especially the smallest ones," Franco says. "Thus, whenever there is a new product or coverage to be rolled out, we let the clients know and get their feedback for system development."
The April rendezvous came a few weeks after SAIN sealed a guarantee for a $172 million loan that will provide 100% of the funding for renovations to the Kumasi Market in Ghana. Brazilian contractor Contracta Engenharia won the bid in 2014 for the project that will improve conditions at the largest open-air market in West Africa. It was the only tender participant able to provide financing for the entire project costs.
"There is fierce competition in the international arena and the export credit agencies are definitely important for Brazil's exports, not only when a crisis arises but also to provide stability and predictability to exporters," Franco notes.
SAIN is guaranteeing a $135 million, nine-year tranche of the financing for the Kumasi Market renovations. Deutsche Bank is the sole mandated lead arranger, lender, underwriter and agent for the deal, which also includes an uncovered, $37 million eight-year loan that will go toward the down payment to Contracta. The guarantee, which is issued in the form of a Seguro de Crédito à Exportação (SCE), marks the first time the guarantee has been used by a private commercial lender in the service sector. Prior to Kumasi, Natixis had been the only other commercial lender to utilize the guarantee, in two Embraer aircraft financings in 2011 and 2013.
"Once the first deal is closed by a bank, others tend to follow," says Graciema de Almeida, a senior attorney at Pinheiro Neto that represented Deutsche Bank in the Kumasi Market deal. "In that sense, Deutsche's role in discussing and adjusting that specific type of certificate at the time, together with the government, opened the doors to other banks looking at the SCE as an interesting mechanism."
Tailoring the solution
Executed export guarantees are backed by the Export Guarantee Fund (FGE), which holds roughly $31.2 billion in exposure mostly in infrastructure, but also in civil aircraft, power equipment, transportation and defense sectors in Angola, Argentina, Dominican Republic, the US, Venezuela and other countries. BNDES takes up 99% of that volume and while the program clearly has a strong record, the government is working with market players to make the guarantee relevant and practical to commercial lenders and their clients.
"The language is very outdated and because BNDES might not have been very demanding in that sense, it was not very marketable," says de Almeida. "The Brazilian government is interested in making this a viable guarantee to the banks to promote the financing. They are reviewing all of the draft certificates to make them more bankable."
Fashioning the guarantee and the related certificates to allow for loan syndication, making coverage available in the foreign currency of the financing, translating parts of the guarantee into English and clarifying concepts that are standard in international banking are all examples of the adjustments being made. The ABGF is working out technical agreements with several European export credit agencies and, like their Western peers, is also using country risk ratings issued annually by the Organization for Economical Cooperation, to offer more uniform pricing for borrowers.
While change is rarely easy, especially for large bureaucratic bodies, international lenders and their clients are not the only entities reaping benefits.
"There is the sense of becoming more professional, becoming more international and realizing that by bringing more international banks on board, we bring with us all of our expertise, rules of compliance, loyal customers… which they didn't really have beforehand," Shoshany says of SAIN and ABGF. "It's one of the interesting things about SAIN, they believe that by bringing in more international banks, we will be able to bring in new exporters and new buyers based on the relationships and portfolio that we have."
Increasing efficiency is another clear indicator of the advantages of the evolving program. The Kumasi market deal was sealed in roughly five months compared to the 18 to 24 month timeframe that is normally associated with an international transaction with BNDES.
Some skepticism remains over the potential success of expanding the guarantee offering to be more inclusive of commercial lenders.
Most prominently, the specter of a downgrade looms for the sovereign. Such an action would likely give borrowers some pause as to the practicality of a Brazilian government-backed guarantee. The recent arrests of mega contractor Odebrecht's top brass in June are the latest iteration of the Petrobras corruption scandals that effectively shut Brazilian issuers out of the financial markets late last year and for much of this year. That issue, combined with increasing government indebtedness, economic contraction and an erosion of the tax base, ware among the factors that have prompted ratings agencies, such as Fitch, to put the sovereign on a credit watch negative. Fitch held Brazil's long-term credit at BBB and put it on credit watch negative in April.
The program's indemnification process, while fairly straightforward, is also largely untested. In the case of a default under the financial transaction, the underlying export transaction or any situation that puts the lender at risk of recovering funds, the government can instruct the lenders on how to resolve the situation.
"They interfere in this moment of the transaction. This is not like an ordinary, standard letter of credit. It's important for the banks to have this in mind," says Rosine Kadamani, another attorney at Pinheiro Neto in São Paulo who worked on the Kumasi market deal.
FGE has an $8 billion net worth and its funding is included in the annual federal budget. The government is still obliged to cover indemnification, even if the FGE has insufficient funds. Indemnifications will be paid according to the loan's original installment schedule, though in the case of bankruptcy, the entire indemnification may be paid in a lump sum.
"There's a learning curve from the banks that are not very familiar with the SCE and want to understand what it means to have this coverage from the government," de Almeida notes.
Despite these hurdles, the agency is still encountering an eager audience. SAIN has reportedly approved three to four more transactions that are awaiting final execution and at least a handful of other deals are making their way through ABGF, LatinFinance understands. Roughly a dozen unidentified international lenders and several prospective exporters have approached Pinheiro Neto and Deutsche Bank with potential transactions that range from construction services and production, oil and gas and commodities, with crop production in particular. There is no local content requirement for the guarantee.
"The official program supports national exports towards any continent or country… This is a demand-driven process," Franco notes.
The guarantee can cover sovereign and private buyers of Brazilian goods and services or the loans to the exporters and suppliers themselves. "What we have in most transactions that we're looking at is a Brazilian exporter participating in a public solicitation, where they have to provide some alternatives to their buyer in terms of funding," Shoshany explains.
SAIN will guarantee up to 100% of a financing of a sovereign borrower and 95% of a financing of a private borrower. The financing must have a tenor of longer than two years. The guarantee is often used in tandem with the ProEx equalization program, wherein the Brazilian government will pay lenders a portion of interest costs on behalf of the borrower. SAIN can also facilitate competitive arrangements, such as delaying a borrower's down payment to a supplier by guaranteeing an early loan to the supplier that will allow it to get started on manufacturing and production.
Countries with political synergies and interests, such as Angola and other Latin American nations, are of particular interest to SAIN for the guarantee. The 13 members of the Associação Latino-Americana de Integração (ALADI), a regional organization that promotes and regulates reciprocal trade, also have some degree of favor, especially when prospective projects directly benefit Brazil.
"Obviously, we at Deutsche Bank, and other banks, are following the strengths of the Brazilian economy. Today everybody is focused on a couple of African countries where Brazil is quite strong and Latin America, because that's where Brazilian exporters are active," Shoshany says.