Financing in foreign currency to Brazilian borrowers, whether syndicated or bilateral, is regaining popularity in times of reduced international liquidity and as international bond markets slow down. The increase in the Brazilian interest base rate from 7.25% in January 2013 to 8.5% in mid-July 2013, and its expected rise to 9.5% by the end of 2013, has also stimulated loan markets. In turn, the government recently reduced taxation and softened regulation on foreign funding transactions in an attempt to stimulate capital injection and contain US dollar appreciation.

So-called 'pre-export financing', traditionally an important source of funding for Brazilian exporters, has recently returned to the fore. 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.

In March 2012, during a period of US dollar depreciation, the Brazilian government - through a regulation issued by the National Monetary Council - limited the maximum tenure of pre-export financing transactions to 360 days, nearly impairing the use of the structure by exporters. However, in December 2012 this tenure limitation was extended to five years and on July 3 2013 it was 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.

In the event that the goods are not shipped, the credit arising from the original transaction may be repaid in cash, converted into a direct investment or a currency loan. However, in such cases, the creditor will not benefit from the zero withholding income tax rate over the interest amounts received.

Pre-export financing may be structured as a club deal, allowing for the division of the credit risk among various participants.

It is certainly good news that Brazilian exporters have regained the ability to obtain foreign funding from importers and foreign banks through pre-export financing, and that the tenure limitation has been removed. The country is a huge export and commodity-based economy and this type of structure clearly plays an important role. Pre-export financing may also be suitable for importers and lenders looking at Brazilian assets and attractive interest rates while international bond markets are slow.

For further information on this topic please contact Antonio Giglio at Demarest Advogados by telephone (+55 11 3356 1800), fax (+55 11 3356 1700) or email (agiglio@demarest.com.br).