Over the last couple of years, Brazil's economic success as one of the world's 25 largest exporters and importers has increased the importance of the trade finance market in the country.
This growth has relied heavily on exports destined for China. Ten years ago, the US was the biggest trade partner for Brazil but now China has surpassed the US as the main trade partner. In 2017, Brazil exported $219B and imported $140B, resulting in a positive trade balance of $78.3B. Agricultural products, such as soybeans, sugar, iron ores and poultry have dominated the export market of Brazil.
The traditional way that companies in Brazil have financed exports has been through "Pre-Export Finance" loans. These transactions rely on the risk of the buyers and not necessarily of the borrower. Lenders discount the export amount based on buyers' risk and give the money to the exporter before they export. Once the items are exported the funds go back to the bank to pay the loan through a collection account - an escrow. Collateral agents and escrow agents are needed for these types of transactions between the exporters, buyers and the banks as they require controls of the buyers´ list – the "eligible buyers" and the escrow account where payments are credited. As Brazilian tax legislation benefits exporters, this structure has been widely used.
Even at the height of the Brazilian economic crisis, the trade finance market has always been strong and steady. Exports like soybeans, sugar and poultry, along with other agribusiness, have consistently helped maintain a steady flow of finance into the country.
Challenges for financing in Brazil
Businesses are now facing some challenges when looking for financing. There are fewer international commercial banks offering trade finance and credit facilities have offered much shorter tenors than exporters' needs. For example, in the past, tenors were long enough to allow a farmer to finance two cycles of their crop with two export cycles. This would put the investment back into the production of the crop for a longer time period. Banks now offer shorter tenors leading to less sustained production because of the higher interest rates along with the increased risks for the lenders. Even though the market has demonstrated that it is looking for more collateral to approve new loans, an independent agent, such as TMF Group should be there to help "manage" the deal. This can give confidence to the lenders that the flow of payments, the calculations and paperwork, are all being done properly to protect the transaction.
Foreign fund opportunities
The change in the dynamics of the banks in Brazil and because Brazilian investment funds are not allowed to lend to companies, brings an opportunity for foreign funds to assume a more predominant position to lend to Brazil exporters. Foreign funds should look at the trade finance market in Brazil for possible success. In these situations, it is even more important for funds to join with a local partner in Brazil to understand the intricacies of the market and can guide them through the process.
We can help
With increasing trade finance opportunities in Brazil, our expert independent service providers can provide independent agents, both for escrow and collateral services in trade finance transactions. TMF Brazil offers services for lenders and companies to help manage and navigate the challenges that come with entering a new market. We can help. Talk to us.
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