One of the widely used lines of credit for financing Brazilian agribusiness exports is “Export Prepayment” facilities, also called “Export Prepayment”.
Foreign banks, funds, trading companies and family offices lend tens of billions of dollars annually to finance Brazilian agro companies from the planting, storage and shipment of soft commodities such as soybeans, corn, cotton, coffee, tobacco, among others, and their by-products, to perform export contracts with offtakers around the world.
It is called the “triangle structure”, where the Brazilian borrower takes credit in foreign currency, produces the commodity, exports it to the buyer abroad who, after the export is completed, pays the foreign lender directly outside Brazil.
It is common for foreign lenders have several questions about the legal structure of Export Prepayment with local borrowers.
We list below 5 key points of this type of loan facility:
1. The Preliminary Document “Term Sheet”: After carrying out the risk assessment, the foreign lender will sign a Term Sheet with the Brazilian borrower setting forth the basic terms and conditions of the loan, such as the maximum principal, interest, default charges, payment schedule, collateral structure, among others.
Lenders must provide at this preliminary stage (i) whether the Term Sheet and the credit line are binding or not for the lender and/or the borrower and (ii) the validity term of the credit offer, otherwise if the client does not sign Term Sheet by the specified date, it expires.
2. The Loan Agreement: once the Term Sheet is signed and legal due diligence is carried out on the borrower and guarantors’ corporate documentation, collateral, relevant liabilities, among others, the main agreement of the operation named “Export Prepayment Agreement”, “Pre-Export Finance Facility Agreement” or other equivalent name is negotiated and signed.
Also called “EPA”, the loan agreement will reflect the Term Sheet to regulate (i) the loan facility, (ii) the interest and default charges, (iii) the format and schedule of payment for principal and interest, (iv) the conditions precedent for withdrawing the loan, (v) the collateral to be constituted, (v) the financial and non-financial covenants to be observed by the borrower, (vi) definition of the events of default and acceleration of the outstanding amount, (vii) applicable law (which generally is the State of New York, although some foreign lenders already prefer to use Brazilian law) and jurisdiction, among other relevant provisions.
3. The Promissory Note: jointly with the execution of the Export Prepayment Agreement, the borrower issues a Promissory Note in the amount of the credit (plus a percentage to cover interest and other charges) in favor of the foreign lender, payable in cash and very important, governed by Brazilian law and enforceable in Brazil.
The Promissory Note will be one of the key documents to be used by foreign creditors to execute the borrower and guarantors in Brazil in case of default.
4. The Collateral: Export Prepayment facilities are generally secured by (i) collateral on the financed goods, which include Rural Product Bills (Cédula de Produto Rural – CPR) with fiduciary lien over the commodity or agricultural pledge over the crop, and/or CDA/WAs, (ii) collateral on fixed assets, such as fiduciary lien over rural land, warehouses and other real estate, or, in the case of assets already recorded with senior mortgage, constitution of mortgage at a subordinate rank to reach the eventual residual value of the property, (iii) collateral over the export receivables, such as the fiduciary assignment of the export contract and the export proceeds arising from the export to be carried out to the buyer abroad, and (iv) personal guaranty (aval and fiança) to be granted under the Promissory Note and the Export Prepayment Agreement by the borrower’s controlling shareholders and other senior individuals and entities related to the borrower.
5. Stock Monitoring: since, in Commodity Finance transactions, the lender is generally abroad, it contracts in Brazil service providers specialized in monitoring and depositing the financed commodity. This monitoring service may be periodic, through the issuance of inspection certificates (called soft monitoring), or 24/7, with the company assuming the role of faithful depositary of the commodity in favor of the foreign creditor (called hard monitoring).
The growth of Brazilian agro companies will make more of them have to borrow funds via “Export Prepayments”, which will increase this market for foreign lenders already consolidated or interested in entering this segment. It is always important to observe the above legal framework to reduce the legal and credit risks involved as much as possible.