832.51/5–448
Memorandum by the Associate Chief of the Division of Investment and Economic Development (Longstreet) to the Chief of That Division (Havlik)
Subject: Brazil—Eximbank Credit No. 424, Electrical Export Corporation, Sorocabana Railway Electrification.
Background: In April 1947 Eximbank, with State Department concurrence, authorized for the second electrification program of the Sorocabana Railway two loans at the interest rate of 4.5%. Loan No. 1, or Credit No. 424 ($6,649,021 amortizable in seven years), was on behalf of the Electrical Export Corporation, New York for 26 electric locomotives and other electrification equipment, Loan No. 2 ($1,500,000 amortizable in five years) on behalf of the Whitcomb Locomotive Company, Rochelle, Illinois to finance delivery of 15 Diesel-electric locomotives. The security of the loans rested upon guarantee by the State of Sao Paulo, which owns Sorocabana. This railway was, moreover, in a rather strong financial position.
However, in embarking subsequently upon major improvements the railway assumed a disproportionately large volume of short-term indebtedness in anticipation of an increase in rates which did not materialize. Also, there are indications that in 1947 receipts have been falling off while expenses were at a record high. Sorocabana has thus [Page 391] not been able to live up to the payment plan for Loan No. 1. The first note maturing under it and due December 1, 1947, was paid as late as February 1, 1948 by the Banco do Brasil instead of by Sorocabana or by its owner, i.e., the State of Sao Paulo. The State itself has been, struggling for some time with considerable financial difficulties.
The availability of Loan No. 2 to the Whitcomb Company will expire June 15, 1948. No deliveries have as yet been made under this credit and Eximbank believes that in view of the financial position of Sorocabana the Whitcomb Company will not take advantage of the Eximbank commitment.
Recently the Brazilian Ministry of Finance became interested in this project. Because of the financial difficulties involved a representative of the Ministry now suggests the following amortization plan: The semi-annual payments for principal and interest to be reduced to $250,000 for a period of three years, to be resumed in the full original amount of $798,000 for the remainder of the original term (comprising seven semi-annual payments) and to be followed by six added semiannual payments of around $732,000. In other words, the duration of the loan would be raised from seven to ten years. In consideration of the concession which Eximbank would make by changing the amortization plan the Brazilian Finance Ministry will secure a Banco do Brasil guarantee.
Owing to the delay in Sorocabana payments Eximbank stopped buying notes from the Electrical Export Corporation. Under Loan No. 1 the expiration date for availability of credit to the Corporation is June 15, 1948. Since some equipment is still to be shipped and since two notes aggregating $1,000,000 have not been bought by the Bank and a third one for $559,000 is to be presented shortly, the Corporation has requested an extension of the availability of the credit to December 31, 1948. In the absence of Eximbank purchase of notes corresponding to goods already shipped, the Electrical Export Corporation has not been able to make agreed payments to the General Electric Company, Westinghouse and other suppliers. Deliveries by these companies are at an advanced state. Shipments of $3,225,000 had already been made at the time when Sorocabana failed to pay the December 1, note. Another $1,000,000 of equipment was then nearing shipment, and work was in progress on nearly the entire balance of the contract. Much of the equipment was built according to such specifications as would make it difficult or impossible to dispose of it in other markets.
Eximbamk Recommendations: In a memorandum of April 26, 1948 to the Board of Directors an Eximbank Staff Committee recommends that: (1) the availability of the credit under Loan No. 1 be extended to December 31, 1948, (2) the Electrical Export Corporation inform the Brazilian Ministry of Finance to the effect that the proposals for [Page 392] adjustment and guarantee of the obligations given under this credit are acceptable to Eximbank, and (3) purchase of notes drawn under this credit be resumed in accordance with the agreement between the Electrical Export Corporation and Eximbank.
State Department Recommendation: As there is strong economic justification for the continuance of the electrification program, and as the guarantee of the Banco do Brasil has become desirable ED, with the concurrence of BR and FN, suggests that the recommendations made by the Eximbank Staff Committee be strongly supported.