811.516 Export-Import Bank/12–2148

Memorandum by Mr. J. J. Stenger of the Division of Investment and Economic Development to the Chief of the Division of Financial Affairs (Spiegel)

[Extracts]
confidential

Subject: Agenda for Meeting of Board of Directors Eximbank December 22, 1948.

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3. Brazil—American & Foreign Power Company. The American & Foreign Power Company first submitted an application in January, 1948 for a credit of $24,547,000 to finance the purchase of U.S. equipment, [Page 395] supplies and services required for an expansion program tor twelve of its operating subsidiaries in Brazil during the 4-year period 1948–51. The entire cost of this program was estimated at $70,707,000 with local construction costs amounting to $46,160,000. Consideration of this application along with other applications was deferred awaiting a settlement of the Vale do Rio Doce matter.

On October 28, 1948 the Bank’s staff advised the applicant that its request of September 20, 1948 for an immediate credit of $8,129,000 to finance the U.S. costs of that part of the 4-year program which was already under way and which would be completed by September 1, 1949, could not be recommended since it would imply further commitments by the Bank on the January application.

Consequently, an amended application dated November 3, 1948 for an immediate credit of $8,278,000 was made by American & Foreign Power Company. The applicant agreed to withdraw its January application, but stated such withdrawal was made without prejudicing its “right” to apply for further credits for its Brazilian subsidiaries approximately $24.5 million.

The amended application proposes that the Bank purchase obligations of twelve of the applicant’s Brazilian operating subsidiaries in amounts corresponding to their individual requirements in the aggregate total of $8,278,000. The applicants top holding company, the Brazilian Electric Power Company, would be the guarantor. The aplicant and its associated companies will subordinate their creditor position with relation to the Brazilian subsidiaries in case of their default in the payment of principal or interest. They undertake to obtain an exchange guarantee from Brazilian Government similar to those given to the Bank by other Brazilian debtors. The loan would bear interest at 4½% with repayment in semiannual installments during 10 years beginning March 1, 1950. The total estimated cost of this part of the program scheduled for completion in September, 1949 is $13,150,000. In addition to Bank participation, $4,011,000 will come from current earnings of the operating subsidiaries and $861,000 will be advanced by the applicant.

Proceeds of the credit would be used to finance the purchasing of materials, equipment, technical services and forwarding costs as follows:

(a) Payments made between January 1 and Sept. 9, 1948 $2,121,000
(b) Payments to be made on orders already placed 3,353,000
(c) Payments on orders not yet placed  2,804,000
Total $8,278,000
[Page 396] The amount under (a) when reimbursed plus $900,000 to be advanced by the applicant will provide part of the funds required to meet local construction costs.

Included in (a) is the sum of $521,000 (including shipping costs) spent for materials and equipment forwarded to Brazil on Brazilian and other foreign flag vessels, reimbursement for which applicant understands is contingent upon its securing a waiver from the Maritime Commission of provisions of Public Resolution No. 17, 73rd Congress.

Applicant has already placed orders in Switzerland and Canada for equipment costing about $275,000 which is to be used in program covered by the application. In view of this small amount, however, the Bank’s staff has indicated it will not recommend elimination of these offshore purchases.

The Bank’s staff is satisfied that private capital, either in the U.S. or Brazil, is unavailable. However, one commercial bank is interested in the purchase of the first two or three years’ maturities, if Eximbank will guarantee the exchange (but not the rate) of cruzeiros for dollars.

The Bank’s staff recommends approval of the application subject to certain terms and conditions including suitable exchange requirements, reasonable indication that borrowing companies will be permitted to operate during the life of the loan and suitable controls by the Bank, through covenants in loan agreement, over financial operations of the borrowers and the guarantor.

The NAC on December 17, 1948 approved the consideration of the credit.

In reply to the Department’s telegraphic inquiry, the Embassy in Rio reported by cable on December 20, 1948 that because of the limited time for investigation, its report must be of a preliminary nature. The Embassy feels that all of the subsidiary companies, except Cia Energia Electrica da Bahia have rate problems, particularly with regard to streetcar operations. The Embassy also believes that the Federal Government is, as a general rule, favorably disposed toward the development of the BEPCO subsidiaries, but that some of the subsidiaries are confronted with state government political problems, and that this is particularly true with regard to the following companies; Cia Força e Luz Nordeste; Pernambuco Tramways & Power Company; and Cia Energia Electrica Rio Grandense. Finally the Embassy is of the opinion that it is important that the position of the state governments be clarified before the loan is granted, as well as the “supposedly” poor financial position of Nordeste which has Brazilian shareholders.

While the Embassy does not make a specific recommendation, the Embassy’s cable may be construed to imply that it has no objections [Page 397] to the approval of the credit, provided that the Bank clarifies the position of the state governments.

This whole matter was discussed with the staff of the Bank, and a member of the staff remarked that it was familiar with the points raised by the Embassy, but that it would not adversely affect the decision of the staff. The staff believes that the Bank will be fully protected with the unconditional guarantee of BEPCO, the Brazilian holding company owned by American & Foreign Power.

Recommendation: While the political and the economic officers in the Department are of the opinion that the Department should not object if the Bank wishes to extend the credit in spite of the warning from the Embassy, because there are no political objections per se and because the projects when completed will benefit Brazilian economy, they do feel that the Embassy’s comments merit careful consideration. Unless the position of the state governments is clarified, the Bank may at some time or other find itself in a difficult position because of local politics, especially in view of the fact that the Bank is advocating “that suitable controls over the financial operations of the borrowers and the guarantor be retained by the Bank through covenants approved by the General Counsel”.

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