Export Prepayment (PPE) is a typical financing modality in Trade Finance operations, authorized by the Brazilian Central Bank.
The objective of the PPE is to provide Brazilian exporters with advance resources to finance the entire agricultural production cycle, from the purchase of inputs to the sale of their products.
How does the PPE work?
In the PPE, a foreign financial institution advances credit limits in foreign currency to Brazilian exporting companies before the goods are shipped. This financing can reach 100% of the total export value.
Who can request the PPE?
The PPE is aimed at every rural producer, agribusiness, or trading companies, as long as they can prove, for the purposes of framing the operation in the PPE mode, the exportation of the goods produced or acquired in the domestic market.
What are the advantages of the PPE for the rural producer?
- Access to lines of credit in foreign currency, with interest rates indexed to the international market and with repayment of the credit taken out, directly in foreign currency;
- Term compatible with the production cycle of the commodity (for example, the loan granted can be released gradually with each harvest and also repaid according to the flow of exports);
- Flexibility in structuring.
Thus, the PPE makes the cost of an export operation even more competitive, raising the profit margin for the exporter, without forcing the borrower to decapitalize in order to repay the bank.
How is an operation with export pre-payment structured?
An export pre-financing operation is by nature complex and international. Therefore, it requires a sophisticated legal structure, with a set of interdependent contracts that will specify and define the terms and conditions of the financing line. This is usually done by negotiating a Term Sheet.
Understand the contracts and terms that are part of the PPE operation
Term Sheet
Initial contract with the initial terms and principals of the operation to be structured between the parties that will be involved in the operation, which can be:
- the lender;
- borrower;
- service providers;
- guarantors;
- among others, according to the complexity and the level of compliance that will be required in the follow-up of the operation.
Export Prepayment Agreement
Once the Term Sheet is implemented, it is time to go to the main contract, which is usually called Export Prepayment Agreement. In this contract, every word has its importance, because it is in this contract that the parties will base themselves to operationalize what has been agreed upon.
We will find key words that will guide the operation, such as:
- “Transactional”, which means that the line of financing granted has an operational vocation (rather than Project Finance operations);
- “Corporate”, which refers to the financial health of the borrower to grant credit;
- “Uncommitted”, which means that the bank is never obliged to release the resources within the credit line,
- The credit lines can also be “Clean” (with no guarantees required by the bank) or “Secured” (with guarantees granted by the borrower or another);
- among other key words.
Purchase and Sale Export/Export Agreement
The very essence of the PPE, as we indicated above, is the existence of a commercial relationship of cross-border sale of goods, the famous international purchase and sale agreement. In our Trade Finance jargon, this contract is the Purchase and Sale Export or Export Agreement.
This Contract contains the practical and commercial points of the operation, which details the quality and quantity of the financed goods, their origin, port of shipment and port of destination, among other terms of the sale between the producer/exporter and the importer. This contract will attribute to the PPE operation the fundamental characteristic of export, thus proving the purpose of the anticipated resources.
Assignment Agreement
Finally, the great advantage of the PPE is the possibility of direct repayment by the importer to the bank of the amount granted to the exporter. The contract used for this is the Assignment Agreement, which is nothing more than an assignment of the commercial relationship, making the bank a creditor of the importer. In this way, the chain and the time between the moment of the loan and the moment of repayment is shortened.
What are the usual PPE guarantees?
Since the creditor agrees to pre-pay an export, that is, to anticipate resources that will be repaid in case of performance of the export of the Brazilian goods, the risk in this type of operation becomes greater, since it depends on the production, the existence or even the export of the goods.
Therefore, the creditor needs a certain level of security to ensure the transaction and to be sure of being paid in the future, thus avoiding the risk of default, i.e., the default of the PPE.
The collateral used in PPE-financed transactions is intended to protect the lender against credit risks and particularly against the insolvency of the debtor.
But these guarantees also protect the lender against the risks of non-performance of the obligations of the underlying commercial transaction, such as:
- crop failure;
- detour of goods
- delays in shipments; or even
- other force majeure factors.
Therefore, guarantees are a means of increasing creditor confidence, reducing risks and therefore reducing the cost of credit as well.
In addition to the usual guarantees of Brazilian civil law, such as real guarantees, fiduciary guarantees, or even agribusiness credit titles created by Law 11076/2004, we usually resort to other more operational guarantees that allow for concrete monitoring of the progress of the transaction.
Some of these guarantees include
- monitoring of the harvest, the storage, the shipment of the financed goods;
- insurance naming the lender as the beneficiary of the indemnity in case of a claim;
- audits on the economic-financial health of the parties;
- among other various resources that are part of the Trade Finance engineering.
