Case Study: Managing Brazilian Sovereign Risk

Paul Boodee describes, in the July/Agust edition of The Exchange, how Banco Toyota do Brasil ("BTB"), Toyota Financial Services' affiliate in Brazil managed their sovereign risk. He sets the scene with: "Despite boasting the world's sixth-largest economy, Brazil has seen its currency, the real, plummet in recent times. And attempts by the Brazilian government to manage the real (BRL) and foreign investment inflows through frequent changes to the financial transactions tax "IOF tax" have been quixotic at best."

He explains how: "Banco Toyota do Brasil ("BTB"), Toyota Financial Services' affiliate in Brazil, was established in 1999 to provide consumer retail, lease, dealer financing and insurance products to Toyota/Lexus dealers and their customers. BTB's US$1.3 billion balance sheet has benefited from the strong Brazilian economy and growth in the domestic automotive market. BTB funds itself primarily through the Brazilian interbank market and issues CDs and finance bills supported by a brAAA, stand-alone, domestic credit rating from Standard & Poor's.

Strong capital inflows to Brazil over the last few years have created pricing disparities between the BRL onshore and offshore swap markets. Periodically, companies located in Brazil that borrow foreign currency from offshore sources are able to swap and hedge the proceeds in BRL onshore at significant savings compared to domestic alternatives. BTB wanted to take full advantage of such opportunities so it engaged Toyota Financial Services' global banking relationships."

Boodee describes the tensions between the different options and how the solution was to restructure BTB's loan agreements and combine these with some inter-company funding and political risk insurance.

 

Read more in the full article recommended - here.