With a backdrop smeared by an energy crisis, political elections and a hard hit from the Argentine contagion, Banco do Brasil is still expected to come to market with the first financial future flow transaction, as early as next week.

The long-awaited $250 million fixed-rate worker-remittance deal is being led by Merrill Lynch. Nikkei Remittance Trust has been established in Banco Central do Brasil in Japan.

Brazilians working in Japan can then deposit yen or American dollars into the trust and the money will then be transferred to the assigned account in Brazil in real. (See ASR 3/12/01 p. 22).

"For almost any plain vanilla type transaction it would be tough to imagine that you would be coming to market with any deal," said one market participant working on the transaction.

"But obviously for credit enhanced deals, particularly ones that are as robust as this one, there's not going to be that significant of an impact."

Standard and Poor's has assigned a preliminary triple-B-plus rating to the deal, higher than Banco do Brasil's double-B-plus local currency rating. S&P currently has a double-B-minus sovereign rating for Brazil with a stable outlook.

Moody's Investors Service is not rating the transaction, however it has maintained its B1 sovereign rating on Brazil.

However, Fitch (also not rating the transaction) placed Brazil's double-B-minus sovereign rating on negative outlook last week and cited the devalued real as a result of the worsening economic and financial situation in Argentina as the reason.

"This transaction is the first of its kind out of Brazil, it's very innovative and it's in a market which is extremely unforgiving right now so I think it will get a lot of visibility," said the market participant.

Additionally, Caraiba Metais, a Brazilian mining company, also closed a $100 million future flow export receivables deal this month, arranged by West LB.

The transaction was privately placed with investment bankers and a select small group of banks. The notes were backed by copper cathode exports and derivative copper products that are sold internationally. The deal was not rated.

"When you have a situation like we have today with Argentina and the contagion affect, this is the kind of deal that investors look for in this kind of market - a mitigated risk transaction," said a source close to the deal.

The performance risk of the transaction was guaranteed by a tightly structured surety bond provided by Liberty Mutual. According to the source, the payment terms are structured in such a way that there is virtually no payment risk to the investors.

"The buyer pays before they see the goods," the source said. If there is a non-performance, it falls to the surety bond. "Almost all of the risk is captured by the surety bond," the source noted.

There is a small degree of price risk with this transaction, which is said to be mitigated by a low-based pricing.

"The deal had quite a bit of momentum going into it and it was an issue and a concern to many of the investors that have been looking at this for the past few months," the source said. "But the Brazilian risk is minimal as a result of the surety bond."

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