VIII. TRADE AND PROJECT FINANCING Brief Description of Banking System The banking system offers many of the asset and liability products available in international financial centers. Foreign trade financing and money exchange operations are particularly active and efficient compared to the rest of Latin America. In early 1994, 38 banks were operating in Chile, high for a country with a 1993 GDP of US$43.6 billion. At the end of 1993, bank assets were US$43 billion, loans totalled US$25 billion and deposits US$20 billion. Authorities have not allowed new banks to enter the market since the early 1980s financial crisis, except via purchasing existing banks. This restriction applies to domestic as well as foreign banks. Vigorous economic growth in recent years has strengthened bank profits, but restrictions remain on banks' ability to enter several rapidly growing areas of business, including pension fund management, factoring and leasing. The sector is regulated by the Superintendent of Banks and Financial Institutions, an agency that reports to the Finance Minister. The Central Bank, which is autonomous from the government, in conducting monetary and exchange rate policy and regulating international capital movements also regulates bank operations. The only state-owned bank is the Banco del Estado, Chile's largest bank, which accounts for 15 percent of loans and 19 percent of deposits. Private banks handle nearly all corporate business. The only Chilean banks with a direct presence in the U.S. as of the end of 1993 are the Banco de Chile, which has a branch office in New York and has received U.S. approval to open a branch in Miami, and the Banco de Santiago which has a representative office in New York. The largest Chilean private banks are the Banco de Chile, the Banco de Santiago, Banco Osorno, and Banco O'Higgins. The largest foreign bank is the Spanish Banco Santander. U.S. banks rated by size of deposits are: Citibank, Bank of Boston, Republic National Bank of New York, Chase Manhattan, Bank of America, Chemical Bank, and Chicago Continental. U.S. banks concentrate mostly on corporate lending to small and medium-sized business. Corporate lending is focused on medium-sized businesses, because restrictions on the percentage of a bank's assets that can be lent to a single customer lead firms wanting large loans to resort to international sources of finance. According to a recent report by Standard & Poor's, Chile's banking sector is the soundest and most solid in all of Latin America. On the down side, however, the S&P report considers the subordinated debt to the Central Bank, originated by its bailout of banks in the early 1980s financial crisis, and the restriction of access to international markets. The report adds that foreign banks have captured 20 percent of the domestic market. The report concludes that most of the Chilean banking system, current handicaps and future opportunities (i.e. securitization, bankruptcy insurance, and factoring) are likely to be tackled within the context of a pending reform to the Banking Law. Foreign Exchange Controls Affecting Trading Money exchange operations are particularly active and efficient by Latin American standards. As a general rule, currency may be freely traded in two markets, the informal and the formal or inter-bank market. The Central Bank is empowered to require that certain transactions be executed only through the formal market, such as those related to the import or export of goods and services, foreign loans, capital flows and profit remittances. It may also determine that certain operations be subject to prior approval as is the case of foreign loans and investments, repatriation, as well as hedging and other future market operations. The prevailing exchange rate is allowed to float within a 20 percent band around a central rate (a "crawling peg") that is adjusted to compensate for differences between Chilean inflation and that of its trading partners. The band allows for significant fluctuation in the real value of the peso. For example, the peso appreciated in real terms in each of the years 1991-1993, and it appreciated by an additional 5 percent in real terms in the first five months of 1994. Foreign Investment The Foreign Investment Statute, Decree Law 600, is based on the principle of non-discrimination between foreign and local investors. It guarantees access to the formal market for repatriation of capital and profits. Foreign Loans Foreign loans may be brought into Chile under the Foreign Exchange Law or tied to an investment project under the Foreign Investment Statute. They must be converted into local currency except when used for payment of imports or foreign services. All foreign loans, except supplier credits are subject to a 30 percent mandatory non-interest-bearing deposit in the Central Bank for one year which can be replaced by a payment to the bank of the equivalent to interests on that deposit. The purpose of this reserve requirement ("encaje") is to discourage short term capital inflows which can adversely affect exchange rates and fuel inflation. The end effect of this reserve requirement is that it increases the effective interest rate of loans. Foreign Investment Funds Foreign Investment funds that invest in Chilean stocks are fairly new. Since 1989 they grew by 868 percent to assets of US$1.1 billion in 1992. They function via Decree Law 600. Recent Changes The trend of recent changes is towards further liberalization. The percentage of export earnings that must be repatriated to Chile was reduced in early 1994. At the same time, the restrictions for placing ADRs were lowered from a minimum of US$50 million to US$25 million. The credit rating required was also lowered, to BBB for equity and BBB+ for debt. General Financing Availability Large-scale financing normally should be obtained outside Chile because of limits on the amount banks can lend to any one customer. Further, local interest rates tend to be much higher than those prevailing outside Chile. The Foreign Investment Statute, Decree Law 600, is a straightforward piece of legislation based on the principle of non discrimination between foreign individuals, corporations or entities and local investors. It guarantees foreign investors access to the Formal Currency Market for repatriation of capital and profits as long as investments are registered, and grants them special treatment regarding taxes and customs duties. Statutory provisions govern the authorization of foreign investments, which must be brought into the country within 8 years for mining investments and 3 years for all others. Foreign investors may repatriate their capital after one year. Profits may be repatriated at any time, conditional on payment of Chilean taxes. The law entitles foreign investors to choose between the taxation system applied to Chilean firms or a guaranteed income tax rate of 42 percent on distributed profits. In either case, the system chosen remains in effect for 10 years from the start of operations. This term can be extended to a total of 20 years for projects over US$50,000,000 in the manufacturing and mining industries. Companies utilize a variety of financing sources, including retained earnings due to strong profitability, stock, direct investment, bank debt, bonds and since 1993 through the issue of ADRs on U.S. Stock Exchanges, Eurobonds are also utilized. The larger corporations have evolved from the use of bank debt to public source of funds such as stock and bonds issued locally and also to international capital markets. The improvement by Standard and Poor's of Chile's investment grade rating from BBB to BBB+ in 1993 (the best in Latin America) will open more opportunities for raising funds abroad. Even before the changes noted above, the list of companies planing to issue ADRs was growing rapidly. Bank Debt Bank debt has been the one of the largest source of financing for companies in Chile. Companies listed on the stock exchange have an average debt-equity ratio of 0.43 (US$0.70 of equity for every US$0.30 of debt), indicating an aversion to debt among Chilean companies. This aversion to debt financing is likely to decrease as access to debt markets improve, source of funds become more plentiful and investor confidence continues to increase. This low ratio allows for considerable increases in leverage, implying continued growth in bond issues, bank debt, factoring and leasing. Most bank debt has been for trade finance. For large loans it is usually necessary to structure a syndicated loan. Even then only few companies obtain long-term bank debt. Companies requiring longer maturity must go to the bond market, which is only available to the larger companies. For very large amounts of debt, the relatively small size of the domestic market makes it difficult to raise funds in Chile, so companies have had to utilize foreign bond issues. Stock issuance has been attractive as share prices have consistently increased. Nevertheless the market is relatively illiquid except for the largest companies. Financing decisions can be influenced by institutional investors, which are the largest source of funds in the capital market representing about 37 percent of the total value of Chile's capital markets. Among these, the private pension funds (AFPs) are the largest (about 70 percent of the total), putting about US$2 billion yearly of additional funds into the market. A company weighing a new stock issue should consider regulations that limit AFP investments in any one stock. Foreign Banks In recent years there has been a steady increase in foreign debt, most of it to the private sector. Credit lines offered by foreign banks are mostly for trade finance. Since 1992 foreign banks have started to make longer term loans, generally for project finance or to local banks which repackage them for trade finance. Medium-sized companies, which traditionally relied on bank debt and retained earnings, are increasingly using mechanisms such as leasing, factoring and venture capital as sources of funds. Other Forms of Credit Other instruments which are becoming more prevalent include supplier credit, leasing, factoring, and hedging derivatives. Supplier credit has played a role in some major financing deals. It seems more visible of late due to the large size of investment projects that require major fixed asset purchases. Such project investment has been related to soft credits offered by official export credits, an area where European and Japanese competitors are beating U.S. firms. Leasing has increased from practically nothing in 1987 to US$760 million in contracts signed in 1993, mostly used for transportation equipment, industrial machinery, real state, earth-moving equipment and office equipment. This sector should continue to grow aggressively with emphasis on international leasing both for imports and exports. Currently only 15 percent of imports are financed by leasing, versus 30 percent in developed countries. Factoring Although still small, factoring is becoming an option mostly for mid- sized companies in the industrial, commercial and service sectors. Derivative products: These are not actually a source of funds but a way to control financing costs. Rate hedging with forwards and swaps can lock in interest payments. Currency risks can also be hedged with forwards and futures. This market, nonexistent in 1990, grew by 1992 to US$500 million in currency hedging contracts handled by banks and securities firms. These will probably become more common in the future. Recent Changes The capital markets law approved by congress in January 1994, among other things will affect the market by increasing investment alternatives for Chile's asset-rich AFPs, insurance companies and mutual funds. The percentage of assets that can be invested abroad was raised from 3 percent to 6 percent (with an eventual maximum of 12 percent) for AFPs and up to 15 percent for insurance firms. Also, banks can lend up to 10 percent of assets to a single entity (up from 5 percent). The new banking law, expected to be approved in 1994, among other things will allow for adopting risk-based deposit insurance premiums, and authorize banks to begin international operations and enter new businesses such as securitized lending and factoring. Despite a cautious approach, the direction is clearly towards liberalization. How to Finance Exports/Methods of Payment Payment to suppliers is made by an irrevocable letter of credit from a Chilean commercial bank to the supplier. This is fast and simple, with no lengthy delays in the remittance of foreign exchange. Payments are made upon receipt of notice of shipment of goods. Other methods of payment to suppliers include an unconfirmed letter of credit and open account. Suppliers dealing in open account usually should have developed a long- standing relationship with the buyer. Types of Available Export Financing and Insurance The U.S. Export-Import Bank and the Overseas Private Investment Corporation provide credit and insurance programs for U.S. exporters and investors in Chile. The Inter American Development Bank is also active. The World Bank's Multilateral Investment Guarantee Agency's (MIGA) first project involved Chile, and it has remained active here. Project Financing Available Major project financing is available through issue of equity and bonds in the international capital market, and through syndicated loans (see General Financing Availability above). Eximbank does not offer project financing in Chile. For information on multilateral bank related business opportunities, please contact: Office of Multilateral Development Banks U.S. & Foreign Commercial Service U.S. Department of Commerce, Room H-1107 Washington, DC. 20230 Tel: (202) 482-3399 Fax: (202) 273-0927 The IBRD, a member of the World Bank group makes long-term loans at market-related rates primarily to developing countries. Loans are extended to promote broadly based economic growth and frequently focus on structural adjustment, sectoral reform and individual project lending. Typically, the World Bank does not finance the entire cost of a project, but instead covers components of a project purchased with foreign exchange, which on average is about 40 percent of the total project cost. Each project may cover a wide variety of sectors and can involve anywhere from one to hundreds of separate contracts providing export business opportunities for suppliers worldwide. For further information on IBRD business opportunities please contact: U.S. Department of Commerce Liaison Office of the U.S. Executive Director International Bank for Reconstruction and Development 1818 H Street, NW, Room D-13004 Washington, DC. 20433 Tel: (202) 458-0118 Fax: (202) 477-2967 The Inter-American Development Bank (IDB) provides funding to primarily public sector entities for the design and execution of projects. IDB projects afford U.S. suppliers of goods and services significant export opportunities, mainly in the transportation, environment, health, education, urban development, tourism, agriculture, and energy sectors. U.S. firms seeking information on IDB-financed commercial opportunities should contact: U.S. Department of Commerce Liaison Officer Office of the U.S. Executive Director Inter-American Development Bank 1250 H Street, NW, 10th Floor Washington, DC. 20005 Tel: (202) 942-8265 Fax: (202) 942-8275 List of Banks with Correspondent U.S. Banking The following U.S. firms maintain banking offices in Chile: Santiago Santiago Telephone Fax Firm (56-2) (56-2) ------------------------- -------------- -------------- American Express Bank Ltd. 671 3259 672 3214 Bank of America NT & SA 699 4501 698 8746 Bank of Boston 639 3841 639 1297 The Chase Manhattan Bank, NA 699 0068 690 5177 Chemical Bank 672 1053 699 2089 Chicago Continental Bank, NA 206 7000 206 7140 Citibank, NA 690 8000 690 8505 Republic National Bank of N.Y. 695 2002 698 7512 The following banks, both Chilean and foreign-owned, maintain correspondent banking relationships with U.S. banks: Santiago Santiago Telephone Fax Chilean Bank (56-2) (56-2) ------------------------ -------------- -------------- Banco BHIF 698 0000 698 4704 Banco BICE 692 2000 696 5324 Banco Concepcion 698 2741 696 0271 Banco de A. Edwards 631 3000 638 0904 Banco de Credito e Inversiones 696 6633 699 0279 Banco de Chile 637 2440 637 2560 Banco de Santiago 692 4000 696 7930 Banco del Desarrollo 698 2901 671 5547 Banco Internacional 638 3894 633 9134 Banco O'Higgins 630 4000 698 3730 Banco Osorno y La Union 696 0414 672 8449 Banco Security 632 5502 633 2156 Banco Sud Americano 692 6000 698 6008 Banco del Estado 698 1209 698 1209 Non-Chilean Bank ------------------------- ABN Tanner Bank 671 5776 672 2696 Banesto Chile 698 1873 672 8902 Banco Continental Group Credit Lyonnais 672 2760 671 3307 Banco de la Nacion Argentina 671 2045 698 7341 Banco do Brasil 698 1821 672 7421 Banco do Estado de Sao Paulo 695 1307 672 2459 Banco Exterior 639 4731 639 6095 ING Bank 672 1037 699 1113 The Bank of Tokyo Ltd. 633 2031 633 0742 Banco Real 672 7729 696 5874 Banco Santander-Chile 631 2000 696 0622 Banco Sudameris 638 1514 633 0957 Note: When dialing from outside Chile, use country code 56 and city code 2 for Santiago. For more information Refer to Appendix C "U.S. and Country Contacts"