Message-ID: <4932434.1075844526670.JavaMail.evans@thyme> Date: Fri, 17 Sep 1999 10:19:00 -0700 (PDT) From: sara.shackleton@enron.com To: barbara.lewis@enron.com Subject: Re: Products for Trading in Brazil. Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Sara Shackleton X-To: Barbara Lewis X-cc: X-bcc: X-Folder: \Sara_Shackleton_Dec2000_June2001_1\Notes Folders\Sent X-Origin: SHACKLETON-S X-FileName: sshackle.nsf Please have Gary review this message. ---------------------- Forwarded by Sara Shackleton/HOU/ECT on 09/17/99 05:18 PM --------------------------- From: Bruce Harris@ENRON_DEVELOPMENT on 09/17/99 04:31 PM To: Gary Hickerson/HOU/ECT@ECT, Joe Kishkill/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT cc: Harry Arora/HOU/ECT@ECT, Sara Shackleton/HOU/ECT@ECT, Kaye Ellis/HOU/ECT@ECT, Bruce Harris/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Lynn Aven/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Robert H George/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Kent Castleman/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Pushkar Shahi/HOU/ECT@ECT Subject: Re: Products for Trading in Brazil. Gary and Joe, We should probably have a conference call sometime next week to discuss how we want to proceed on the financial derivatives/trading side. I have a number of concerns which I share here. First, we do not have a tax-efficient entity in which to trade. If we set up a Brazilian limitada solely for the purpose of trading, and we lose money, we will generate Brazil tax credits. Enron already has at least $25M of these credits and I think we want to try to limit the possibility of generating additional credits going forward. In addition, there is a possibility that Enron Corp. may begin limiting the utilization of these credits, so one might end up with minimal tax benefit if there was a loss (creating an asymetrical trading payoff). I was hoping we could trade out of Elektro, but Lynn informs me that any gains in Elektro will be subject to both US and Brazil taxation. Second, to the extent that we do take tax risk in a limitada, we still need to fund (and possibly) guarantee the limitada. Currently, the only way to fund the limitada without being exposed to a whole host of tax/FX issues is through equity. However, equity is difficult to repatriate (it would be repatriated probably only as far as Cayman for tax reasons) and we are subject to convertibility risk. In addition, earnings in the company could most likely only be repatriated via shareholder loans (dividends would be subject to US tax), meaning that the cash would have to come back into Brazil when the loan expired (and then it would be sent back out if there was no convertibility event). Third, trading stocks on the Bovespa may create Chinese Wall issues with regards to our ongoing M&A and Financing activities. In all likelihood, one would be trading energy/telecom stocks. Those companies are also the ones with which the ESA origination teams are trying to do business. We might be able to create a Chinese Wall, but given the size of the ESA office (not big) and the limited scope of our intended trading operation, we have to consider whether it is worth potnetially limiting those core activities to spec. trade (or consider what cost would be incurred to ceate a Chinese Wall). The other two products--money markets and futures--can be traded (albeit in a more limited fashion) offshore. Because money market instruments can't be shorted locally, they are really just passive investment vehicles (like a bank CD) off of which one trades the interest rate via swaps. That is, you are shortening or lengthening your investment horizon based on one's expectation of rates and continually earning either a higher or lower carry than market. Most of this type of trading can be done offshore through credit-linked notes (including R$ CDI, R$ prefixed and USD fixed) and short-term Brazil Bradys. Currency futures of course can be traded via NDFs. In sum, I think we need to better define the type of trades we will do and where we are going to do those trades. My hope is that we can define a couple of products/ideas we want to implement now and then figure out in which entity to house that activity. I will try to set up a conference call for next week on this topic. Regards, Bruce Sara Shackleton@ECT 09/17/99 11:39 AM Sent by: Kaye Ellis@ECT To: Harry Arora/HOU/ECT@ECT, Bob Crane/HOU/ECT@ECT, Bruce Harris/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Gary Hickerson/HOU/ECT@ECT, Joe Kishkill/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT cc: Kaye Ellis/HOU/ECT@ECT Subject: Products for Trading in Brazil. Please review the attached memo to verify that I have identified all of the products that you are interested in trading in Brazil. I will be in Sao Paulo on Monday, September 20, 1999. Thank you, Sara