Sara: attached is the memo that I received from Tozzini & Freire yesterday. 
As you will notice, the memo addresses Gustavo's questions and corrects 
certain assumptions made by him in his e-mail. 






Sara Shackleton@ECT
08/24/99 02:10 PM
To: Andrea Bertone/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT
cc: Brent Hendry/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT 

Subject: Brazilian Regulations for Swaps & Prepays

Help me understand HOW MANY Tozzini memoranda exist which address financial 
swaps and derivatives.  I e-mailed Michael about this attachment and I think 
his response was that Antonio Felix ADDED comments to the attachment.  I am 
not clear.  I am aware of only TWO Tozzini memos :  dated 12/26/97 (physical 
trading of energy) and 2/20/98 (local derivatives market).  Let's all start 
from the same point.  Thanks.  Sara
---------------------- Forwarded by Sara Shackleton/HOU/ECT on 08/24/99 11:06 
AM ---------------------------

Michael Guerriero@ENRON_DEVELOPMENT

08/20/99 07:45 AM

To: Sara Shackleton@ENRON_DEVELOPMENT
cc: Gustavo Junqueira/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, D'Arcy 
Carroll/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Maria Ines 
Granado/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT 
Subject: Brazilian Regulations for Swaps & Prepays

Don Black has suggested we get you in the loop on the below issues we are 
seeking answers on. We have some pending financial transactions that we would 
like to work through all the Brazilian mechanics before proceeding. Your 
primary contact down here for this issue will be Maria Ines Granado. Please 
provide us with your comments as soon as possible so that we do not encounter 
a transactional conflict. 

Gustavo thank you for all your work to date we will keep you briefed to make 
sure we have your input. Please follow up on the Tozzini issue we discussed 
to make a final decision on their input.

Thanks
MFG  

---------------------- Forwarded by Michael Guerriero/ENRON_DEVELOPMENT on 
08/20/99 09:40 AM ---------------------------
   
	Enron International
	
	From:  Gustavo Junqueira                           08/17/99 06:19 PM
	

To: afac@tfts.tozzini.com.br
cc: Andrea Bertone/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Michael 
Guerriero/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, D'Arcy 
Carroll/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Marcelo 
Parodi/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Scott 
Porter/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Maria Ines 
Granado/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, David S 
Reinfeld/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT 

Subject: Brazilian Regulations for Swaps & Prepays

Antonio Felix,

As Enron is finding several opportunities involving financial derivatives in 
Brazil, we would like to get from Tozzini Freire Law Firm a summarized but 
concise read on the "cans and cannots" of these type of transactions in 
Brazil. Here is my understanding of the regulations from the memo you have 
already sent to us regarding swaps and prepays as well as a list of the most 
common examples of deals that Enron would be encountering in the marketplace. 
I would appreciate if you could comment on what is written here and also add 
further information so Enron can have some sort of menu of deals of this 
nature that can be pursued. I would like to ask you to add your comment in 
this same message to make the review process a little easier. Thank you 
inadvance for your attention.

Swaps (Pulp & Paper, Petrochem, Power)

OTC Swaps

The Central Bank regulates swap transactions involving local financial 
institutions acting either as dealers for their own account or as 
intermediaries to the contracting parties. When the financial institutions 
act as intermediaries, the agreements are in fact private agreements 
negotiated by two non-financial companies, but become subject to the 
requirements and regulations normally applicable to swaps involving financial 
institutions. According to regulations currently in force, such swaps can 
relate to exchange rates, interest rates, gold and price indices.

All of the swap agreements involving financial institutions must be 
registered with CETIP or with another custody and clearing system authorized 
by the Central Bank or the CVM (Brazilian SEC). As a matter of practice, the 
agreements used by the banks that participate in the swap market do not 
follow a standard form, since normally each bank has a particular sample form 
with which it feels more comfortable.

Derivatives
In addition to exchange-traded derivatives and OTC swaps involving financial 
institutions, there is no legal impediment, in principle, to derivatives 
transactions being privately negotiated and entered into between two 
interested parties. As a general rule in Brazil, as long as no specific 
prohibition is found in the law, parties are free to negotiate agreements 
that best suit their interests.

International Hedge 
Central Bank regulations authorize that Brazilian companies enter into 
transactions abroad, either in exchanges or having a financial institution as 
their counterpart, to hedge against the fluctuation of interest rates, 
exchange rates or commodity prices in the international markets. 

Such hedge transactions must refer to payments in foreign currency scheduled 
to be made by or to the Brazilian company in respect of commercial or 
financial rights or obligations, or to payments in local currency arising out 
of certain financial obligations subject to the variation of exchange rates 
and payments relating to imports, exports or local transactions involving 
commodities priced according to their valuation in foreign exchanges. The 
commercial market exchange rates are applicable to foreign exchange 
agreements referring to remittances of currency in connection with hedge 
transactions.

When the underlying obligation/right is registered with the Central Bank, the 
corresponding hedge transaction must be informed to the Central Bank within 
10 days of its execution. When there is no registration with the Central 
Bank, the banks executing the foreign exchange agreements relating to the 
hedge transaction must verify the existence of the obligation/right being 
hedged.

Examples

Commodity swap between two Brazilian companies:
As per what has been said above, there is nothing that precludes Enron Brazil 
of entering into a swap with another Brazilian company regarding any 
commodity traded by Enron (Pulp, Paper, Petrochem products, Power, Gas). 
Enron does not need to be a financial institutions to provide swaps 
transactions. On the other hand, I am not sure yet on the following points: 
(1) Does such swap agreement should be registered with CETIP or any other 
clearing system to be valid under Brazilian regulations? (2) What are the 
taxes involved in a swap?

Commodity swap between a Brazilian company and an offshore company:
This kind of deal seems to be also available in the Brazilian market and the 
only difference from example 1 would be the fact that it must be registered 
with the Central Bank and it would involved transfer of foreign currency.

Commodity swap between two offshore companies but involving Brazilian exports:
I am not sure if Brazilian regulations would have anything to do with a 
transaction like this one. I would assume that a Brazilian exporter would 
sell to their offshore subsidiary and such subsidiary would sell to their end 
customer. Enron would step in and offer a swap agreement for the offshore 
subsidiary of the Brazilian company therefore Enron would not have any 
involvement with Brazilian regulations because it would not be dealing with 
Brazil. 


Prepays (Pulp & Paper, Petrochem, Power)

The regulations currently in force governing export prepayments, especially 
Central Bank of Brazil's Carta-Circular 2624, of February 14, 1996, establish 
that all repayments of principal under such transactions must necessarily be 
made by means of shipments of the relevant exported goods.  Carta-Circular 
2624 allows cash remittances abroad only in regard to payments of interest 
under the facility.  Therefore, it is not possible to structure a transaction 
where the repayment of principal will be made only in cash or where the 
borrower has the ability to choose between paying cash or exporting the goods.

A transaction that involves structuring a direct loan to the Brazilian 
company where the value of the principal of which would be tied to the price 
of the relevant commodity is very difficult to be approved.  Under a direct 
loan registered with the Central Bank the borrower may remit all due amounts 
of principal and interest in accordance with the schedule of payments 
attached to the certificate of registration. The problem with such 
alternative is that, although there are no express regulations preventing it 
to do so, the Central Bank will most probably not issue a prior authorization 
for such type of loan, as it only normally issues authorizations for normal 
loans where the principal is a fixed amount and the interest rate is either a 
fixed rate or a floating rate (normally based on LIBOR or US Treasury).  It 
should also be noted that generally speaking all interest payments under such 
an agreement are subject to withholding tax at the rate of 15% p.a.

CC 5 Account

A possible alternative way to structure a prepay would be by using a 
non-registered loan with the Central Bank.  Under such alternative, the funds 
disbursed by Enron under the loan would be remitted to Brazil through an 
international transfer of Brazilian currency, as allowed by Circular 2677 of 
the Central Bank of Brazil. The international transfer of Brazilian currency 
("International Transfer") is a system which uses a non-resident current 
account in Brazil and the Brazilian interbank foreign exchange market to 
effect remittances of funds to and from Brazil.  Under such system, a lender 
that wishes to disburse funds to a Brazilian borrower makes a foreign 
currency deposit with a bank located outside of Brazil ("offshore bank")  and 
instructs the offshore bank to deliver such dollars to a Brazilian bank in 
exchange for Brazilian currency.  Such Brazilian currency is then deposited 
in a non-resident account held by the offshore bank in Brazil and thereafter 
transferred to the borrower. The repayments follow the inverse procedure, 
i.e. the borrower deposits the amount in a non-resident account of an 
offshore bank and instructs it to exchange the funds into foreign currency 
and deliver them to the lender abroad.

The main differences between the registered loans and the non-registered 
loans are that the non-registered loans are not subject to prior approval by 
the Central Bank of Brazil (and therefore not subject to scrutiny as to their 
minimum tenors and applicable interest rates) and the applicable foreign 
exchange rate to non-registered loans is the floating rate (as opposed to the 
commercial rate of exchange). All transfers of funds to Brazil as 
International Transfers are subject to a Financial Transactions Tax ("IOF") 
at the rate of 2% on the amount transferred, plus a bank fee that normally 
ranges from 0.4% to 0.6% of such amount.  Any interest payments under a 
non-registered loan are subject to withholding tax at the rate of 15% (or 25% 
if the lender is located in a tax-haven jurisdiction).

I don't think this type of transaction is the best way to circumvent some of 
the Brazilian regulations regarding prepayment given the bad press that deals 
via the CC 5 Account mechanism would bring to Enron but I have it addressed 
just in case someone does not share the same opinion. 

Examples

Financial prepay between two Brazilian companies
Not allowed unless the company providing the prepay qualifies as a financial 
institution as per Brazilian law. Since it will not be the case in Enron's 
cases, we should not focus in these kind of transactions.

Financial prepay between a Brazilian company and an offshore company
As it has been mentioned before it is allowed as long as Enron can structure 
the prepay in way where there is a pre-established amortization schedule for 
principal and interest. It is very hard to structure a prepay with specific 
split between principal and interest because the objective of the prepay is 
to lock on a certain volume of a product and not on a specific price. 
Therefore, if Enron prepays for a specific product on a floating basis the 
attached value of that commodity can go up or down as the market fluctuates 
as well as the total value associate to the deal. Such value can be either 
principal or interest and it is impossible to determine what it will be.

Financial prepay between two offshore companies but one being a subsidiary of 
a Brazilian entity
I think there is no restrictions in this case given the whole deal will be 
closed offshore and the Brazilian authorities are not going to be involved. 
It will most likely be a deal involving three parties: a company in Brazil, 
its offshore subsidiary and Enron.

Physical prepay between two Brazilian companies
No restrictions.

Physical prepay between a Brazilian company and an offshore company
No restrictions as long as there is physical deliveries.

Physical prepay between two offshore companies but  involving Brazilian 
exports
No restrictions. It would also involve three parties: a company in Brazil, 
its offshore subsidiary and Enron.

Thanks,

Gustavo