New financing for Brazil’s middle market

Author: Danielle Myles | Published: 15 Nov 2011
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A venture loan programme has paved the way for foreign investors to gain exposure to established companies in Brazil’s middle market.

US-based Resource Holdings issued an $11.4 million note last month, allowing it to make its first loan under a unique capital programme targeting the country’s gold mining operations, and which will be extended to small- to mid-cap companies in other sectors.

The loan chain stretched from West Ventures, a US asset-based lending company, to Resource Holdings and then down to Reginaldo Luiz de Almeida Ferreira (RLAF), a 30-year gold mine operator based in Cuiabá.

The collateral structure underpins the financing which gives start-up Resource Holdings, and in turn smaller mine operators, access to funds they would otherwise not have in today’s market.

The $9.5 million loan from Resource Holdings was secured by RLAF’s mine tailings and $5.5 million of equipment which was purchased in accordance with the loan document. As a smaller operator, the amount of gold left in tailings at RLAF’s site is higher than at more advanced and heavily-invested mines.

The mine’s tailings still contain a high value of gold which can still be extracted, said Pryor Cashman partner Eric Hellige who acted for West Venture on the transaction. The new equipment and extra funds could lift the extraction rate from around 30% to up to 60% or 70%.

Resource Holdings has extended the loan in exchange for a percentage of the mine’s profits.

Further up the loan chain, West Venture benefits from the increased extraction rate and Resource Holdings’ profit share by virtue of its own collateral structure. Its $11.4 million note is fully collateralised, earning 15% interest, plus equity in Resource Holdings.

"Venture capital investments in Brazil are relatively new concepts; it’s been difficult for many of them to get financing," said Hellige.

This loan chain, however, allowed a start-up to use the backing of a well-established goldmine operator in Brazil to obtain funds it wouldn’t normally have access to in this market. For RLAF, it received foreign funding at a time when foreign investment in Brazil is dominated by large infrastructure projects.

Resource Holdings is looking to start similar programmes involving seasoned companies in Brazil’s other middle market sectors including agriculture, for which Brazil is one of the world’s biggest exporters.

"The first one is always the hardest," said Hellige, so the documentation, terms and timeframe will be better for Resource Holdings going forward.

With the RLAF deal, Resource Holdings originally intended for a subsidiary to purchase and then lease the $5.5 million of equipment to keep the assets on its books. But Brazil’s withholding tax scheme made this more expensive than having the mine purchase the equipment.

For small-cap focused venture capitalists that are shifting their focus from China, Brazil’s comparatively benign regulatory framework and good growth projections make it an attractive alternative.

Resource Holdings’ programme has the interest of other lenders looking to access Brazil’s middle market. "People have wanted to do that for a long time," said Hellige.