A second alternative involving minimal exchange risk was a back-to-back loan, also known as a cash-collateralized loan. The back-to-back loan was a financial arrangement between the Bank of Brazil and the United States parent company. Morris (USA) would make a dollar deposit equal to Morris de Minas' funds needs in the New York Branch of the Bank of Brazil. In return, the Brazilian bank would lend the countervalue in cruzeiros, at the prevailing exchange rate, to Morris de Minas.
At the maturity of the loan, the parent company's dollar funds would be returned simultaneously with the repayment of the loan in cruzeiros by the Brazilian subSidiary. The exchange risk would be borne by the Bank of Brazil, because the exchange rate of cruzeiros for dollars would remain the same both when the parent currency is converted for local lending and when it is returned to the parent at maturity.
The parent company's dollar deposit in New York would earn interest at the prevailing market rate of 11 percent per annum. On the other hand, the Bank of Brazil would charge an interest rate equivalent to 20 percent p.a. over indexing on the loan in cruzeiros. Interest and monetary correction on this cruzeiro loan to Morris de Minas would be tax deductible.
It was the Morris (USA) policy to charge 13 percent p.a. payable in dollars in all loans made to its subsidiaries. Since the back-to-back loan would tie up Morris dollar funds, a 13 percent interest charge per year, payable in dollars, would be required of Morris de Minas on the dollars deposited in New York. However, since the parent company would receive interest of 11 percent p.a. on its dollar deposit with the Bank of Brazil, the Brazilian affiliate would only be charged for the remaining 2 percent p.a. interest. This interest payment would not be tax deductible in Brazil because the dollar deposit was not loaned directly to Morris de Minas. In addition, it would be subject to a 20 percent withholding tax applied to all interest remittances on foreign loans.
Another alternative, possibly cheaper, would be a direct loan from the parent company, Morris (USA). In recent months Morris (USA) had made similar dollar-denominated loans to foreign subsidiaries at an interest rate of 13 percent p.a. However, Brazilian regulations stipulated a minimum term of eighteen months on such foreign loans made directly by foreign companies to its affiliates in Brazil, and there was no assurance that the foreign exchange would be available to repay the loan, or at what price. For this reason Albuquerque felt that a surcharge of perhaps 2 percent would have to be added to the rate normally charged for subsidiary loans.
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