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
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