C.A. Cigarrers Bigott, Suc.
Bigoft Solicitud de transmisi6n de facsimile
vnmvgu *a vm=vw Facsimile N'
0 a I a 1:) a v
Fecha: FEB. 23. 1988
N* do Inas: 8 INCLUDING THIS COVER PAGE
(PIP N:!)9
Para: B.A.T. - LONDON
(TO)
De CIGkRRERA SIGOTT K. LILLIENSKIOLD
Atenci6n: MR. KEITH VWT
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B.A.T INDUSTRIES P.L.C. - MINNESOTA DEPOSITORY COPY PRODUCED PURSUANT To VILD. OF
CONSENT JUDGMENT DATED 5/8M IN STATE OF ANINNESOrA, ET AL V. PNXIP UORRIS, ET AL CASE No. CI-94-8565
RESTRICTED
FACSIMILE Bigott
FOR: KEITH DUNT, BAT
Re. Protection /Bolivarization of our US$ assets /depos its.
Furthei to your discussions earlier today with David Etchells
please find @enclosed our " proposal elaborated with Banco
Provincial, one of our main banks, for asset protection
as far as our US$ deposits are concerned, introducing our
best endeavours for an effective hedge against strict fz
control measurts. Banco Provincial has offered the outlined
operations to us (due to the delicate subject thLere is no
official signed offer document) and stresses that they have
concluded such operations in the past. They are 1001 legal.
As you will appreciate the proposed construction will only
be committed for I year and subject to renewal by mutual
aqre*mont. Banco Provincial is not prepared to commit them-
selves for a longer period, since local legislation may
change. we did not find any operation which right from
the beginning could be concluded for 7 years, which is the
remaining term of the official refinancing scheme introduced
bv the Von. Government.- In the future the restructuring
period may even be further extended, and therefore, hedges
with 360 days rollover have to be considered as relative,
as far as effectiveness is concerned. in our original
presentation rolated to RBC we have already made the point
that there does not exist any 1001 secure collateral /hedge,
and therefore we recommended early repayment.
:As agreed previously we would like to ask you to present
.our suggestion to Treasury in BAT Industries/BATIF for their
evaluation and comments.
In the meantime we are asking two other banks for their
offer, in order to find out whether there exist any new
substantially different ideas in the local market, for the
effective hedge. In the past we already initiated discus-
sions with Citibank, Caracas, and Banco Merc*ntil. Their
projects were rather similar.
Best regards,
Mark Lillienskiold
MLIaly
2212/88
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B.A.T INDUSTRIES P.L.C. - MINNESOTA DEPOSITORY COPY - PRODUCED PURSUANT To VILD. OF
CONSENT Juoomm DATED 618/98 iN SrATE OF Af#wSOTA, ET AL. V. PtOLAP MORRO, Er AL CASE No. C1 -9"565
IF_-STRICTED
BOLIVARIZATION
OF
ASSETS IN US$
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BoLrvARiZATION OF US$ ASSETS
1. Bigott xells US$ buying Sollvars at historic fx rate.
Transfers 055 to SPO and receives8s.
2. Bigott deposits the as. at 360 days with BPS.
3. BPS lends the as. to BANPJtO for the same t*ron (360
days).
4. m"PRO deposits the Us. with SPO for the same term
@360 daysi.
S. BPO galls US$ forwaird (360 days) to RAT.
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B.A.T INDUSTRIES P.L.C. - MINNESOTA DEPOSITORY COPY - PRODUCED PURSUANT To VILD. OF
CONSENT JUDGMENT DATED 5/&W IN STATE OF MINNESOTA, ET AL V. PHILIP MORM, ET AL, CASE No. CI-9"565
RESTRICTED
2
Explanation of Abbreviations
- BANPRO - BAN - Inversiones BANPRO, a subsidiary of
Banco Provincial, which Is not a financial institution
and tnerefore not subject to Venezuelan banking
regu!atlons.
- BAT - c:uld be any BAT Group company outside of Venezuela.
- Bigqtt - C. A. Ci qarrera Bigott, Sucs., Carac;s/Venezuela.
- BPO - Banco Provincial Overseas, N. V., Curazao.
- BPS - Eance Provincial SNICA, Caracas/Venezuela.
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B.A.T INDUSTRIES P.LC. - MINNESOTA DEPOWTORY COPY - PRODUan PURSUANT To VILD. OF
CONSENT JUDGMENT DATED 518/98 IN Sun OF A&MMESOTA, ET AL. v. PHILP MORRI% ET AL CASE No. Cl-94-8565
RESTRIC7E:
A, Descriction of the Scheme
Presumably in June 1986 Bigott. would sell approx.
USS 15 Mn. to SPO at its historic average fx rate
fin Bigott-s accounts) estimated at Bs. 30/USS
and would be credited by SPO for the equivalent
C! approx. as. 450 Mh.
2. S@r;;ltaneously Bigott. would depos3t the same Bs.
Vncunt wi th BPS, receiving from BPS a 360 days
C:".
N-- t e BPS, for the time being, is not prepared
commit themselves 'or a longer period than
?60 days (renewable by ;utual agreementl . Although
we would prefer a longer term, we feel that a
-ming from June l9eS for one year may bridge
-@e time after the presidential elections and
t.he first months of the new president being in
-narge, when the strongest pressure to introduce
a strict fx control is supposed to occur,
3. BPS would lend the same as. 450 million to SAN.
i
4. A,:. the same ;time BAN would lend the as. 450
r@llion to BPO, hence closing the chain and avoiding
actual cash flows (other than debits and creditsi.
S. Tl e above mentJoned steps 1. to 4. would have
t@ be executed at the same moment and to be supported
L-F proper documentation. The due date of the
C:) and the loans must be the same
6. B?O, receiving USS 15 Mn. from Bigott would conclude
an offshore forward contract with BAT selling
tne Bs. 15 Hn. in 360 days (some due date as abovel
at a fx rate of approx. Oz. 3L.2/USS which Is
slightly higher than the original historic rate
fer the following reasons:
CD
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B.A.T INDUSTRIES P.L.C. - IWIMESOTA DEPOSITORY COPY - PRODUCED PURSUANT To VII.D. OF
CoNsENT JUDGMENT DATED 5/8/98 IN STATE OF A#1WESoTA, ET AL V. PHEW MORRIS, ET AL CASE No. Cl-94-8565
4
t.rSTRICTED
Calculation of Interest Receivable and -Expenses
T-or Bigott
Es. interest income tax free 9.001
interest differential versus LIBOR
@ssumedl -2.00%
Margin for Bank (ne;ctiable) -0.25%
Bank's 131 p.a. Interest loss on 6%
legal cash requirement -1.04%
Bank's 4.51 loss on 17% agrocultural
fin. requirement -0.77%
Legal stamp requi.rement 0.111 flat -0.1
Total charges I- interest diff. 91 -4.161
versus LIBOR -2.16% p.a.)
4.16t p.a. applied
on Bs. 30/USS would result In a future
selling rate of Bs. 31.248/115S.
Net Income (- LIBOR - 2.16% p.a.) 4.841
The above calculation which is subject to variations
in LIBOR and to negotiation with the Bank ISPS
initially asked for charges of 5.33S and still
has not yet confirmed our above calculation of
4.161 p.a.) shows that the scheme, due to legal
cash requirement. subsidized aqrocultiral loans
of 17% on total portfolio and stamp, is rather
expensive. However, avoiding such requirements
would mean that Bigott had to deposit the es.
offshore, which would afford ouch less protection
sine* It would be visible that the Bs. offshore
CDs cover fx constructions.
CD
B.A.T INDUSTRIES P.L.C. - MINNESOTA DEPOSITORY Copy - PRODUCED PURSUANT To VILD. OF
CONSENT JUDGMENT DATED 618/98 IN STATE OF MiNNESOTA. ET AL- V. Pfflup A#ORRA ET AL. CASE No. CI-94-8565
RESTRICTED
A t due date after 360 days (presumably in June
191it) there exist basically three options;
a) If no fx control has been introduced BAT
can endorse Its fx future contract with BPO
to Bigott, and Bigott then would repurchase
its original US$ us!nq the proceed of the
Bs. CD, or
b) BAT and Bigott in acreement with EPS can
renew the operation for another period, if
the then prevailing legal situation allows
SO.
c) If strict fX control should have been
introduced, Bigott would create an account
payabie for the same Bs. amount which BAT
owes to BPO, e.g. by declaring a dividend,
and then at due date in lieu of payment the
transfer thp CD to BAT, The CD would be used
by BAT to comply with Its Bs. commitment
out of the forward contract. Such payment
using the CD should be expressly admitted
in the documentation.
At d-je date presumably in June 1969 BPO and BANPRO
aIsc would have to pay their Bs. loans, using
Bs, =r the CD received.
9. If &: due date, due to strict fx control no Bs.
nor any Bs. instrument whatsoever would be available
for. BAT, the latter company would have to sell
the M acquired at the very some moment of tMe
forw rd contract falling due. The difference
in N. converted into US$ would be credited for
char4;*dl to BAT. The extent of the fx difference
in favor ior, in the worst case, against) BAT
would depend on the then prevailing free, controlled,
or black market rate and onthe rate applicable for
conversion offshore, if any.
B.A.T INDUSTRIES P.L.C. - MINNESOTA DEPOSITORY COPY - PRODUCED PURSUANT To VILD. OF
CONSENT JUDGMENT DATED 6/8M IN SrA TE OF MINNESOTA, ET AL V. PH&AP MORRIS, Er AL. CASE No. C1 -9"565
RESTRICTED
6. Advantages ofthe Proposed Scheme
I Bigott would maintain an onshore investment in
Bs.
Fror. , a consolidated point of view the Group would
stay with US$ assets and take the advantaces of
reval,jetions of this currency ve:sus the Bs.
2. -The 9% p.a. interest income is tex exempt, whereas
USS deposited abroad are subject to 141 Venezuelan
Incorme tax.
4. Resur-inq, the above construction affords the most
effective hedge for USS assets, presently available.
C. Disadvanc'eqes/Risks
i. The interest income is only in Bs. Groupwise this
could be avoided by taking out SPO of the above
scheme, Bigott selling the USS directly to RAT
and B;@T taking up a Bs. loan from BAN. However,
this variation of the scheme would require SAT
to pay Do. interest to BAN.
If after 360 days BAT would not be in & position
to honour its IRS. commitment to SPO because there
were no $a. available and BAT could not acquire
any Bs. instrument usable to pay the purchase
price for the US$, there exists a slight risk
of SAT incurring fx losses by liquidating the
forward contract t due date.
Z@(
Mark Lillifnskiold
ML/aly
4/2/88
C)
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B.A.T INDUSTRIES P.L.C. - MINNESOTA DEPOSITORY Copy - PRODUCED PURSUANT To VII.D. OF
CONSENT JUDGMENT DATED S18198 IN STATE OF MjAwESOTA, ET AL. V. PHfL/p MORRIS, ET ALI CASE NO. CI-9"665