EDC's financial performance

9.166 In the context of EDC's financial performance, we understand Brazil to argue that EDC provides concessionary, and therefore subsidized, debt financing because it provides debt financing on terms that do not cover the risk margin of its loan portfolio. Although EDC's net interest margin appears to compare favourably with that of commercial banks, we understand Brazil to argue that a true comparison cannot be made because of the greater riskiness of EDC's loan portfolio relative to that of commercial banks. Brazil does not dispute Canada's argument that its net interest margin compares favourably with that of certain commercial banks.

9.167 By way of preliminary remark, we recall that Brazil itself initially referred to EDC's net interest margin ("a mere 2.82 percent in 1997, and 3.03 percent in 1996")⁵⁵⁵ to indicate the poor financial performance of EDC. We find unconvincing, therefore, that Brazil subsequently seeks to indicate that in fact EDC's net interest margin does not constitute a sufficient basis for comparison.

9.168 Furthermore, we consider that Canada has demonstrated that the net interest margin is a sufficient basis for comparing EDC's debt financing performance with that of commercial banks. In our view, Canada has demonstrated that EDC's net interest margin already takes into account any additional riskiness in EDC's loan portfolio compared with commercial banks. We recall Canada's argument that, when a loan becomes non-performing, in calculating net interest margin the EDC ceases to recognize interest income on that non-performing loan, but continues to carry the interest expense of that non-performing loan. Thus, the gross interest income is the interest income on performing loans, but interest expense is that of all loans in the portfolio, performing and non-performing. This argument has not been challenged by Brazil .

9.169 We do not accept Brazil's argument that EDC's net interest margin reflects a poor financial performance indicative of concessionary, and therefore subsidized, financing as even if all EDC's loans for aircraft were secured, private lenders would still demand a spread of at least 150 points above riskless US Treasuries of identical tenor. As noted by Canada, that assertion is based on the yield for unsecured bonds. We consider that assertions based on unsecured bonds provide no guidance in reviewing returns on secured lending.

9.170 Brazil has also sought to establish the added risk of EDC's loan portfolio by emphasising EDC's allowance for losses. We note in this regard that Canada has expressly acknowledged that "the average portfolio of [EDC] business is of a poorer risk quality" than that of commercial banks. As also noted by Canada, however, "EDC's provision charge is higher than that for a commercial bank", and therefore the risk in EDC's loan portfolio is offset by these allowances, or provision. Furthermore, EDC's higher allowance for losses does not undermine any appraisal of EDC's debt financing made on the basis of net interest margin, since the allowance, and therefore the higher risk of the EDC portfolio, is reflected in EDC's net interest margin. In this regard, we recall Canada's express statement that "the provision charge is funded by the Net Interest Margin".⁵⁵⁶

9.171 We recall Brazil's argument that the fact that 57.6 percent of EDC's performing loans generally are classified as below investment grade demonstrates that EDC's loan portfolio is riskier than that of commercial banks. However, Canada explains that EDC's aircraft portfolio is not as risky as its general portfolio. In particular, Canada asserts that all loans in the civil aircraft sector, and therefore the regional aircraft sector, are secured, and that as a result in fact 91 percent of EDC's aircraft portfolio is investment grade or higher. Brazil has provided no basis for us to dispute Canada's argument, or otherwise suggested that a loan portfolio comprising 91 percent investment grade loans is inconsistent with commercial banks' aircraft portfolios.

9.172 We are not persuaded that our analysis of Brazil's arguments concerning EDC's debt financing performance should be influenced by indemnification payments from the Government of Canada to EDC following the writing-off of sovereign debt pursuant to Canada's Paris Club commitments. We do not consider that EDC action in response Canada's Paris Club commitments is indicative of whether or not EDC debt financing in the Canadian regional aircraft sector confers a "benefit". In any event, we recall that the relevant sovereign debt was unrelated to the civil aircraft sector.

9.173 Before concluding our examination of Brazil's arguments concerning EDC's financial performance, we recall the EDC Standing Board Resolution of 17 June 1992, which applies to all business conducted by EDC under its corporate account, including the regional aircraft sector. We note that, according to this Resolution, EDC's lending yield must cover cost plus a minimum risk margin (which varies according to the credit rating of the recipient). Brazil makes no attempt to suggest that this policy is inconsistent with that of commercial banks. Although we acknowledge that under the Resolution EDC may derogate from this policy, Brazil has made no attempt to establish⁵⁵⁷ that such derogation has been exercised with respect to EDC debt financing in the regional aircraft sector.

9.174 In light of the above, we are not convinced by Brazil's argument that EDC's net interest margin does not provide sufficient basis for comparing EDC's debt financing performance with that of commercial banks. Brazil's position is based on its argument that EDC's net interest margin does not reflect the risk of EDC's loan portfolio. However, in light of the above we consider that the riskiness of EDC's loan portfolio is reflected in its net interest margin. Once again, we recall that EDC's net interest margin compares favourably with that of certain commercial banks.

EDC debt financing for ASA

9.175 Brazil has referred to the EDC debt financing provided to ASA in April 1997, in support of its claim that EDC debt financing is provided on concessionary, and therefore subsidized, terms.

9.176 On the basis of information in the record, on 13 December 1998 we asked Canada to provide details of the terms and conditions of the alleged EDC debt financing to ASA, together with a copy any relevant finance agreement. Canada refused to provide the information requested by the Panel, on the grounds that "Brazil has made no allegation concerning ASA", and that the information requested is Business Confidential Information.

9.177 In commenting on Canada's response to our request, Brazil asked the Panel to "adopt adverse inferences, presuming that the information withheld is prejudicial to Canada's position."

9.178 We recall our earlier rejection of Canada's criticism of the Panel's Procedures Governing Business Confidential Information, and therefore regret deeply Canada's refusal to provide the requested information. With regard to Canada's assertion that Brazil failed to make any specific allegation concerning the ASA transaction, we understand Brazil's claim against EDC debt financing to cover all instances of EDC debt financing in the Canadian regional aircraft sector. We therefore reject Canada's assertion that Brazil has made no allegation concerning the ASA transaction.

9.179 In adducing evidence regarding the ASA transaction, Brazil does not assert, much less provide evidence to show, that EDC provided ASA with debt financing at below-market rates. The only information adduced by Brazil concerning the financing terms for this transaction is contained in ASA's 1997 annual report. At pages 15/16 of the annual report, reference is made to loans or leases "with interest payable at various interest rate options determined by reference to either U.S. treasury rates or LIBOR". Brazil makes no attempt to specify what these rates are, or how they are calculated, or that the rates referred to are below-market. Accordingly, we find that Brazil's arguments concerning ASA provide no basis for finding that either this specific instance of EDC debt financing, or EDC debt financing in the regional aircraft sector generally, confers a "benefit" within the meaning of Article 1.1(b) of the SCM Agreement.

9.180 For the above reasons, we do not believe that the evidence and arguments adduced by Brazil in respect of statements by EDC officials or EDC's overall financial performance demonstrates subsidized debt financing. In particular, we find no basis for accepting Brazil's argument that EDC debt financing confers a "benefit" because it does not provide for a margin to cover the additional risk of EDC's loan portfolio. Indeed, we note that as a matter of policy, EDC debt financing generally (i.e., in all sectors) is designed to cover cost and provide a minimum risk margin. Brazil has not demonstrated that this general policy is derogated from in respect of debt financing in the regional aircraft sector. Certainly, the evidence adduced by Brazil concerning the ASA debt financing transaction in no way indicates that the general EDC debt financing policy of covering costs and a minimum risk margin has not been applied in the regional aircraft sector.

9.181 We note that Brazil asked us to make "adverse inferences" in light of Canada's refusal to provide details of the ASA transaction. In certain circumstances when direct evidence is not available, we consider that a panel may be required to make such inferences when there is sufficient basis to do so. This is especially true when direct evidence is not available because it is withheld by a party with sole possession of that evidence. In the present instance, however, we do not consider that there is sufficient basis for an inference that EDC debt financing in the Canadian regional aircraft sector confers a "benefit". In particular, Brazil has made no attempt to demonstrate that EDC debt financing was provided to ASA on below-market terms. Furthermore, Brazil has not demonstrated, on the basis of its arguments concerning statements by EDC officials and EDC's financial performance, that EDC debt financing generally confers a "benefit". Had Brazil done so, we may have been required to make the inferences requested by Brazil.

9.182 Thus, we find that there is no prima facie case that EDC debt financing confers a "benefit", and therefore constitutes a "subsidy", within the meaning of Article 1 of the SCM Agreement. In the absence of such prima facie case, we cannot find in favour of Brazil's claim that EDC debt financing in the regional aircraft sector takes the form of prohibited export subsidies, contrary to Article 3.1(a) and 3.2 of the SCM Agreement, and we therefore reject that claim

(b) EDC loan guarantees

9.183 Brazil claims that EDC offers long-term loan guarantees to purchasers or lessors of Canadian regional aircraft, contrary to Article 3.1(a) and 3.2 of the SCM Agreement. Brazil asserts that loan guarantees constitute the "potential direct transfer of funds or liabilities" within the meaning of Article 1.1 of the SCM Agreement. Brazil asserts that EDC loan guarantees confer a "benefit" within the meaning of Article 1.1 because such guarantees allow Bombardier to deduct as much as 20 per cent from the selling price of a CRJ.

9.184 In support of its claim against EDC loan guarantees to purchasers or lessors of Canadian regional aircraft, Brazil has adduced evidence of two alleged EDC loan guarantees. First, Brazil claims that in April 1995 EDC provided loan guarantees to a Bombardier customer for CRJs. Brazil refers to a press report of statements by an Industry Canada official in support of this claim. In this press report, one Industry Canada official is quoted as saying that "[i]n this case, the federal loan guarantee can shave as much as 20% off the selling price of a Canadair jet." Second, Brazil claims that EDC loan guarantees were provided to Comair Holdings Inc. ("Comair") in 1997. Brazil refers to 10-K forms filed by Comair with the US Securities and Exchange Commission in support of this claim. The relevant 10-K forms state that "Comair expects to finance the aircraft ... through a combination of working capital and lease, equity and debt financing, utilizing manufacturers' assistance and government guarantees to the extent possible."

9.185 On the basis of information in the record concerning alleged EDC loan guarantees, we asked Canada to provide details, including terms and conditions, of any loan guarantees issued by EDC for transactions concerning the civil aircraft sector since 1 January 1995. We also asked Canada to provide details of any loan guarantees provided by EDC to Comair in 1997.

9.186 In response to our question concerning loan guarantees to Comair, Canada denied that EDC had provided loan guarantees to Comair in 1997.⁵⁵⁸ In light of Canada's denial, and considering that Brazil has merely adduced evidence of Comair's expectation of government guarantees, rather than Comair's actual receipt of government guarantees, we reject Brazil's allegation that EDC granted an export subsidy in the form of a loan guarantee to Comair in 1997.

9.187 Furthermore, Canada informed us that the April 1995 loan guarantee referred to in the press report cited by Brazil was provided for a domestic sale of CRJs by a government agency other than EDC. In light of this information, and in the absence of information to the contrary from Brazil, we find that Brazil's allegation concerning the alleged April 1995 EDC loan guarantee falls outside our terms of reference because the April 1995 guarantee does not constitute a "loan guarantee provided by the Export Development Corporation."⁵⁵⁹

9.188 In its reply to our question requesting details of any EDC loan guarantees granted since 1 January 1995, Canada informed us that the EDC had granted two loan guarantees since 1 January 1995. The first transaction was in support of the sale of two used de Havilland Twin Otters and two used de Havilland Dash 8-102s to an airline operating in the South Pacific. The second transaction was in support of pre-shipment financing of a flight inspection system sold to a sovereign Latin American buyer. Canada asserts that both guarantees were provided at "commercial rates". Canada refused to provide us with business confidential details of these transactions, because it claimed that Brazil had failed to make a prima facie case against EDC loan guarantees, and because it claimed a lack of adequate procedures to protect business confidential information.

9.189 In its comments on Canada's reply, Brazil asserted that the Panel should adopt "adverse inferences" where Canada has expressly refused to provide documentary information specifically requested, presuming that the information withheld constitutes inculpatory evidence of Canada's infringement of the SCM Agreement.

9.190 As noted above at para. 9.181, in certain circumstances we consider that a panel may be required to make inferences on the basis of relevant facts when direct evidence is not available. This is especially true when direct evidence is not available because it is withheld by a party with sole possession of that evidence. In the present case, however, we do not consider that there is sufficient basis for any such inference. The only evidence adduced by Brazil in support of its claim that EDC grants subsidies in the form of loan guarantees to purchasers or lessors of Canadian regional aircraft has been fully rebutted by Canada. In particular, Brazil's evidence concerning alleged EDC loan guarantees that "can shave as much as 20% off the selling price of a Canadair jet" has been shown to relate to non-EDC loan guarantees. Thus, this statement is in no way relevant to EDC loan guarantees provided for the export of Canadian regional aircraft. Accordingly, we decline Brazil's request to infer that EDC loan guarantees to purchasers or lessors of Canadian regional aircraft constitute prohibited export subsidies contrary to Article 3.1(a) and 3.2 of the SCM Agreement.

9.191 For the above reasons, we find that there is no prima facie case that EDC provides prohibited export subsidies in the form of loan guarantees to purchasers or lessors of Canadian regional aircraft, contrary to Article 3.1(a) and 3.2 of the SCM Agreement. We reject Brazil's claim accordingly.

(c) EDC residual value guarantees

9.192 Brazil claims that in certain instances EDC offers prohibited export subsidies in the form of residual value guarantees to lessors of regional aircraft, protecting against the risk that the residual value of the used aircraft will be lower than anticipated. In support, Brazil relies on a press article that refers to a "suggestion that the residual value of [an] aircraft [sold in 1992] may have been guaranteed."⁵⁶⁰ Brazil asserts that EDC residual value guarantees constitute the potential direct transfer of funds or liabilities within the meaning of Article 1.1 of the SCM Agreement. Brazil asserts that EDC residual value guarantees confer an Article 1.1 "benefit" because, "by protecting [a special purpose company] against the risk that the residual value of a used aircraft at the end of a lease will be lower than anticipated, the [special purpose company] is relieved of the burden of absorbing a loss from a lower-than-expected residual value, and can pass any savings along to the airline customer in the form of lower lease payments."⁵⁶¹

9.193 Canada asserts that Brazil's claim is based on "an article that notes a 'suggestion' that a deal completed in 1992 'may have' involved a residual value guarantee." Canada denies the factual basis of Brazil's claim, and states that "neither the EDC nor the Government of Canada has provided residual value guarantees through CRJ Capital or any other means in support of civil aircraft." Canada provides an Officer's Certificate from CRJ Capital as well as one from Exinvest to this effect.

9.194 On the basis of Brazil's allegation that Canada "deliberately attempted to mislead the Panel" in its response to another question from the Panel not related to EDC residual value guarantees, and "because of the risk that Canada is also misrepresenting the truth" regarding EDC residual value guarantees (because the Officer's Certificates presented by Canada only expressly concern CRJ Capital and Exinvest, and not EDC), Brazil asserts that "the Panel should not accept Canada's denial as an effective rebuttal of Brazil's prima facie case." ⁵⁶²

9.195 We note that the only evidence adduced by Brazil to support its claim that EDC provides residual value guarantees to lessors of regional aircraft is a 1994 press article containing the "suggestion" that residual value guarantees may have been granted in 1992. In light of Canada's express denial that EDC provides residual value guarantees to lessors of regional aircraft, we find that there is no factual basis to Brazil's claim that the EDC has provided prohibited export subsidies in the form of residual value guarantees to lessors of regional aircraft.

9.196 For the above reasons, we find that there is no prima facie case that EDC provides residual value guarantees to lessors of regional aircraft, contrary to Article 3.1(a) and 3.2 of the SCM Agreement. We reject Brazil's claim accordingly.

To continue with EDC equity financing

⁵⁵⁵ See para. 6.7 above.

⁵⁵⁶ Section II(a), Analysis of EDC's Financial Performance, EDC Corporate Finance and Control, 12 December 1998.

⁵⁵⁷ We recall that the burden is on Brazil, as the complaining party, to adduce evidence sufficient to support its case.

⁵⁵⁸ See para. 6.100 above.

⁵⁵⁹ WTO document WT/DS70/2.

⁵⁶⁰ "A very tactical regional response", Airfinance Journal, November 1994, pages 18-20.

⁵⁶¹ See para. 6.139 above.

⁵⁶² See para. 6.144 above.