Workshop on Tools for Risk Mitigation in Clean Infrastructure Projects The Plantar Project Alexandre Kossoy CF Unit - World Bank November 19-20, 2003

The Company: Plantar S.A.  Founded in reforestation (and charcoal production) due to tax incentives  Expertise led to advisory opportunities  Investment in genetic engineering (high-yield clones)  In pig iron (to metallurgy / foundry industries)  In FSC’ certified charcoal (export market)  Nowadays, Plantar income mainly with service (reforestation for the major Brazilian pulp producers)  30% of Brazilian annual forest plantation (~60k ha/year)

Pig Iron Activity Mineral Iron Charcoal (vegetal) Coke (mineral) + Pig Iron = Foundries Steel Mineral Iron + = Pig Iron Independent producers Integrated producers Pig Iron Sales Own production

Company / Sector Analysis (w/o the project)  Revenues USD 52 MM in 2001 (guarantees)  Almost no leverage (conservative management)  Low cost producer (profitable)  Long track-record (recognized expertise in the Market)

Company / Sector Analysis (cont.)  Non traditional client  Small player in the metallurgy industry  Risky sector  Family owned domestic player (annual exports insufficient for DSCR and hedge for a USD loan; non-audited numbers)  Small deal (high lender’s preparation cost; probably low ROS)  Long cycle with no income up the 7 th year (low IRR / long pay-back / unbankable: 10-y loan with 7-y grace period for repayment) … a new component : GHG ERs …

Project Objective: To make sustainable charcoal production a viable alternative to coke in the pig iron industry  Project:  Sustainable managed Eucalyptus plantations (FSC certified): 23,100 ha (3,300 ha x 7 years)  Reforestation of pasture land with native forest: 478 ha  Improved Charcoal production in kilns (reducing methane)  Charcoal displacing Coal / Coke in Pig iron production and produced for lump charcoal market in Europe

Project Financing  Entire investment (for newly established plantation): US$34 million  PCF contribution at $3.50/tCO2e = $5.3 million  Other carbon finance potential up to $20 million  Financial Structure  Plantar Equity: $29 million already invested over the years  Seeking new sources up to $5 million (debt financing ?)

ER Generation (ERPA) $ 4,880,000Total loan  Loan amount matches ERPA value less PCF expenses  Loan repayment schedule matches PCF annual payments  “Securitization of the ERPA receivables”

Target structure: Pre-Export Finance Trade finance: repayment through performance (export) of CERs Advantages: lower cost to the borrower (absence of WT 17.64% / 33.33%) for both I and fees. Rabobank CuracaoPCF Rabobank Brazil Plantar I loan P ERs EFEX Contract

However, Ers are not eligible for trade finance in the MERCOSUL… Rabobank Curacao PCF Rabobank Brazil Plantar I EFEX contract loan P ERs (Escrow Account) at Rabobank “Financial” loan fully repaid by the borrower (P + I). Account opened at Rabobank in the name of Plantar for PCF payments. Liberation of the ER payments by PCF after Plantar's repayment to Rabobank. + P Alternative for the Plantar Case

Main Risks and mitigants identified Credit risk: the pig iron industry was considered very risky and the competitive advantage of the project sponsor’s activity was not evident to the lender. Mitigant: The payments for the ERs were not linked to the industrial activity but, to the annual sequestration of GHG during the Eucalyptus’ growth. Due to the very cheap and easy maintenance of the forests after its implementation, almost no delivery risk lefts after the 1 st year (i.e. credit risk was highly mitigated). Replicability: Several deals in the BioCarbon Fund may take advantage of this feature.

Main Risks and mitigants identified Credit risk: the sponsor, a Brazilian company operating domestically, becomes highly exposed to local currency fluctuations if indebted in hard currency loans. Mitigant: The ER payments in hard currency result in a natural hedge for the sponsor and drastically reduces its exposure to the local currency devaluation. Replicability: This specific risk mitigation is extremely relevant for all CDM sponsors whose operate in the domestic markets but want to have access to cheaper international loans.

Main Risks and mitigants identified Credit risk: despite low, charcoal export revenues are subject to non- payment risk. (Special risk for exports of goods to other developing countries, exposed to the same economic risks of the exporter - not applicable for this case). Mitigants: WB is a risk-less buyer in a risk-less Country (AAA). Replicability: All CDM buyers are companies based on Annex I Countries, and operate with the most solid currencies (i.e. “hard currencies”). These countries effectively have the lowest sovereign risk rates given by the international financial institutions.

Main Risks and mitigants identified Country risk: local government’s acts which do not enable the loan repayment in hard currency (i.e. local currency convertibility to hard currency and transfer overseas). Mitigant: PCF payment directly in the lender’s account. Exporters may have a natural protection against this risk if buyers agree to pay for the goods directly in the lender’s account abroad. However, for the full offset of this risk the Country origin of the buyer must have a developed financial system and legal framework to be recognized as a low risk Country, as the Countries of the Annex I, and as in the item above, this is a natural advantage of CDM projects.

Main Risks and mitigants identified Country risk: Confiscation of goods, Expropriation of assets or Nationalization of the goods, threatening the sponsor capacity to produce the goods and export them. In order to mitigate these risks, lenders may have to buy the “CER risk insurance” in the market, in order to offer loans in developing countries. Its price is always passed to the borrower, increasing the all-in cost of the loan. Mitigant: LNO signed by the government and Kyoto ratification (BR). Replicability: The signature of the LOA by the Designated National Authority evidences the host country compliance to the CDM rules. After that, and due to the intangible nature of the carbon credits, there is a minimal chance of government interference in the production and remission of the ERs to their buyers.

Main Risks and mitigants identified Country risk: the project had a “construction phase” of 7 years before generating cash to repay a loan[(i.e. 7-y grace period loan). Additional 3 years would be required by the project to fully repay the loan. However, the maximum tenor allowed for uncovered Country risk’s loans in Brazil was 2 years in the 2ndH’01 and due to the events of 09/11, there was no Country risk insurance available for Plantar for such time period (10 years), at any price. Therefore, the project was unbankable.[ Mitigant: The absence of cash convertibility and transferability, plus the intangibility of the carbon credit (i.e. absence of the CER risk), allowed the transaction to be rated by the lender as a “Country risk free” export transaction.

Main Risks and mitigants identified Replicability: the above-mentioned points, the loan to Plantar deal only became possible due to the full Country risk offset by the ER component. In addition, the strong credit risk mitigations also resulted in a substantial reduction in the commercial bank’s interest pricing to the borrower. The same rational is expected for all other CDM deals worldwide.

Loan Structure  6-y loan (2-y grace period for P), with almost 5-y duration  All-in cost to Plantar lower than L + 5%  ROS to Rabobank higher then 65%