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Financing Projects in the Forest Industry in Eastern Europe
Juhani Numminen, Senior Advisor - Pulp, Paper and Forest Products Industries, EBRD EEBF Stockholm 26 November 2004
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Contents Introduction Role and Activities of the EBRD
How to Work with the EBRD Financing Instruments of the EBRD How Banks Evaluate Project Risks EBRD and the Forest Industry Case: Estonian Cell
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Introduction The main output of the forestry sector is wood raw material Demand for most end products of the Forest Products industries still grows steadily Eastern Europe is forecast to have the fastest growth of paper and board demand to 2015 Western Europe (excl. Nordic) is a big net importer of fibre Eastern Europe, esp. Russia, has untapped forest resources It is expected that investment in the Forest Products industries in Eastern Europe by local and foreign companies will gather pace Most Forest Products industries are very capital intensive Financing is critical to the development of this sector
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Contents Introduction Role and Activities of the EBRD
How to Work with the EBRD Financing Instruments of the EBRD How Banks Evaluate Project Risks EBRD and the Forest Industry Case: Estonian Cell
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Cumulative commitments €24.1 billion
What is the EBRD? International financial institution, promotes transition to market economies in 27 countries from central Europe to central Asia Owned by 60 countries and two inter-governmental institutions Capital base €20 billion Cumulative commitments €24.1 billion Unaudited June 2004
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Network of 32 Offices in 27 Countries
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EBRD – Focused on Private Sector
State loans 26% Equity 20% Guarantees, etc 4% Private loans 50% 2
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Contents Introduction Role and Activities of the EBRD
How to Work with the EBRD Financing Instruments of the EBRD How Banks Evaluate Project Risks EBRD and the Forest Industry Case: Estonian Cell
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Key Requirements for Financing
Every EBRD investment must: Help move the country closer to full market economy Take risk supporting private investors, not crowding them out Apply sound banking principles Be environmentally sound
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EBRD’s Role Functioning as a catalyst for change, the EBRD:
Promotes co-financing and foreign direct investment Mobilises domestic capital Provides technical assistance
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Strengths of the EBRD Strong, internationally recognised financial partner with long-term perspective and mission Willing to share risks, including political risks (customised to each transaction) Preferred Creditor Status in all Countries of Operations Excellent working relationship with commercial banks Excellent working relationships with governments
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Strengths of the EBRD (cont’d)
Experience gained in problem resolution Door opener for foreign private investors Nationals from our countries of operations are among the multi-national staff (390 banking professionals) Extensive knowledge of local economy, business environment and practices
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Important to contact the EBRD early on in process
EBRD’s Procedures Operates like any other bank/investor with Credit Committee and Board approvals for all projects Dedicated banker to follow project through and manage it internally and externally Bankers supported by lawyers, other specialists and consultants Important to contact the EBRD early on in process
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How to Obtain Finance Provide the EBRD with overview of proposed investment Commitment to work together clarify role of the EBRD mandate the EBRD to initiate the transaction mutual understanding of corporate integrity issues Visit EBRD website for “A Guide to EBRD financing”
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Project Information Required for EBRD Financing
Business plan covering 3 main areas: 1. Project Information: A brief description of the project, detailing how the Bank’s financing will be used Information on the sponsor, including operating experience, financial status How the sponsor will support the project in terms of equity, management, operations, production and marketing Details of the product or service that will be developed and how it will be produced A review of the market, including target customers, competition, market share and sales volume, pricing strategy and distribution
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Project Information Required for EBRD Financing (cont’d)
2. Financial Information: Breakdown of the project costs and how the funds will be used A summary of the implementation requirements, including the appointment of contractors, and an overview of the procurement process Identification of additional sources of funding An analysis of the project’s anticipated financial performance
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Project Information Required for EBRD Financing (cont’d)
3. Environmental and regulatory information: A summary of any environmental issues, environmental audits or impact assessments Details of government licences or permits required, subsidies available, import/export restrictions, border tariffs or quotas and currency restrictions
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EBRD’s Environmental Procedures
Initial environmental screening to identify potential environmental issues Environmental assessment and/or audit undertaken by the sponsor Public consultation requirements Development of an Environmental Action Plan to document key environmental issues and the action to be taken to address them adequately Incorporation of environmental conditions into legal documentation Environmental monitoring and evaluation of projects
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Contents Introduction Role and Activities of the EBRD
How to Work with the EBRD Financing Instruments of the EBRD How Banks Evaluate Project Risks EBRD and the Forest Industry Case: Estonian Cell
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Financing Instruments
Direct Indirect Loans Equity, including combination of loan and equity Guarantees, including credit enhancements (performance bonds etc.) SME loans Equity funds Micro/small business programmes Credit lines Trade Facilitation Programme Co-financings
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Project Financing Guidelines
the EBRD 35% Significant equity contributions (in cash/in-kind) required from sponsor(s) Prudent capital structure (normally 60% long term debt in total financing) Co-investors 65%
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Typical Capitalisation Structure
the EBRD 35% Foreign sponsor 25% Loan Equity Others 10% Loan Loan Equity Syndicated 15% Local sponsor 15%
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EBRD’s Risk Profile the EBRD Sponsors Takes financial risks
Takes political risks Takes long maturity Shares equity risk Have sound management Take operational risks Take commercial risks
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Financial Flexibility
Wide range of loans Fixed or floating rate loans Choice of currencies Short to long-term maturities Hedging Financing structured to meet project-specific needs, including repayment schedules Tailored to particular situation of country/region and sector Pricing reflects risks with project, borrower and country
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Contents Introduction Role and Activities of the EBRD
How to Work with the EBRD Financing Instruments of the EBRD How Banks Evaluate Project Risks EBRD and the Forest Industry Case: Estonian Cell
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How Banks Evaluate Project Risks
Who is the investor? track record/experience/resources/ integrity Completion (no completion = no cash flow = no debt service) Cost overrun Delays in construction/implementation Technology – proven or experimental Raw material supply – availability/certainty/pricing Logistics/transportation/costs Availability of necessary skills, labour and managerial staff
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How Banks Evaluate Project Risks (2)
Start-up and operation at planned capacity Environmental compliance Operating costs Relative project competitiveness Markets/demand/marketing/sales/pricing Contractual/legal Political/legislative Financial/macroeconomic
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Contents Introduction Role and Activities of the EBRD
How to Work with the EBRD Financing Instruments of the EBRD How Banks Evaluate Project Risks EBRD and the Forest Industry Case: Estonian Cell
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EBRD Organisation Russia and Central Asia Central Europe Southern & Eastern Europe Financial Institutions Industry and Commerce Infrastructure Automotive Chemicals FOREST INDUSTRY Non-Ferrous Metals Steel Aerospace Combining Industry Knowledge with Experience and Contacts in the Region to deliver tailored solutions to financing and political risk
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Selected EBRD Investments in Forest Industries
*: Multi-project facility
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Selected EBRD Investments in Forest Industries
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Contents Introduction Role and Activities of the EBRD
How to Work with the EBRD Financing Instruments of the EBRD How Banks Evaluate Project Risks EBRD and the Forest Industry Case: Estonian Cell
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Introduction – Estonian Cell
EUR 19 million equity investment into green-field Aspen BCTMP pulp mill in Estonia, 140,000 t/a Total project cost EUR 153 million Second largest foreign direct investment in Estonia Three equal shareholders: EBRD, Larvik Cell, Heinzel State-of-the-art technology and high-demand product Low cost producer 3
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Deal Structure – Estonian Cell
Larvik Cell AS, Norway EBRD 1/3 Shareholder Estonian State Forest Management Centre 1/3 Shareholder & Sponsor EUR 19 mln Long-term wood supply contract Heinzel Holding GmbH Austria, 1/3 Shareholder Wood Supply Agreements Estonian Cell AS Estonia RZB Senior Debt Underwriter Nor-Est Wood AS Estonia EUR 108 mln Long-term wood supply contract Agency Agreement OeKB Austrian Export Agency EPC Contract LT Supply Agreements RWE IN / Tessag KSH Wilfried Heinzel AG Gas / Electricity Utilities with Andriz as the main equipment supplier Austria 2
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How to Contact the EBRD www.ebrd.com Juhani Numminen
Senior Adviser, London Pulp, Paper and Forest Products Industries Timo Hartikainen Principal Banker, London Business Development
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