Financing Projects in the Forest Industry in Eastern Europe Juhani Numminen, Senior Advisor - Pulp, Paper and Forest Products Industries, EBRD EEBF Stockholm

Financing ProjectsFinancing Projectsin the Forest Industryin the Forest Industry

in Eastern Europein Eastern Europe

Juhani Numminen, Senior Advisor - Pulp, Paper and Juhani Numminen, Senior Advisor - Pulp, Paper and Forest Products Industries, EBRDForest Products Industries, EBRD

EEBF Stockholm 26 November 2004EEBF Stockholm 26 November 2004

ContentsContents

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

IntroductionIntroduction

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

ContentsContents

Introduction






Case: Estonian Cell

What is the EBRD?What is the EBRD?

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'98 '99 '00 '01 '02 '03 '04

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 billionCumulative commitments €24.1 billion

Unaudited June 2004

Network of 32 Offices in 27 CountriesNetwork of 32 Offices in 27 Countries

EBRD – Focused on Private SectorEBRD – Focused on Private Sector

State loans 26%

Equity 20%

Guarantees, etc 4%

Private loans 50%

ContentsContents

Introduction






Case: Estonian Cell

Key Requirements for FinancingKey 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

EBRD’s RoleEBRD’s Role

Functioning as a catalyst for change, the EBRD:

Promotes co-financing and foreign direct investment

Mobilises domestic capital

Provides technical assistance

Strengths of the EBRDStrengths 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

Strengths of the EBRD (cont’d)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

EBRD’s ProceduresEBRD’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

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”

http://www.ebrd.com/pubs/find/index.htm

How to Obtain FinanceHow to Obtain Finance



Project Information Required for Project Information Required for EBRD FinancingEBRD 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

Project Information Required for Project Information Required for EBRD Financing (cont’d)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

Project Information Required for Project Information Required for EBRD Financing (cont’d)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

EBRD’s Environmental ProceduresEBRD’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

ContentsContents

Introduction






Case: Estonian Cell

Financing InstrumentsFinancing Instruments

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

Direct Indirect

Project Financing GuidelinesProject Financing Guidelines

Significant equity contributions (in cash/in-kind) required from sponsor(s)

Prudent capital structure (normally 60% long term debt in total financing)

the EBRD 35%

Co-investors 65%

Typical Capitalisation StructureTypical Capitalisation Structure

Equity

Equity

LoanLoan

Loan

Foreign sponsor

25%

the EBRD 35%

Syndicated 15%

Local sponsor 15%

Others 10%

EBRD’s Risk ProfileEBRD’s Risk Profile

Takes financial risks Takes political risks Takes long maturity Shares equity risk

Have sound management

Take operational risks

Take commercial risks

the EBRD Sponsors

Financial FlexibilityFinancial Flexibility

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

Wide range of loans

Fixed or floating rate

loans

Choice of currencies

Short to long-term

maturities

Hedging

ContentsContents

Introduction






Case: Estonian Cell

How Banks Evaluate Project RisksHow 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/implementationTechnology – proven or experimentalRaw material supply – availability/certainty/pricingLogistics/transportation/costsAvailability of necessary skills, labour and managerial staff

How Banks Evaluate Project Risks (2)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

ContentsContents

Introduction






Case: Estonian Cell

EBRD OrganisationEBRD Organisation

Financial Institutions

Industry and Commerce

Infrastructure

Automotive

Chemicals

FOREST INDUSTRY

Non-Ferrous Metals

Steel

Aerospace

Southern & Eastern Europe

Combining Industry Knowledge with Experience and Contacts in

the Region to deliver tailored solutions to financing and

political risk

Combining Industry Knowledge with Experience and Contacts in

the Region to deliver tailored solutions to financing and

political risk

Russia and Central Asia Central Europe

Selected EBRD Investments in Forest Selected EBRD Investments in Forest IndustriesIndustries Project Foreign Investor EBRD Financing

Year Company Product Country Owner/Partner Country €million Type

2004 Frati-Sebes Chipboard, MDF, Resin

Romania Kronospan Group Austria 70 Loan

2004 Estonian Cell Pulp Estonia Larvik Cell Heinzel Holdings

Norway Austria

19 Equity

2003 Kronospan MDF, Resin Russia Kronospan Group Austria 63 Loan

2003 Rubizhansky Paperboard, Packaging

Ukraine D.S. Smith U.K. 12 Loan

2003 Pestovo Saw mill Russia UPM Finland 15 Loan

2002 Imavere Saw mill Estonia 7 Loan

2002 Stora Enso MPF* Saw mills, Packaging

Regional Stora Enso Finland 100 Loan

2000 Kostrzyn, KZP Paper Poland Trebruk Sweden 12

11

Equity

Loan

1999 Ambro Pulp, Paper Romania Rossman/Sical France 6 Loan



1997 Krono-Wood Mielec

Chipboard Poland Kronospan Group Austria 19 Loan

*: Multi-project facility

Selected EBRD Investments in Forest Selected EBRD Investments in Forest IndustriesIndustries Project Foreign Investor EBRD Financing

Year Company Product Country Owner/Partner Country €million Type

1996 Kostrzyn, KZP Paper Poland Trebruk Sweden 13 Loan

1995 Sepap Steti Pulp, paper Czech Rep. AssiDoman Sweden 57 Loan

1994 Kronospan Szczecinek

MDF, Resin Poland Kronospan Group Austria 31 Loan

1994 Kwidzyn Pulp, paper Poland International Paper U.S. 28 Loan

1994 Papirnica Kolicevo

Paperboard Slovenia Saffa/Sarrio Italy 3

10

Equity Loan

1994 Zapsibinvest Solid wood board

Russia Loschen Germany 4 Loan

1993 Kostrzyn, KZP Paper Poland Trebruk Sweden 18 Loan

1993 Polspan Szczecinek

Chipboard Poland Kronospan Group Austria 16 Loan

1993 Malta-Décor Paper Poland Kronospan Group Austria 6 Loan

1993 Kner Nyomda Packaging Hungary Cofinec France 4

2

Equity

Loan

1993 PCA-Budafok Packaging Hungary PCA U.S. 3 Loan

Total 541

ContentsContents

Introduction






Case: Estonian Cell

Introduction – Estonian CellIntroduction – 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

Deal StructureDeal Structure – Estonian Cell – Estonian Cell

Larvik Cell AS,Norway

1/3 Shareholder & Sponsor

Estonian Cell AS

Estonia

Estonian State Forest

Management Centre Long-term wood supply

contract

Nor-Est Wood AS

EstoniaLong-term wood supply contract

Gas / Electricity Utilities

RWE IN / Tessag KSHwith Andriz as the main equipment

supplier

Wilfried Heinzel AG

Austria

Wood SupplyAgreements

Heinzel Holding GmbH Austria,

1/3 Shareholder

RZBSenior Debt Underwriter

OeKBAustrian Export Agency

EBRD1/3 Shareholder

Agency Agreement EPC Contract

LT Supply Agreements

EUR 19 mln

EUR 108 mln

How to Contact the EBRDHow to Contact the EBRD

Juhani NumminenSenior Adviser, LondonPulp, Paper and Forest Products Industries+44-20-7338 [email protected]

Timo HartikainenPrincipal Banker, LondonBusiness Development+44-20-7338 [email protected]

www.ebrd.com

Documents

Financing Projects in the Forest Industry in Eastern Europe Juhani Numminen, Senior Advisor - Pulp, Paper and Forest Products Industries, EBRD EEBF Stockholm