Financing Projects in the Forest Industry in Eastern Europe

1. Financing Projectsin the Forest Industryin Eastern Europe Juhani Numminen, Senior Advisor - Pulp, Paper and Forest Products Industries, EBRD EEBF Stockholm 26 November 2004

2. 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

3. 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

4. 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

5. 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

6. Network of 32 Offices in 27 Countries

7. Private loans 50% Equity 20% Guarantees, etc 4% State loans 26% EBRD – Focused on Private Sector

8. 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

9. 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

10. EBRD’s Role Functioning as a catalyst for change, the EBRD: • Promotes co-financing and foreign direct investment • Mobilises domestic capital • Provides technical assistance

11. 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

12. 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

13. 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

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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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 Financing Instruments Direct Indirect

21. 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%

22. Typical Capitalisation Structure the EBRD 35% Foreign sponsor 25% Loan Equity Loan Others 10% Loan Equity Syndicated 15% Local sponsor 15%

23. Takes financial risks Takes political risks Takes long maturity Shares equity risk Have sound management Take operational risks Take commercial risks EBRD’s Risk Profile Sponsors the EBRD

24. 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 Financial Flexibility

25. 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

26. 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

27. 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

28. 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

29. EBRD Organisation Southern & Eastern Europe Central Europe Russia and Central Asia 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

30. Selected EBRD Investments in Forest Industries *: Multi-project facility

31. Selected EBRD Investments in Forest Industries

32. 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

33. 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

34. Deal Structure – Estonian Cell Larvik Cell AS, Norway EBRD 1/3 Shareholder 1/3 Shareholder & Sponsor Estonian State Forest Management Centre EUR 19 mln Long-term wood supply contract Heinzel Holding GmbH Austria, 1/3 Shareholder Estonian Cell AS Estonia Wood Supply Agreements RZB Senior Debt Underwriter EUR 108 mln Nor-Est Wood AS Estonia Long-term wood supply contract Agency Agreement OeKB Austrian ExportAgency EPC Contract LT Supply Agreements RWE IN / Tessag KSH Wilfried Heinzel AG with Andriz as the main equipment Gas / Electricity Utilities Austria supplier

35. How to Contact the EBRD Juhani Numminen Senior Adviser, London Pulp, Paper and Forest Products Industries +44-20-7338 7056 numminej@ebrd.com Timo Hartikainen Principal Banker, London Business Development +44-20-7338 6272 hartikat@ebrd.com www.ebrd.com