Sociedad Inversora Forestal S.A

completed

The Fondo Forestal Lignum (the Fund) is seeking IFC’s assistance for a forestry asset securitization project to monetize standing forests and unforested, eroded areas on small and medium rural properties in Chile. The Fund is a scaling up of a successful pilot program carried out by Sociedad Inversora Forestal (SIF) with the support of Fundación Chile, the project sponsor. The pilot program started in 2000 with an investment of $4.1 million to acquire land use rights from small and medium landowners. As part of this project, SIF acquired 4,600 hectares of standing forests and planted 3,100 hectares of new forests. In November 2002, SIF issued a 10-year $13 million bond backed by the cash flows from these forestry assets.The Lignum Fund Project is based on the same business model as the pilot program, with a proposed financial structure of a $34 million equity fund, to be contributed by IFC and 3-5 Chilean institutional investors. IFC is considering an investment of up to $6.5 million in the Fund.Over an 8-year period, the Fund intends to:- purchase approx. 20,000 hectares of standing radiata pine and - plant approximately 30,000 hectares of eucalyptus globulus and radiata pine on properties held by small and medium landowners mainly in regions VII and VIII of Chile. The cash flows from the future harvest of these assets will support a securitization or a forestry bond issuance in the Chilean capital markets. The Fund intends to use proceeds of the securitization or bond issuance to finance a second round of investments in standing forests and new plantations to support a second securitization. The Fund will target dry, eroded areas of little or no agricultural value. The average size of the standing forest or barren land that individual owners will cede usufruct to the Fund is expected to be approximately 130 hectares. The project will be supported by Forestal Celco/Arauco (a subsidiary of Copec S.A.) and Forestal Mininco S.A. (a subsidiary of CMPC S.A.), the two largest forestry companies in Chile. These two companies (the Forestry Companies) will:- carry out the operational activities during the forestry cycle (planting, fertilizing, thinning, pruning, measuring, guarding, harvesting, commercializing, transporting logs and building access roads needed to harvest);- purchase the wood harvested from existing plantations and the afforested land;- provide certain volume guarantees of standing forests at the time of the signing of the land use right agreements;- comply with the minimum standard specified for new plantations by the Chilean government of a 90% survival rate and doubling the size of the seedling at the end of the first year (meeting these standards qualifies the plantation for planting subsidies); and- provide forest fire combat infrastructure.SIF S.A., a wholly-owned Fundación Chile affiliate, will be the forestry advisor to the Fund and, as such, will have the following responsibilities:- locate, assess and negotiate land use contracts with current owners, after the forestry companies have pre-approved both the land location and projected future harvest volume;- acquire insurance for forest fire;- contract services to control biological damage and theft;- market log volumes prior to harvest; and- coordinate harvesting and log merchandizing through third party contractors.Structuring and mobilization assistance are being provided by Asset Chile (an investment bank providing specialist corporate finance advice) and Independencia (a privately-owned fund manager specialized in real estate).