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Research Report

Financing Pulp Mills:: An Appraisal of Risk Assessment and Safeguard Procedures

Machteld Spek
Copyright Date: Jan. 1, 2006
Pages: 104
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Table of Contents

  1. (pp. 1-3)

    A CIFOR/WWF study on Indonesia’s pulp and paper industry conducted in 2000 found, among other things, that ‘weak due diligence practices and inadequate financial reporting standards led the international investment community to channel over US$ 15 billion to Indonesian pulp producers without a secure, legal, and sustainable supply of wood fibre’. In response to this finding, CIFOR’s project on Financial Institutions and Forestry Investment began working to strengthen the financial due diligence practices, risk assessment techniques, and regulatory reporting standards associated with forestry and plantation investments. The present study was commissioned as part of this project.

    This study provides a...

  2. (pp. 4-15)

    Pulp is used to manufacture materials such as paper, board, tissue and rayon. Pulp can be made from a variety of fibers, of which wood is most predominant.

    Pulp has traditionally been made from coniferous wood found in temperate countries. This type of wood is also known as softwood, and specific species include pine, aspen, spruce, fir and hemlock. These types of wood derive their consistency from cellulose fibers that are extracted in the pulp production process. The length of these fibers is critical in determining the strength and consistency of the final product into which it is processed. The...

  3. (pp. 16-38)

    Pulp mills are highly capital intensive, and the need for capital forms a major barrier to entry to the industry. Obtaining a production license is no guarantee that the mill that will be built can be operated economically. Investors and lenders have to assess mill viability for themselves prior to accepting the financing risk. Because of this process it is to be expected that the financing stage forms an additional screen by filtering out projects that are unlikely to be successful. By granting or denying financing to parties, financiers can have a major impact on which projects get financed, and...

  4. (pp. 39-52)

    The most common form of risk affecting all lending transactions, whether direct in the form of loans, or indirect in the form of the purchase of a debt security, is the possibility that the obligor fails to meet its obligations in accordance with agreed terms. If a debt issue is publicly traded, even a change in relative creditworthiness has an impact on the price at which the security is traded, so that credit risk considerations are relevant for companies across the spectrum of financial strength, and not just those at the edge of default. The primary objective of bank risk...

  5. (pp. 53-65)

    Since the late 1990s commercial banks have taken greater responsibility for their lending actions by integrating social and environmental considerations into lending policies that were previously guided by economics alone. This was both an expression of Corporate Social Responsibility and a response to criticism by green parties and non-governmental organisations (NGOs). Initially, banks adopted corporate values and business principles, that in some cases later found expression in explicit do-no-harm policies. In 2002 a large number of commercial banks took a step further, by proactively drawing up a code that would govern their project finance activities. This code is the Equator...

  6. (pp. 66-71)

    This study has reviewed how investments in new pulp producing capacity obtain funding, and the criteria that these investments have to meet. The specific focus of the review was to see why it is that companies operating unsustainable mills could still obtain financing despite the fact that such companies pose a higher default risk as a result of being controlled by sponsors with a poor commitment to their business. A key finding here was that once mills are in existence, financiers assume they operate within the standards laid down by relevant national legislation, and on that basis these financiers go...