financing a cdm project – dbbl’s experience farhad ahmed khan assistant vice president...
TRANSCRIPT
Financing a CDM Project
– DBBL’s experience
Farhad Ahmed KhanAssistant Vice President
Syndication & Structured Finance
Credit Division, Dutch-Bangla Bank Ltd
DBBL to provide to the extent of Taka eqvt. Euro 2.00 million in part funding of implementation of WWR Bio Fertilizer Ltd, a municipal organic waste-to-bio-fertilizer plant
FMO to act as Arranger and DBBL to act as Agent and Security Trustee
DBBL’s Participation in Euro 12 Million Project
Waste Concern Consultants (WCC) from Bangladesh. It is working in the area of waste management in Bangladesh since 1995. It is specialized in small and medium scale waste management projects especially composting. Waste Concern is involved in design and implementation of 47 compost/recycling plants distributed in 26 cities and towns of Bangladesh. Apart from Bangladesh, WC is also involved in waste composting projects in Sri Lanka and Vietnam.
World Wide Recycling BV from Netherlands. It is also working in the areas of waste management. This company is associated with VAR a large scale waste recycling company. It is specialized in large scale waste projects including composting
WCCWCC WWRWWR
WWR Bangladesh Holding BV.WWR Bangladesh Holding BV.
WWR Bio Fertilizer Bangladesh Ltd.
Project Partners
The Shareholders Structure
WBH holds 100% less legally required local shareholding of one share of WWR Bio.
The shareholders of WBH are WWR (EUR 1.7m, 54.2%), WCC (EUR 0.4m, 13.6%), FMO (EUR 0.5m, 16.1%) and Triodos (EUR 0.5m, 16.1%).
About ‘VAR’/WWRWWR is closely related to the VAR via Jan Boone, who is the founder of VAR, was director of VAR till July 2002, and still is main shareholder of VAR with 80% and he is chairman of the supervisory board of VAR. VAR was established in 1981 by Jan Boone. VAR is one of the largest and most innovative companies in the area of sustainable waste treatment in the Netherlands. VAR and WWR have signed a Cooperation Agreement via which VAR is obliged to provide technological support to WWR.
At the end of 2006, VAR had a Balance Sheet total of EUR 83m, turnover of EUR 48m, net profit EUR 4.1m, solvency 32% and 140 staff. The following key figures of VAR in 2006:
– Balance sheet total: EUR 79,992,817– Equity: EUR 27,096,302– Turnover: EUR 47,643,755– EBIDTA: EUR 7,300,429– Net profit: EUR 4,122,329
Financing Plan of WWR Bioin million Euro
Amounts x1m EUR
Equity to
WBH*
Loan to* WBH
Loan to WWR Bio
Total
FMO 0.43 1.54 3.90 5.87
Triodos 0.43 0.43 1.50 2.36
WWR/WCC 1.80 - - 1.80
DBBL - - 2.00 2.00
Total 12.03
*the amounts paid out to WBH are transferred to WWR Bio as equity
Investment and Financing Investment Plan (in Euro) 2007 2008/2009 2009/2010
1 Investments in intangibles 690,000 0 0
2 Land 187,198 327,273 297,521
3 Buildings + machines 1,304,035 3,899,706 3,806,134
4 Contingencies (activated) 167,903 502,112 490,064
5 Enrichment 550,000 413,223
6 One-off costs 225,000
Total 2,574,136 5,279,091 5,006,942
Financing Plan (in Euro)
7 Capital injection WWR/WC 840,000 804,900 155,100
8 Capital injection FMO 200,000 191,643 36,929
9 Capital injection Triodos 200,000 191,643 36,929
10 WBH subloan FMO 164,805 689,914 688,138
11 WBH subloan Triodos 79,305 191,643 157,623
12 WWR Bio subloan FMO 721,680 1,743,950 1,434,370
13 WWR Bio subloan Triodos 269,639 651,586 535,919
14 WWR Bio loan DBBL 372,736 900,721 740,829
Total 2,848,164 5,366,000 3,785,836
Projected Operating ResultsAmounts in x1000 EUR 2008 2009 2010 2011 2012 2013 2014 2015
Turnover 1,537 6,323 6,178 11,293 10,986 9,367 8,852 8,365
EBITDA 412 2,541 2,447 4,550 4,584 3,313 3,122 2,942
Net profit -129 1114 1169 2692 1767 1117 1100 1137
Operational cash flow 220 1,416 2,477 3,484 4,648 3,650 3,230 3,043
Cash at end of year 240 999 1,177 2,804 4,704 6,257 6,151 5,993
Balance sheet total 7,989 9,502 13,941 16,018 16,902 17,158 16,163 15,200
Solvency (%) 26% 34% 33% 42% 48% 53% 61% 71%
Risk Bearing Capital as % of TA 82% 81% 85% 88% 92% 95% 95% 95%
Debt/EBITDA 14.05 2.28 3.61 1.83 1.71 2.21 1.76 1.25
Current ratio 4.37 5.40 5.79 6.48 8.64 11.52 11.84 12.10
DSCR excl. investments 2.03 3.87 4.07 5.39 4.63 4.00 2.26 2.47
Tenor/Repayment Period
Tenor:
Tranche I – IV : for the loans, 10 years from the financial close, with a
grace period of 6 years.
Tranche V: (6 years) from Financial Close with a grace period of 12
months.
Repayment Period:
Tranche I-IV: In 8 semi-annual equal installments with the first such
installment due 78 months after the closing date.
Tranche V: In 20 quarterly installments with the first such installment due
15 months after the closing date.
Feedstock risk Feedstock risk Construction
risk
Construction risk
Perceived Risk as assessed by DBBL:
Off-take risk Off-take risk Land
Operational risk
Revenue from CERs
Environmen-tal and social
risks
Key Man Risk Loan Structure
Risk
Loan StructureRisk
Feedstock risk:
Input of organic waste is guaranteed by a Concession Agreement with the municipality that allows WWR Bio to collect up to 700 ton/day waste from designated areas, like local markets.
Construction risk:
A compost facility is a relatively easy concept. Also, the construction is done under supervision of the VAR with extensive experience and knowledge
Operational risk:
Employees will be trained, partly at the VAR in the Netherlands. If major problems occur the VAR will give technical assistance. Management of the companies will come from WCC and WWR and thus have experience with waste management
Off-take risk (demand, competition and distribution):
Compost can be used as a substitute for or additional to more expensive fertilizers. The compost market is only marginally developed, while the domestic fertilizer market can not foresee in total demand. So (potential) demand is high, while competition is low. Because the compost will be tailor made for different crops it can be sold during the whole year. WWR Bio negotiates on agreements with end-users directly and off-take agreements with wholesalers/distributors. Own distribution will then be considered later
Land:
For the first 100-130 ton/day capacity land is acquired under a lease contract, which might not be sustainable. DBBL’s investment is however limited to EUR 0.372 m in the first phase and for subsequent phases it is required that land is obtained in ownership.
Revenue from CERs:The used methodologies are approved as CDM projects and thus CERs will be generated as soon as the compost facility is operational. The price of CERs stays, nevertheless, very insecure, but profits of the project are mainly generated by selling (enriched) compost
DBBL assumed a fixed selling price of Euro 8 per unit CER
Environmental and social risks:
The project has significant environmental and social
positive impacts, the most important being the reduction of
greenhouse gas emissions, the production of soil
improving compost and the offering of livelihood
opportunities and improvements for poor and marginalized
people. Potential adverse impacts do exist, but are limited
and manageable and they can be mitigated.
Key Man Risk:
The Directors of WWR Bio are A.H. Md. Maqsood Sinha of WCC and a representative of WWR, currently Jan Boone. A.H. Md. Maqsood Sinha has experience with waste management in Bangladesh. A.H. Md. Maqsood Sinha and Jan Boone seem very capable of running WWR Bio. Nevertheless, if Jan Boone or any other key person should fall away, an important financial and business partner is lost (key man risk), especially during construction phase.
Loan Structure Risk:
The tenor for the DBBL’s loans is 6 year, with a grace period of 1 year. DBBL (senior loans) receives security over all fixed and floating assets of WWR Bio.
Another mitigant is that disbursements of the loans to expand capacity from 100 to 700 ton/day, will be considered only if the project at phase 1 has proven to be a success.
Milestones Achieved:
Concession Agreement with DCC has been signed to collect and transport waste
National CDM Board Approval has been obtained
Land lease agreement for 22 years has been signed
Trade licensee obtained
Land use clearance obtained
BOI registration obtained
Third party verification of Environmental and Social Compliance has been done
Environmental clearance obtained from DOE
Work permit for the WWR engineer has been obtained
Import permit has been obtained
Land development completed
Detailed Engineering design completed
Major construction works for phase 1 completed by March 2008
The project has gone into trial operation end of March 2008
Pending : Registration of compost/enriched compost
DBBL to finance First CDM project in Bangladesh
– Commercial lenders are cautious in providing new loans particularly to projects involving unfamiliar technologies.
– Technologies, equipment & processes relevant for CDM are available commercially, many of which offer viable economic returns; yet, not many of such projects are being implemented in Asia compared to what can be potentially achieved.
– Bangladesh is yet to see any lender, other than DBBL, to finance CDM project.
– DBBL wishes to extend thanks to FMO for involving it with the country’s first ever CDM project.
Summing up – DBBL’s Feeling
• An adequate risk-sharing structure is often difficult to put in place and almost always creates unanticipated delays in achieving financial closing.
• Risk should be allocated, by contract, to the party that is best able to mitigate or control.
• Completion risk could be avoided by implementing such project in phases.
• There should be transfer of technical know-how from Annex I country.
• Carbon Credit market development needs accelerators. Action by participating players needed – advisors, buyers, FIs, government to put in place the necessary accelerators.
• Regulatory support needed.
• Lenders should have greater oversight of the project. They should have control the application of cash flows.
Summing up - DBBL’s Feeling (Contd.)
• First time lenders for projects like CDM should be in the senior loan category. Equity and quasi equity should be invested first.
• Banks need assets to back-up; however, CDM project is often not asset based but idea based.
• Documentation is lengthy and complex, and costs a great deal to put into place.
• Success of WWR Bio is crucial for other lenders to finance CDM project.
• Bangladesh is an attractive market for CDM.• DBBL will embark on the lessons learned to take on more such viable
CDM projects. Journey has just begun.