Agro Loan SecuritizatonsHow can the Capital Markets Finance Brazilian Agriculture

Bernardo Costa

Associate Director

Fitch Ratings - International Structured Finance

(P) 312-606-3315

bernardo.costa@fitchratings.com

October 08, 2008

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Cedula de Produto Rural: CPR

> Authorized by Law 8.929 of 1994 (modified by 10.200 of 2001)

> May be Issued by Producers, Cooperatives and Rural Associations under two types

– Financial: a bond/security paid through Price x Quantity

– Physical: Like a Futures/Forward Contract paid through delivery

> Needs to be Registered at a Notary Republic

> First Lien Pledge on Product being Financed

– Article 17: False Statements or Actions may cause criminal prosecution

> Including Product is already in lien of other debt

> Fiscal responsibilities

– Article 18: Products cannot be seized by other issuer creditors

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Financial CPR Flow

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Financial CPR Volumes Issued

(As of October 2, 1998)Sugar CaneEthanol Sugar Cattle Soybeans Coffee

2001 0.008661 0 0 0.410287 0.280623 0.073903

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008

Sugar Cane Ethanol Sugar Cattle Soybeans Coffee Other(%)

Financial CPR

(New Sub Head123233)

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Certificado de Direitos Creditorios do Agronegocio (CDCA)

> Authorized by Law 11.076 of 2004

> Debt Securities representing promises of payment in cash backed by receivables

originated through rural activities (mostly CPRs)

> Pledge on Product being Financed

– Products cannot be seized by other issuer creditors

> Custodian is in charge of servicing receivables

> Registered at Under the Counter Exchanges (BM&F + Cetip)

> Cannot issue more debt than amount of receivables

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CDCA Flow

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CDCA Volume Issued

-

20

40

60

80

100

120

140

160

Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Numer of CDCAs (Left) Volume Issued (Right)

CDCA Evolution

Source: CETIP

(N#) (BRL 000)

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Analyzing CPRs and CDCAs = What to Look for…> CPRs and CDCAs don’t have a maximum term

– They can finance more than one harvest (recovery through product only for first harvest)

> Basis Risk

– Accrue at Inflation Indexes, Exchange Rate, Interbank Rate

– Spot Prices for Sugar Cane, Cattle, Soybeans, etc…

> How are you assigning value to your Collateral?

– Receivables + Take Out Provider = 100% or

– Debt or Receivables = Take Out Provider?

> Surveillance Companies

– Somebody has to make sure the collateral is still there…

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Financing Agriculture Through Capital Markets

> Historically, the credit markets haven’t really financed agriculture…

– Credit Analysis

– Low Individual Transaction Volumes

– Concentration!!!!

> That’s where the Investment Banker Comes In…

– Create a different vehicle, of larger volume

– Diversified Producers (Management Issues)

– Diversified Sectors (Price Volatility Issues)

– Diversified Regions (Natural Causes Issues)

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Fundos de Investimento em Direitos Creditorios - FIDC

> Ruled by CVM (SEC) Instruction 356 of 2003 (altered by 442 of 2006)

– Main Vehicle used for Securitization in Brazil

– Follows European Model – True Sale through Funds and not through Trusts

> Issuance Highlights

– Union National Agro+ FIDC Financeiros Agropecuarios (BRL500 MM)

– Vision Brazil Agro FIDC MultiCredito (BRL200 MM)

– Banif FIDC Agro I (BRL82.5 MM)

Now How do These

Transactions Work?

Volume Issued in FIDC Notes

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2003 2004 2005 2006 2007 2008

BEL(

Mill

ion)

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Agro Loan FIDC Structure

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Vision Brazil FIDC Agro - MultiCredito

Senior Issuance: BRL100 MM ‘AA(bra)’ CDI + 1.78%

Mezzanine Issuance: BRL 50 MM ‘BBB-(bra)’ CDI + 7.3%

Junior Issuance: BRL50 MM ‘CCC(bra)’ Equity Piece

> Max Individual Concentration = 7.5%

> Sector Concentration Criteria

– Max Sugar & Ethanol 75%

– Min Cattle 25%

– Max State 70%

> Senior Default Rate: 75% with 30% Recovery

> Mezzanine Default Rate: 35% with 30% Recovery

Fitch Ratings

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