Chile's Sociedad Inversora Forestal (SIF) is preparing to issue the country's first forestry-backed bond this year via local investment bank IM Trust. "The objective is to create a new financial instrument to make capital available to the forestry sector," said Michele Golodetz, the CEO of SIF. Stimulating forestation is another aim of the $12.5 million deal, she added.

The bond is basically a future flows transaction. SIF has signed land-use contracts with individual property owners in the seventh and eighth regions in Chile, where timberlands are most lucrative. As part of the deal, SIF has also secured long-term administration contracts with two of the country's leading forestry companies, Forestal Mininco and Forestal Millalemu. SIF currently holds land-use contracts and purchase options covering 4,073 hectares of Radiata Pine, a major export of the Chilean economy. The deal is also backed by land-use contracts for nearly 3,000 hectares of bare land to be planted in 2003 with Radiata pine and Eucalyptus Globulous. The two operators are responsible for managing the timberlands and have agreed to buy all the volumes harvested on SIF's properties. The value of the products is based on the volumes received at the intermediate or final consumption destination and is based on a market reference price.

Fitch and Standard & Poor's affiliate Feller Rate have rated the bond AA-' and A+' on the national scale, respectively. The ratings are bolstered by a reserve account kept at 1.4 times the next coupon payment six months prior to disbursal, and a $4.1 million capital injection from Fundacion Chile and the Ministry of Agriculture.

Price volatility is a drag on the bond's risk profile, although the structure presupposes a dreary market. In fact, the base scenario assumes prices hovering at the lowest levels of the last decade.

Though forestry-backed deals are far from common, they already have a history in the U.S. The first such public transaction was in early 1993, when Pacific Lumber Company issued a $385 million bond due 2009 via Salomon Smith Barney. Backed by timberlands and harvest, the deal priced at 7.95%.

Apart from its structure, SIF's bond stands out as a scarce commodity in the domestic debt market because of its dollar denomination. With the Chilean peso taking a plunge over the last few years and still wobbly, issuers have stuck to the local currency. Historically, tight interest rates have further fed this trend. Even some exporters - natural debtors in dollars - have opted for local currency and undergone swap operations to cover risk. The exception came last year, when Bank of America brought an 8-year $37 million bond to market from power company Guacolda. The deal priced at 8.9% and was rated A+' by the three agencies active in Chile: Fitch, Feller Rate and Moody's Investor Services affiliate Humphreys.

The lack of local dollar deals has whet investor appetite for the greenback, which obviously bodes well for the SIF bond. "There's definitely demand out there, it's just that all the big issues were from non-exporters, so no one dared venture into dollars," said one pension fund official. "We'd definitely look at this forestry bond."

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