The 'Pile In' on food projects

When I was a kid - whenever there was a fight between 2 cousins at a family reunion, there was nothing else for the remaining cousins to do but to 'pile-in' . Almost always we ended up smothering someone who called 'peace' and then we rolled off laughing and had a glass of Kool-Aid and laughed.

Such is not the case with Egypt, Jordan and potentially other unrest in the Middle East - affecting oil prices.

China's raising of their rate to combat inflation is going to raise rates globally. Watch. Think about how many of Developed and Emerging market industrial inputs are manufactured in China!

There is only so long that Bernanke can hold USA rates at virtually zero. Once again - the outsized impact of imported oil is going to hoist us on the petard of inflation. Mervyn King of UK has virtually thrown in the towel and Germany's dominance is once again clear in the Euro zone. So are we breaking into currency zones once again? Oceana, Asiana, Americana? Is it a 'Pile-On' or a rational response to the recent liquidity infusion? Probably a little of both.

OK so, as an Emerging Market Private Equity investor in food projects - what to do? 1) I would check your portfolio carefully - how much is invested in food, energy and industry, 2) You did the management due diligence, how able are they to cope with an increase in price of inputs.

What? - did you think food is grown with high yields without hybrid seed (imported), fertilizer (natural gas based and imported), weed killer (carbon based chemicals and imported) and transport to the warehouse (variable cost - petrol). Now, given the unrest right now - how easy do you think it will be to raise food prices on the back-end to counteract the rise in cost of inputs. Answer-not easy.

Now capital costs - pay attention, this could be the 'rear-end' saver. In the project structure, an investor doing due diligence obviously utilised every capital maximization tool possible. That would include Export Credit Agency equipment financing, Food for peace concessionary financing, and other hedges such as insurance and grant programs.

So the fact is clear - when everyone starts talking inflation, investments are endangered and apart from a good management team, you have to have a razor sharp capital allocation scheme. For example, why borrow to buy imported equipment locally at 27% when you can get Export Credit Agency funding at 3.1% for 8.5 years fixed. Today. Time to review those capital structures.

Lastly, if you are an investor in food projects in Emerging Markets - let me tell you - I am a management management management investor. Anyone can write an algorithm (a set of mechanical instructions) but it takes a certain management spirit to move company elements to maintain investment value and provide value to the shareholders as well as the social good for food protection.

Summary: Yes, the MSCI dropped on the back of Latin America trading, China's change of rates and Europe's continued weakness. If your management is sound and flexible to adjust, and you have a strong capital structure with strong DSCR and EBITDA, your investments should be sound. The macro elements are indicating an increase in demand in resources and that will only benefit Emerging Market industries.

Maurice Johnson

Post Road Advisors

+1 203 255 0226

Sub Saharan Africa Growth

I had the opportunity to work in Ghana, West Africa from September to mid-December and more is to come. The tasks: protect foodstuffs in warehouses through creation of standards and a commodity trade exchange. Remember, farmers, traders often lose 30-50% of grain value while storing harvests waiting for higher prices post harvest.

The initial assignment was with Commodity Clearing House and involved a business functional review, interviewing trade prospects, restructuring recommendations and the authoring of a commodity/asset trade manual for the Central Bank review. The CCH team is pictured - (L-R) Sam, Abena, me and Sammy.

The second assignment was to review the Ghana Grains Council (GGC) business model and make recommendations. We felt that the GGC is the premier standard-setter for grain storage conditions. In addition, a finance facility needed to be enacted immediately to secure appropriate warehouse and ancillary services. Lastly, a warehouse receipt liquidity facility needed to be put in place to facilitate transaction velocity - i.e., the farmer produces and sells more grain, the trader transacts more grain and the warehouse gets more volume throughput and hence - more fees.

Fun: Sub-Saran Africa is growing on average at 5% pa with Ghana projected at 9%. It has a robust cocoa and grains sector, gold production and now they found oil. It also has a wealth of human resources in terms of literacy, friendliness and entrepreneurial spirit. There is huge potential for Private Public Partnership finance

Fun-sucker: a) The traffic is gawd-awful - if you thought I-95 at 8AM was bad - spend 1 hour in an un-airconditioned taxi in 120F heat on the Accra Ring-Road (Beltway). b) Power outages- is daily and wreaks havoc on computer systems.

Danger: Ghana controls a wealth of resources and is sandwiched in a relatively unstable if not certainly controversial area - they are very conscious of this and are actively enacting policies to avoid a dependence on oil and corruption. It is not an easy task.

Best part: Laughter. No matter the situation, the poverty or the richness - a laugh is not far away in Ghana. And then a Ghanian hand shake. (now this is a very regimented procedure - a wide arm swing - hands meet in a slap, then a regular shake then a palm shake then a pull-away with a finger snap at the end - to fail a snap requires a redo).

Ghana will do very well. Happy New Year!

(Thanks: ACDI/VOCA and USAID funded the projects - my sincere thanks to the teams - Medaasi Paa)

So we're all grown ups

What happens to men once they pass 40 years old? - do brains run out of their ears? Tom Cruise, Tiger Woods.....

Now it's Al Gore?

I was in the food court in Grand Central Rail station the day Tiger Woods was "rescued" by his wife with a 9-iron. Every man in the area looked at each other and then looked down. We knew EXACTLY what happened.

Now, VP Al Gore - Mr. Inconvenient Truth - has invaded our grocery-store check-out stands with the incessant tabloid story of his affair with a paid masseuse - hello both parties - you are a masseuse and you go to a guy's hotel room at night and do not expect an 'advance' - hey Mr. VP = what were thinking ? You invalidated everything ref global warming.

Thanks - it makes my day.

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There is such a thing as public trust - and if you adopt the mantle of trust - then wear it - and wear it well.

SIMPRA (a partnership between SEA-Enterprises and Post Road Advisors) is pleased to announce a mandate by VICA Technologies LLC to advise and arrange approximately $250 million for two projects to finance equipment and working capital for renewable energy projects in Mali and Nigeria, Africa.

The projects are Waste-to-Energy facilities each processing 292,000 tons of municipal waste per year creating ‘syngas’ to fire gas turbines and subsequent steam turbines (combined cycle process). These projects reduce pressure on overburdened landfills, remove waste in an environmentally friendly process. Each project creates employment of 200 employees, generates carbon credits and produces 20 Megawatts of electricity that will continuously export 132 GWH to the Malian and Nigerian, grid. Each project’s output can power approximately 16,000 homes. Non-combustible metals are sorted and sold to markets reprocessing. Ash waste is sealed in glass blocks.

Using a build own, operate and transfer (BOOT) project model, VICA Technologies LLC mandated SIMPRA to arrange finance for a facility that will operate for 15 years or more. This plant will be transferred to the Governments of Mali and Nigeria after the Concession periods. The projects have been granted concessions by both governments.

VICA is a company of professional engineers and project management specialists with a combined experience of over 100 years in the field of biomass energy. The group key personnel are Dr, Azuka Anyiam - CEO, Jerry Kindrachuk - CFO, Prof. Alexander Sedmak, Hiep Nguyen and Kenneth Hladun from Omega Thermal Technologies Inc.

SIMPRA is the exclusive and sole financial advisor to the project. SIMPRA is a partnership of project and structured trade finance professionals with Christopher Andoh (formerly of City of London Investment Management) and Maurice Johnson (formerly of GE Capital Commercial Finance). The $150MM of equipment is expected to be sourced from the US supporting the export initiative and investment agencies will be involved. The US Trade Development Agency supported the feasibility study.

Questions and clarification can be addressed to: Maurice Johnson +1 203 450 2498.

Clean Energy and Emerging Markets

Summer - I can almost hear the Beach Boys in the summer breeze - but I digress.

As you know, Post Road Advisors has entered into a cooperation agreement with SEA-Enterprises and we are cooperating on several projects. One interesting one is to establish a Waste to Energy facility in Mali and Nigeria, Africa. These facilities would process 150 tons of trash per year to relieve pressure on landfills, incinerate the trash in a clean facility, create 'syngas' to power a combined-cycle turbine to generate electricity for the national grid. Ash and heavy metals are encapsulated in glass bricks using the abundant sand (silica) in these Sahel and sub-Sahel countries.

So this project and our financial calculations bring to the point of - how to calculate the sales price of clean 'syngas' or 'clean energy'?

In the graph above, Andreas Schreyer of The Green Investor compares pricing of clean energy using as a proxy the ETF (Exchange Traded Fund) Power Shares Global Clean Fund vs Platts West Texas Crude price. As you can see there is a very strong correlation - in fact - the correlation coefficient is 0.9 with a perfect correlation between prices being 1.

The point is that Emerging Markets are key players in this sector with biomass and solar clean-energy projects and are affecting the clean energy price grid. It is critical for financial lenders to be able to predict price fluctuations using regression analysis techniques using WTC historical prices as a potential predictor of clean energy project out-put pricing. This is necessary to justify the financial proposals. We will address Multilateral Lenders Agency (MLA) in a later article.

But what does this suggest? Clearly, as oil fluctuates in price, synfuels will also (note the slight lag of the synfuels vs oil prices in the graph) and begin a correlated relation to the price of oil. These elements should be incorporated in sensitivity analyses for project evaluation. In this way we can better predict the pricing required for clean energy projects to service debt and equity. Therefore, we now have a relatively crude- but justifiable-model to sensitize clean energy and Emerging Market renewable energy models for financial projections to evaluate the projects. From here, with this high correlation coefficient, we can derive the NPV and provide lenders with adequate information to make a reasoned decision.

Now, to the beach.

The Euro

So Greece debt disintegrates and Germany 'sounds the bugle ' (France 'chips in') and the calvary comes to the rescue - once - OK that was then - now - the play - I'd short trade Portugal, Spain, Italy and go long Emerging markets. Done.

Funds in Europe

As Carol Ann said in Poltergeist II - 'They're back!!!! '

The FT reports that 142 new funds at $1.82 TRILLION dollars of investment were established by the end of 2009 - in the midst of a recession!

All you have to do is originate the deal, book the fee and then book the asset to the fund with a hedge. It's not that hard to figure out. Below is a note from Reuters and - UCIT3 is transforming to UCITS4 with more cross-border flexibility.

Maurice.

203 450 2498

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Toscafund to launch mid-cap UCITS III fund

12:00am EST

(Reuters) - Hedge fund firm Toscafund, will launch later this month a UCITS III version of its mid-cap fund following demand from private clients, its chief executive said on Tuesday.

The UCITS version fund will be launched in mid-March on a platform provided by Deutsche Bank (DBKGn.DE) and expects to close at $300 million.

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From RBC Dexia http://www.rbcdexia.com/

Moving from UCITS III to UCITS IV The funds landscape is changing, with UCITS IV set to be introduced in 2011. The launch will introduce new regulations designed to strengthen the existing UCITS brand and ease the path for cross-border fund mergers and distribution UCITS IV: Which business model for tomorrow?