Exclusive: Rabobank mulls securitization of UN fund loans

Rabobank’s long-term plans for the $1 billion debt vehicle established jointly with the UN last year include the possible securitization and sale of loans from the fund, according to the lender’s director of sustainability.

In October, Rabobank and the UN unveiled plans for the Forest Protection and Sustainable Agriculture Fund, which they said was designed to support investments in line with the UN’s Sustainable Development Goals.

Speaking to Agri Investor earlier this month, Rabobank director of sustainability Bas Ruter explained that four components will constitute the $1 billion vehicle: senior debt provided by Rabobank from its own balance sheet, grant funding supporting technical assistance, junior debt and soft loans (or “de-risking instruments”) from DFIs and government entities that will help bring individual projects in line with Rabobank’s standard risk criteria.

“Once we have a number of years as track record, we can actually securitize the loans”

Ruter said that in about five to seven years, after the volume of the lending under the program has grown big enough, Rabobank will consider securitizing senior debt offered through the fund and selling it to investors at regular market rates.

“The public money will be used to make [the projects] possible and the senior debt will be used to prove that it is possible to leverage public money using private money to scale up this movement,” said Ruter. “Once we have a number of years as track record, like we do with mortgages for houses, we can actually securitize the loans under this scheme, providing a market rate risk/return profile for institutional investors.”

Given the innovative nature of the vehicles’ plans for mixing public and private support, Ruter said, the five-to-seven-year timeline is largely aspirational. By the end of 2018, Rabobank hopes to secure at least one investment large enough to support the legal establishment of all of the entities needed by the vehicle and break ground on at least one project in Brazil, according to Ruter.

Public and private

Ruter said that between 25 and 40 percent the Forest Protection and Sustainable Agriculture Fund will come from its partner organizations, which could include DFIs such as the International Finance Corporation, climate funds and other sustainability initiatives. He added that the remaining $600 million to $750 million will come directly from Rabobank in the form of senior debt.

While specific terms will vary by project, Ruter said that the combination of financing instruments are designed to allow Rabobank to finance projects in forestry and farming systems that might take as long as 15 or 20 years to fully develop, and otherwise be impossible to support. Without a de-risking facility, for example, he explained that Rabobank would find it difficult to offer loans of more than seven years to businesses in Brazil’s forestry sector.

“The financial solution we are currently designing is a solution in which we combine regular senior debt, by the bank, with a de-risking facility by our public partners, who help us to de-risk this loan, up to the level of our regular risk appetite. We will ask business partners who will invest in the fund to contribute to the de-risking facility within it, so that we can actually provide loans with tenors of more than seven years.”

“There are also private donors who are interested to do the de-risking and the soft lending”

The UN will not contribute capital directly to the fund, but it will serve as a conduit for government-level support through UN Environment as well as directly from countries, possibly including the Netherlands, the UK, Norway, Luxembourg and Canada. In addition, support originating from funds associated with the Paris climate accord could be used to support agricultural projects through the vehicle, according to Ruter.

The private sector’s participation in the fund is likely to come from larger foundations with a focus on impact investing. Investors providing such credit would earn a return of only between 1 percent and 2 percent, said Ruter, who explained that these lenders are focused on facilitating access to Rabobank’s senior debt, on which most projects will largely rely.

“The social impact is the main return they get,” Ruter said. “Some of these very large foundations, including the Gates and Rockefeller Foundations and similar initiatives, they often are interested to provide grounds to make these projects possible and then rely on public donors and the banks to actually finance them. But, there are also private donors who are interested to do the de-risking and the soft lending.”

A culture shift

Though initially framed as a three-year effort, Ruter explained that in that first phase of the project, Rabobank will work to establish the financing structures discussed above, select projects to support, and begin introducing the vehicle to its clients. Once it has been established internally, Ruter said that the fund will function as an evergreen vehicle, which Rabobank plans to continually encourage its clients to use to support projects that protect forests and enhance yields on degraded land.

“The most important element of the dialogue with our big clients is how we can actually set up the programs and projects to serve that public good, while at the same time making money and having a good business in place,” Ruter said.

“We will only be successful if entrepreneurs start understanding the use of public money”

Because Rabobank’s clients include 18 of the 20 biggest food companies in the world, Ruter said, the bank is also well positioned to not only help finance projects directly, but also encourage potential customers to commit to long-term supply contracts that help encourage more sustainable farming and forestry practices in the developing world. Brazil and Indonesia will be the initial focus of the fund, in part because of the large footprint Rabobank already maintains in each, according to Ruter.

Since Rabobank has begun investigating opportunities for the Forest Protection and Sustainable Agriculture Fund in Brazil, it has found that a new forestry law requires farmers to replant a certain percentage of their land with forests within 30 years. Because the 1,500 large Brazilian farmers to whom Rabobank already provides financing, control more than 70 million hectares of land, Ruter said, the bank is in a position to encourage the farmers to do the replanting immediately and refinance their operations at more favorable rates through the fund.

“An important precondition for success is that we realize the culture shift of how public and private parties work together,” said Ruter. “We will only be successful if entrepreneurs start understanding the use of public money and the requirements needed to defend the private use of such money to taxpayers, and if public bodies, like the UN vehicles, start understanding that entrepreneurs want quick decision-making.”