Standardisation to reach impact at scale

4 January 2023 15:45

On January 3, 2023, Rabobank Brazil closed a 10 year, USD 500.000 blended finance transaction with Juliana Glaucia Xavier, a well-established client from the Rural banking network.

What makes this transaction remarkable is not so much the long tenor, nor the risk participation from the Agri3 Fund that makes this possible. Rather, it’s the fact that this is the first commercial result of a 2-year process to create a standardised blended finance solution for cattle ranchers in Brazil.

The first time that Agri3 and RBB offered a joint solution to a cattle rancher was in 2019, to the tune of USD 5mln. A 10 year loan equipped the Carvalho Dias Group with the financial means to restore degraded pasturelands, invest in water infrastructure to prevent cattle from damaging the vulnerable ecosystem at the riverbanks, and accelerate the Group’s compliance with the Brazilian Forest Code. The last part is important, since Brazilian farmers are legally obliged to maintain a minimum percentage of their land as forest. Since forests typically do not generate cash flow, banks are reluctant to lend money to farmers for this purpose.

Partially because a significant share of the loan would be spent on such non-cashflow generating activities as restoring and protecting forest, and partially because of the long tenor that was required to make the cash flows work out, RBB required a risk participation from the Agri3 Fund. The blended finance solution reduced Rabobank’s effective exposure to USD 3mln, with a 7 year tenor. It was an outcome that worked for everyone. The problem was that it took a large deal team almost a year to close a USD 5mln transaction.

“5 million dollars is quite large for the Rural branch network, as most of our tickets are much lower” explains Thiago Guedes, who is responsible for the commercial side of the CSR department. “We realised that tailor-made blended finance solutions would not work out for the majority of our clients, because the origination time is too long”. In other words, large deal teams and long lead times can be justified for some Wholesale transactions, but not for typical Rural ones.

With everything pre-agreed with Agri3, their approval time comes down to a matter of days

Rabo Partnerships’ Blended Finance team, who had helped originate the first transactions in Brazil, set out to develop a standardised product with Agri3, called Renova Pasto. “We basically had to pre-agree everything with the Fund”, says Agnes Johan, who heads up the Blended Finance team. “Farmer eligibility, impact KPIs, environmental and social criteria, you name it.” The tooling that was developed ranges from standardised application forms that can easily be filled out by the RM (Rabobank Relationship Manager) or ATO, to an Agri3 addendum to the legal documentation.

The result is promising. “The transaction with Juliana Glaucia Xavier functioned as our pilot”, Guedes explains. “We have really made this as easy as possible for our RMs. With everything pre-agreed with Agri3, their approval time comes down to a matter of days, rather than months”. The internal steps at RBB are no different from a normal credit approval process.

According to Johan, “this is a solution to farmers that can make a real difference”. An estimated 80 million hectares of pastureland in Brazil is moderately to severely degraded. “As we provide farmers with the financial solutions to invest in their soils and make their degraded land productive again, food production can be increased without having to open up new areas”. That such 10 year loans are now also available to relatively smaller clients in the Rural portfolio, significantly increases the reach of the blended finance toolkit. “During the first years, we were learning by doing. Now we are ready to scale”.

Pastureland with moderate degradation. The land has been overgrazed, evidenced by low grass length and invasive weeds. The loan enables our client to till the land and plant pasture seeds.
Right-hand side: land that has already been tilled and pasture seeds have been planted. When the grass has reached a certain height, rotational grazing will be introduced to prevent overgrazing in future and keep the pasture healthy and productive.
APP area with river source. The loan enables our client to invest in pipelines and other infrastructure to channel the water to the pastures, keeping the cattle away from this valuable ecosystem in the APP whilst simultaneously allowing an increase from 1 head of cattle per hectare to 3-4 heads.
Infrastructure for the water