Pro-Gest - some movement observable

All,

There may be a trade to do in Pro-Gest, but we are not sure we’ll get involved in any material size. Our analysis remains unchanged here.

We have been - and remain somewhat - weary of the bonds, given their stark downside in the event any of a series of necessary events fails:

1 license,

2 term-out of diverse bank exposures,

3 fresh cash,

4 fine payable in instalments.

But clearly a granting of the Mantova license for 200kt or even 400kt would be overwhelmingly positive for the company. Not that everything else would fall in place automatically, but negotiations would become progressively easier.

The province of Mantova seems open to constructive engagement and the company appears to be working on significant concessions. While those concessions do not seem to be entirely aimed at the specific areas of concern raised in the past, they may offer sufficient space for negotiation.

The Province of Mantova has granted the company a two week extension to file its counter-arguments in the dispute over the environmental licensing of the Mantova plant.

We have been hearing that the company is working on a proposal to turn off its cogeneration incinerator, which powers approx. 1/3 of the required energy for the two boilers and two steam turbines to deliver the technological steam required by the paper mill. Incinerators are notorious for environmental damage and have been the target of environmental action throughout Europe since 2002. The energy would have to be bought in, but the reduced carbon footprint should be tax beneficial and partially offset the increased expense.

Thus a granting of the license would certainly propel the bonds significantly, but for the risk it would have to do that. Bonds have an upside money multiple from a licensing event of perhaps 1.5x, bout would likely drop into the teens if the negotiation fails. And on that binary basis it's just not attractive enough on any scale - even if the upside has now become more likely.

Wolfgang