Votorantim Celulose e Papel SA (VCP)

Liquidity and Capital Resources

The Company’s liquidity has historically been sourced from cash generated by operations, short-term borrowings and, depending upon market conditions and other factors, long-term borrowings. We manage our liquidity position by first considering our cash and cash equivalents, short-term financial investments and short-term debt; and thereafter accounts receivable and long-term borrowings, together with our prioritization and re-ordering the capital expenditure projects.

Since a significant portion of our operating revenues is derived from exports (2008: 47%, 2007: 46%—See “Item 4B—Information on VCP—Business Overview-Operations”) we traditionally choose from a variety of trade finance programs offered by several financial institutions under which we borrow short-term funds by transferring either our current or future export receivables to these institutions. See Notes 11 and 12 to our audited consolidated financial statements. These trade finance programs generally have less financial and administrative cost than discounting our domestic accounts receivables or short-term working capital loans; thus our preference not to use either of the latter to manage our liquidity. The current worldwide financial crisis has not diminished our ability to continue to invest funds in short-term investments. Likewise, this crisis has not affected the availability to VCP of the aforementioned short-term credit facilities; their cost has however increased due to the combined effect of the crisis itself, its effect on the availability of trade finance to emerging markets such as Brazil, the financial market’s perception and evaluation of the country risk of Brazil and the downgrade in our credit rating by Fitch on February 2, 2009. See “Item 3D—Key Information—Risk Factors—Risks Relating to VCP and the Pulp and Paper Industry”.

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Long-term borrowings have generally been used to finance our major capital expenditure projects and have historically been sourced principally by either export prepayment contracts under which we, or a wholly owned subsidiary, borrow funds by offering the guarantee of export contracts (see Note 12(a) to our audited consolidated financial statements) or fixed asset acquisition financing programs offered by the BNDES, a related party, (see Note 12(e) to our audited consolidated financial statements). The scheduled maturities of these long-term loans have been structured to match the expected cash flow from the conclusion of the related capital expenditure projects and, as a result, reduce the risk of any significant deterioration of our liquidity position. To a lesser extent we also have relied on bonds or notes issued in the international markets by either wholly owned subsidiaries or by Votorantim Group subsidiaries, all domiciled in other countries. See Notes 12(c) and (d) to our audited consolidated financial statements. Our ability to access these aforementioned long-term funding sources has not been, to-date, significantly affected by the effects of the global financial crisis, although the maturity of any intended borrowings have been reduced and their prospective cost has increased for the same reasons cited above with respect to our short-term borrowings.

These long-term borrowings contain various covenants regarding compliance with certain financial ratios and other restrictions. At December 31, 2008, the Company was not in compliance with covenants on certain loan agreements as a result of a proportional consolidation of Aracruz based on Brazilian GAAP, plus Três Lagoas project investments and the devaluation of the real. See Note 9(a) and 12(i) to the consolidated financial statements and “Item 5—Management Discussion and Analysis—Year ended December 31, 2008 compared to year ended December 31, 2007—Equity in earnings (losses) of affiliates”. Nonetheless, in November 2008, we began the renegotiation of the terms of these covenants with the creditor banks, for which we have concluded the negotiations for more than 80% of the affected loan agreements. Management, at this time, considers none of these renegotiated covenants or guarantees, if requested, are restrictive or inhibitive to the Company’s current level of operations. We believe that our sources of funds and management actions, such as the capital increase that occurred on April 30, 2009 (partially offsetting the effect of additional leverage of the purchase of Aracruz common shares) and increase of credit lines by diversifying creditor banks portfolio, are, and will continue to be, adequate to meet our liquidity levels and currently anticipated uses of funds, which include working capital, recurring capital expenditures and debt repayment.

In the case of the 20% of affected loan agreements, which includes a loan from BNDES (one of our shareholders) the creditor banks do not have the right to demand repayment. In these cases, the only penalty is, if requested by banks, assets pledged as guarantee and just the loan agreements that were renegotiated (more than 80%) give the right to demand payment. We have concluded that there is no requirement to classify these debts as current.

Capital resources to support our business growth and expansion plans may also be obtained from the issuance of equity. Negotiations began in 2008 and were concluded on January 21, 2009 and April 29, 2009 under which we will, via a series of coordinated transactions, purchase, via principally an initial payment and semi-annual installments thereafter, the remaining outstanding common stock of Aracruz from other controlling shareholders and/or exchange any still remaining and outstanding Aracruz common stock for preferred shares of the Company to be issued, and thereafter, exchange Aracruz’s outstanding preferred stock for preferred stock of the Company to be issued. See Note 22 to our audited consolidated financial statements and “Item 5.A Operating and Financial Review and Prospects—Operating Results—Recent Developments”.

Capital subscriptions for our common shares by our controlling shareholder, VID, and a related party, BNDES, totaling R$ 2.648 billion (US$1.215 million at date of actual capital subscription) were made in March and April, 2009 and provided funds to make the initial payment of these common share purchases as well as to manage our liquidity position. The payments of the remaining non-interest bearing share purchase installments, R$2.5 billion and R$1.4 billion (about US$1.1 billion and US$600,000 at December 31, 2008 exchange rates), due in 2010 and 2011, respectively, were structured so as not to significantly affect our prospective liquidity position; and these future payments are expected to be made principally from our traditional funding sources.

For further information on liquidity and capital resources, see “Item 5.B—Liquidity and Capital Resources.”