Transcript Structuring the Carbon Finance Deal

Carbon
Investments:
Concerns,
Barriers and
Solutions
A view
from the other side
of the fence
The Traditional Investor
Relationship
Financial Resources
BORROWER/
Project Proponent
Promissory Notes/ Shares
+
Interest / dividend payments
+
Assets
FUNDER/
Investor
The Carbon Investment
Financial Resources
CDM
Project Proponent
FUNDER/
Investor
Promissory Notes/ Shares
+
Interest / dividend payments
+
Assets
+
Emission Reductions Unit
Emission Reductions Unit
• A new financial asset
• Priced in US Dollars or Euros
• Unaffected by local interest and inflation
rates
• Not based on the financial profile of a
company/ or project
• Value is in the credibility of verification
Investors
now taking a second look at
risky but necessary
and
highly rewarding
investment opportunities
In carbon finance.
Investor’s Concern
1. Safety
2. Liquidity
3. Yield
Safety
• Investment Principal recovery
• Interest / dividend payment streams
reliability
• CER Delivery and Ownership assurance
Safety Measures
• Investment Principal recovery
– Security Options
• REM / Chattel / Guarantees
• Interest / dividend payment streams reliability
– Security Options:
• Assignment of receivables / PPA
• SALE OF CERs
• CER Delivery and Ownership assurance
– Hedging of CERs and Legal Due diligence and
packaging
Safety Measures
• Investment Portfolio Diversification
–
–
–
–
–
–
Project Type (i.e. NRE, Fuel Switching)
Technology (i.e. Hydro, Wind)
Region
Project size
GHG Emissions
Project Implementation dates
Safety Measures
• Comprehensive Due Diligence
– Financial
– Technical Feasibility
– Legal
– CDM-ability
Liquidity
Exit Mechanism
Liquidity: Exit Mechanism
Under normal circumstances
“Profit Take” point in a specified time
– Listing of shares in the Public market
– Conversion from Debt to equity
– Scheduled Redemption
– Exercise of a Put or Call Option
– Buy Out by Existing or Strategic Investors
Liquidity: Exit Mechanism
Under abnormal circumstances
“Cut Loss ” point anytime
How fast can I convert
my investment or security assets
into cash?
Yield
Reasonableness and Stability of Returns
Versus
investment benchmarks
Or
comparable investment options
Yield
Insulation from other major Risks
• interest rates
• Inflation
• Currency
• taxation
Prudent Man Principle
Project Proponent’s Concerns
Access to funding for:
• Project Preparation and Development
• Project Funding
Project Proponent’s Barriers
1. Limited Financing Options or Mechanisms
2. Heavy collateral Requirements
3. Low valuations for Collateral
4. Excessive Equity Participation
5. Onerous Interest Rates
6. Requirement of a sinking fund, JSS…
7. Too Short a Borrowing Term
8. Unfair bias against small borrowers
9. Preferential Option for the Big Borrowers
10.Cumbersome Procedural Systems
Possible Solutions
Leveraging the CERs
• Project Preparation and Development
– Conditional Grant
• Project Funding
– CERs as additional security layer for
• Principal
• Interest payments
– CERs in exchange for Resources
• Financial
• Technological
• Technical/ Industrial Expertise
Leveraging the CERs
– Negotiate for the:
• Lowering of interest rates
• Shorten principal repayment period
• Easing of certain burdensome collateral or equity
requirements
• Expedite your processing time
The Carbon Deal Structure
Funding via DBP- X Carbon Fund Partnership
Carbon Fund
Financial/Technical
Resources
CDM
Project Proponent
$
FUNDER/
(DBP)
Promissory Notes
Interest payments
Assets
CERs
CER
The Carbon Deal Structure
Funding via DBP but CDM PP Direct to Carbon
Fund
Carbon Fund
CERs
$
Financial/Technical
Resources
CDM
Project Proponent
FUNDER/
(DBP)
Promissory Notes
Interest payments
Assets
CERs
The Carbon Deal Structure
Bundling Via DBP
Carbon Fund
ss1
Financial/Technical
Resources
$
ss2
ss3
Small scale
CDM Projects
SPV
ss4
ssn
Promissory Notes
Interest payments
Assets
CERs
FUNDER/
(DBP)
CER
Hedging the CER Delivery and
Price Risk
•
•
•
•
•
Don’t Sell all your CER’s.
Buy a CER Put Option
Do a Forward Purchase on other CERs
Invest in other Carbon funds if possible
Set aside ample funds to pay for the
possible replacement cost
Options on Reducing Investment Barriers:
Setting up a Guarantee Mechanism
Dev Country PFIs and GFls
Guarantee
Fund/ Corp
MOA
MOA
PN
CDM
Project Proponent
FUNDER/
(DBP)
Php
Options on Reducing Investment Barriers:
Creating a CDM Project Debt or Equity Fund
Dev Countries GFIs and PFIs
Financial/Technical
Resources
CDM Project
Debt or Equity
Fund
$
CDM
Project Proponent
PN/Share
+
Financial Returns
And/or
CERs
Rey Guarin
AVP for
Climate Change Program and Special Projects
Development Bank of the Philippines
[email protected]
Rey Guarin
AVP for
Climate Change Program and Special Projects
Development Bank of the Philippines
[email protected]