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 CER
The Carbon Deal Structure Funding via DBP but CDM PP Direct to 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 ss 1 Financial/Technical Resources ss 2 ss 3 Small scale CDM Projects SPV ss 4 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 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 rguarin@dbp. ph
Rey Guarin AVP for Climate Change Program and Special Projects Development Bank of the Philippines rguarin@dbp. ph
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