carbon investments: concerns, barriers and solutions a view from the other side of the fence

Carbon Investments:Concerns,

Barriers and Solutions

A view from the other side

of the fence

The Traditional Investor Relationship

BORROWER/Project Proponent

FUNDER/Investor

Financial Resources

Promissory Notes/ Shares+

Interest / dividend payments+

Assets

The Carbon Investment

CDM Project Proponent

FUNDER/Investor

Financial Resources

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 Requirements3. Low valuations for Collateral4. Excessive Equity Participation5. Onerous Interest Rates6. Requirement of a sinking fund, JSS… 7. Too Short a Borrowing Term8. Unfair bias against small borrowers9. Preferential Option for the Big Borrowers10.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 StructureFunding via DBP- X Carbon Fund Partnership

CDM Project Proponent

FUNDER/(DBP)

Financial/Technical Resources

Promissory NotesInterest payments

Assets

CERs

Carbon Fund

CER$

The Carbon Deal StructureFunding via DBP but CDM PP Direct to Carbon

Fund

CDM Project Proponent

FUNDER/(DBP)

Financial/Technical Resources

Promissory NotesInterest payments

Assets

CERs

Carbon Fund

CERs$

The Carbon Deal StructureBundling Via DBP

FUNDER/(DBP)

Financial/Technical Resources

Promissory NotesInterest payments

Assets

CERs

Carbon Fund

CER$

Small scale CDM Projects

SPV

ss1

ss2

ss3

ss4

ssn

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

CDM Project Proponent

FUNDER/(DBP)

GuaranteeFund/ Corp

PN

Php

MOAMOA

Dev Country PFIs and GFls

Options on Reducing Investment Barriers:Creating a CDM Project Debt or Equity Fund

CDM Project Proponent

Financial/Technical Resources

PN/Share+

Financial Returns And/or

CERs

CDM ProjectDebt or Equity

Fund

$

Dev Countries GFIs and PFIs

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