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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. Financial Resources. BORROWER/ Project Proponent. FUNDER/ Investor. Promissory Notes/ Shares + Interest / dividend payments + Assets.

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Carbon Investments: Concerns, Barriers and Solutions A view from the other side of the fence

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  1. Carbon Investments: Concerns, Barriers and Solutions A view from the other side of the fence

  2. The Traditional Investor Relationship Financial Resources BORROWER/ Project Proponent FUNDER/ Investor Promissory Notes/ Shares + Interest / dividend payments + Assets

  3. The Carbon Investment Financial Resources CDM Project Proponent FUNDER/ Investor Promissory Notes/ Shares + Interest / dividend payments + Assets + Emission Reductions Unit

  4. 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

  5. Investors now taking a second look at risky but necessary and highly rewarding investment opportunities In carbon finance.

  6. Investor’s Concern • Safety • Liquidity • Yield

  7. Safety • Investment Principal recovery • Interest / dividend payment streams reliability • CER Delivery and Ownership assurance

  8. 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

  9. 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

  10. Safety Measures • Comprehensive Due Diligence • Financial • Technical Feasibility • Legal • CDM-ability

  11. Liquidity Exit Mechanism

  12. 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

  13. Liquidity: Exit Mechanism Under abnormal circumstances “Cut Loss ” point anytime How fast can I convert my investment or security assets into cash?

  14. Yield Reasonableness and Stability of Returns Versus investment benchmarks Or comparable investment options

  15. Yield Insulation from other major Risks • interest rates • Inflation • Currency • taxation

  16. Prudent Man Principle

  17. Project Proponent’s Concerns • Access to funding for: • Project Preparation and Development • Project Funding

  18. Project Proponent’s Barriers • Limited Financing Options or Mechanisms • Heavy collateral Requirements • Low valuations for Collateral • Excessive Equity Participation • Onerous Interest Rates • Requirement of a sinking fund, JSS… • Too Short a Borrowing Term • Unfair bias against small borrowers • Preferential Option for the Big Borrowers • Cumbersome Procedural Systems

  19. Possible Solutions

  20. 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

  21. 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

  22. The Carbon Deal StructureFunding via DBP- X Carbon Fund Partnership Carbon Fund $ CER Financial/Technical Resources CDM Project Proponent FUNDER/ (DBP) Promissory Notes Interest payments Assets CERs

  23. The Carbon Deal StructureFunding 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

  24. The Carbon Deal StructureBundling Via DBP Carbon Fund ss1 Financial/Technical Resources ss2 $ CER Small scale CDM Projects SPV FUNDER/ (DBP) ss3 ss4 Promissory Notes Interest payments Assets CERs ssn

  25. 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

  26. 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

  27. Options on Reducing Investment Barriers:Creating a CDM Project Debt or Equity Fund Dev Countries GFIs and PFIs CDM Project Debt or Equity Fund PN/Share + Financial Returns And/or CERs Financial/Technical Resources $ CDM Project Proponent

  28. Rey Guarin AVP for Climate Change Program and Special Projects Development Bank of the Philippines rguarin@dbp.ph

  29. Rey Guarin AVP for Climate Change Program and Special Projects Development Bank of the Philippines rguarin@dbp.ph

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