Securitization

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In the current economic climate development financing has dried up, with many projects stalled as banks are unable to offload mature project investments to recycle funds for developments.

Renewable energy projects lend themselves to securitisation due to their stable income profile. Banks or other institutions could finance projects in their first few years of operation, then, after at least one year’s operation, securitize them as proven and mature investments for institutional investors.

In this model a fund (bond holding vehicle) would purchase portfolios of debt secured against renewable energy projects from banks. The fund would finance this purchase by selling bonds into the market. The bonds could be in the form of c. 15 year amortising bonds which are suitable for annuities. Critical mass is important. The fund must be of sufficient size that its bonds are liquid in the market and can be subsequently traded by bond investors.

Going back to the first forms of securitisation, only quality senior loans would be purchased by the fund, and only a single type of bond would be sold by the fund to investors. The parameters should be transparent, predefined and regulated. This should produce a standardised quality bond for the bond-holders.

The bonds produced will have similarities to energy utility bonds but could be classified as Climate Bonds as they would not be associated with funding any thermal power (coal, oil or gas).

An advantage over energy utility bonds is that retail or institutional investment allocations can be made into the debt of pure renewable energy assets. The bonds could pay a coupon similar to that of the bonds of energy utilities 5% to 6%

This type of fund is designed to transfer to long-term investors the lowest risk part of the capital structure of renewable energy assets that have a track record. It will enable banks to recycle their capital and lend new riskier development finance to facilitate the building of new renewable energy assets, and so facilitate the long term funding requirements of renewable energy asset owners.

This principle could be applied to the idea of a green investment bank where the bank purchases debt and repackages it to produce bonds.

 


This section was contributed by Jason Langley BEng ACA AMIMechE