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

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 CDM Project Proponent FUNDER/ (DBP) Financial/Technical Resources Promissory Notes Interest payments Assets CERs Carbon Fund CER $

The Carbon Deal Structure Funding via DBP but CDM PP Direct to Carbon Fund CDM Project Proponent FUNDER/ (DBP) Financial/Technical Resources Promissory Notes Interest payments Assets CERs Carbon Fund CERs $

The Carbon Deal Structure Bundling Via DBP FUNDER/ (DBP) Financial/Technical Resources Promissory Notes Interest 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) Guarantee Fund/ Corp PN Php MOA 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 Project Debt or Equity Fund $ Dev Countries GFIs and PFIs

Rey Guarin AVP for Climate Change Program and Special Projects Development Bank of the Philippines

Rey Guarin AVP for Climate Change Program and Special Projects Development Bank of the Philippines