L7 Flashcards
What role do banks play in the transition?
provide transition financing to achieve carbon emissions reductions
joining climate groups like PCAF
adopting reporting standards
powerful actors = could change the cost of capital for clean tech and change dynamics for big emitters
why is debt tricky for clean tech
Dont always have cash flow in the first 3-5 years to provide that you can repay debt
need to figure out the loan loss ratio and how the company is going to deal with issues in repaying the loan
What are the 4x option for getting financing?
- public market issuance - equity or credit
- private market financing - equity, debt or infrastructure
- lending
- balance sheet funding
What are some key sectors that are not accounted for yet in green transition financing?
- natural gas pipelines suitable for hydrogen
- land use changes
- cost of decommissioning ff infrastructure
- sustainable food supply
- information and communication technology
What is a stronger alternative to NDCs to transition?
board structure and general board engagement
leadership is v important
but difficult as the main mandate is inflation and growth for major banks - focus on shareholder returns - need shareholders to start asking for change in a concrete way
What role do oil companies play in the transition?
- must be a part of the transition - rapidly transition companies with a legitimate transition plan in the investible universe
What is the requirements to be a legitimate part of the transition if you are an oil and gas company?
Revenues
- 50% green revenues - current
- at least 50% of green revenues by 2050 through legitimate transition plan
Capex
- % of total capex for X number of years
CO2 emissions
- Scope 1 and 2 - what is the min rate of carbon emissions reduction
NOT CREDIBLE to just by carbon offsets
Is there evidence of shifting capex for renewables?
Announcement of aggressive renewable capital expenditures and capacity tragets
as of Q4 2021 - there is little evidence of a significant % of total capex for renewables
Shell is focused on integration of low carbon value chain with position in utilities, EV charging and battery storage
but a renewable power generation portfolio is not a core part of the companies energy transition strategy
What is BPs transition plan?
it will rely on CCS and offsets
trailed behind peers in RE spending but announced it will sped $4 billion a year by 2050 and $5 billion by 2030
8-10x on current green spending of $500 million
2050 - represent 1/3 of capex
but this could be a result of reduced absolute capex, combined with maintenance or ugrades of energy/transition budget
but BP has been opaque in reporting of capex
What is the difference between project debt financing and corporate financing?
PDF is when the investors exposure is tied solely to the cash flows of a specific investment i.e. the project rather than with CF where it is to the entire company
i.e. the sponsor
PDF is ringfencing the investment - financing something v specific
When is project debt financing used?
often in energy and frastructure projects
What are other names for project debt financing?
SPV or special purpose company financing
The use of project financing is becoming more widespread - what explains this trend?
= can spread the same amount of capital available over a greater number of projects
- can ring-fence risks or cap your exposure to a specific project without impacting the resources of the rest of the organisation
- you have no other choice - ie. you don’t have a balance sheet eg. developers or funds
- depending on the credit quality of the sponsor it can be more efficient to use project financing if the credit risk of the project is better than that of a sponsor
- join ventures - allows for shared participation by joint venture partners
What are the key debt financing parameters?
1/ rate - margin, fees, fixed vs. floating
2/ tenor - duration of the loan
3/ repayment terms: amortising or bullet
4/ security - secured vs unsecured
5/ covenants
How do you work out the DSCR?
CFADS/debt service ( principle +interest)
