Split cashflow structures: new from CPI

19/08/2017

Structures that intelligently separate out risks and cashflows are becoming increasingly used in the green finance space. We have reported on the Climate Investor One structure set up by the Dutch DFI FMO, which has different sub-funds capable of taking project preparation, development and operational risk as projects pass through these phases, and receiving appropriately differentiated rewards.

Another interesting recent example in the construction sector was the Treviso Hospital financing led by the EIB and sponsored by Australian contracting giant Lendlease, where short-term building and long-term operating risks and cashflows are similarly parcelled out to investors with the relevant risk appetites and horizons.

The concept makes ample sense. An analogy would be the composition of a football team, which has specialist backs, halves and forwards that advance the ball in an efficient (and in some cases even an artful) manner because of the interactions of those specialisms. The efficiency created by these structures (yet, I think, to be given a generic name) should be a lower cost of finance, since the most costly kind of investor is one that doesn’t understand the risks it is taking and thus overprices that risk. In the case of the Treviso Hospital transaction, an additional twist is that the financial savings made are to be directed into a social impact investing fund to promote local startups servicing the hospital in various ways.

A new formulation of the approach is set out in a note from the Climate Policy Institute, proposing what it calls a Clean Energy Investment Trust, or CEIT. Here, four cashflow phases are identified, structured to suit different investor bases. These are (1) Asset development and construction (2) An operational period where there are conservatively projected but predictable cashflows from fixed price contracts (3) Some likely upside cashflows during this period, because of the conservative based and (4) “Tail” cashflows once the fixed price contract has ended, which will be much more susceptible to market price volatility. Investors for all four sets of cashflows would be identified at the outset, with appropriate discounts used to calculate present values of flows that may go out 20 or more years into the future.

The main purpose of the structure is to carve off all the cashflows that are obstructions to investors in the main cashflow by far, in terms of dollar amounts, which is cashflow (2) above. By so doing, the structure makes these cashflows investment grade* and thus suitable for mainstream investors such as pension funds which are looking for long-term, predictable income to match their pensioner liability. Other cashflows would be picked up by developers (1) and specialist investors such as hedge funds (3 and 4).

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