IRTG1792DP2020 003
Structured climate financing: valuation of CDOs on inhomogeneous asset pools
Natalie Packham
Abstract:
Recently, a number of structured funds have emerged as public-private
partnerships with the intent of promoting investment in renewable energy in
emerging markets. These funds seek to attract institutional investors by
tranching the asset pool and issuing senior notes with a high credit quality.
Financing of renewable energy (RE) projects is achieved via two channels: small
RE projects are financed indirectly through local banks that draw loans from the
fund’s assets, whereas large RE projects are directly financed from the fund. In
a bottom-up Gaussian copula framework, we examine the diversification properties
and RE exposure of the senior tranche. To this end, we introduce the LH++ model,
which combines a homogeneous infinitely granular loan portfolio with a finite
number of large loans. Using expected tranche percentage notional (which takes a
similar role as the default probability of a loan), tranche prices and tranche
sensitivities in RE loans, we analyse the risk profile of the senior tranche. We
show how the mix of indirect and direct RE investments in the asset pool affects
the sensitivity of the senior tranche to RE investments and how to balance a
desired sensitivity with a target credit quality and target tranche size.
Keywords:
Renewable energy financing, structured finance, CDO pricing, LH++ model
JEL Classification:
C61, G13, G32