A conversation with Nemo Perera of Edge Management on the efficacy and necessity of Performance Guarantee Insurance (PGI) when seeking financing for green technology projects during a global pandemic.
Q: First question, Nemo, before we jump into green tech and financing – is performance guarantee insurance real and if so, where has it been all this time?
A: Great question. I get asked this every day – more than once. Yes, PGI is real. While there have been some costly, off the shelf products in the market for years, Edge Management in close partnership with double A rated global insurance companies, makes it possible to for us to create a bespoke insurance product for many different types of ventures and deal structures, allowing for both risk mitigation and credit enhancement. Edge has been binding these policies for some time now but the recent Covid-19 pandemic and the ensuing market uncertainly and hesitancy to deploy capital has put PGI front of mind for many investors, borrowers and lenders.
Q: Moving now to green tech, why the sudden boom in interest and how has this impacted PGI?
A: Interest in green technology projects is indeed growing. A confluence of factors is driving this, including aggressive corporate and government renewable energy goals and investor demand for “green” bonds and exposure to companies with credible environmental, social and governance (ESG) policies. Historically, investors appreciate that many green technology projects are based on proven technologies, have existing supply chains and established demand all of which make financing these projects relatively straightforward, even in these times.
However, in response to the massive amount of demand for new green projects, and the current pace of technological and economic change, companies are rolling out green projects that employ novel technologies and can require new types of supply chains and offtake markets. Lenders see these projects as risky, and since many banks are tightening lending standards due to the Covid-19 pandemic, financing them is a challenge. These are the reasons why Edge GreenTech has developed Performance Guarantee Insurance which is a multi-factor risk management solution, to reduce the risks of these new, green technology projects and secure advantageous financing.
Q: Can you give us an idea of the size, scope and scale of the green tech market and what’s driving it?
A: The extent of demand for green technology projects can be seen in forecasts for electricity generation. BloombergNEF, a research arm of Bloomberg LP, estimates that global electricity demand will rise 62% by 2050, requiring $13.3 trillion worth of new investment in generation. The firm expects most of this will be invested in wind and solar generation projects. The urgency for green technology projects is one reason why the Covid-19 pandemic has not seriously dampened interest in them. At the end of July, ESG-targeted exchange-traded funds had grown to approximately $100 billion in total assets. Meanwhile, two of the world's largest asset managers, BlackRock and Pimco, have joined Climate Action 100+, a group of institutional investors with a total of $47 trillion dollars in assets under management. The group is pressuring the world’s top greenhouse gas emitting companies to achieve net zero emissions by 2050, a goal that will require massive investment in green technology to accomplish.
Q: Can you also speak to the bond market as it relates to green technology and how PGI comes into play?
A: Not surprisingly, the green bond market has also been booming, despite the pandemic. According to market data firm Refinitiv, the first quarter of 2020 saw a slight drop in green bond issuance compared with 2019, but a sudden uptick in April brought proceeds for the first 5 months of the year to $53.3 billion — a 3% year over year increase. Unfortunately, green bond financing is often not appropriate for complex, limited recourse project financings. Typically, companies have hired banks to structure, manage and lend to these projects, often with a bond takeout of the institutional term loan once the facility was running profitably. Banks are better suited to both initial and ongoing credit evaluation and oversight than are bond buyers, who outsource that work to ratings firms. But banks, unlike bond investors, have been retrenching during the pandemic. In the second quarter, two-thirds of the banks surveyed by the Federal Reserve tightened their loan standards. Over a third said they were tighter than at any time in the last 15 years.
So, the challenge for green technology project companies is to reduce the uncertainty inherent in these novel projects, boosting their credit profile so that they can achieve attractive financing from wary banks or in the capital markets.
Edge's PGI product risk manages the supplier, process and offtake aspects of the project using bespoke insurance facilities for each. Edge can then provide an overarching layer of insurance to cover any other risks, thus protecting the project's profitability and creditworthiness. It is with this comprehensive approach, leveraging Edge's risk assessment and mitigation expertise, that PGI adds its real value. If the project company has already identified a potential lender or equity investor, Edge PGI facilitates the deal by providing, essentially, a synthetic financial guarantee. If not, Edge can use the approach to secure an investment-grade rating, allowing the project to fund itself in the bond markets.
Q: Can you give us an example of a green tech deal where PGI was utilized?
A: One of the first PGI beneficiaries was a company seeking $300 million for two renewable diesel facilities. Since this was a pre-revenue situation, financing options were scarce. Edge structured a PGI program that provided an overarching umbrella coverage that guaranteed the projected revenue of the two facilities for the next 10 years. The PGI program underwrote every aspect of the operation, including the novel technology that would ultimately drive its revenue. Leveraging this coverage and its proprietary ratings model, Edge was able to secure an investment-grade rating, and the project obtained financing from lenders at an attractive rate. It plans to follow up with another $200 million in bonds. Financing novel green technology projects was always challenging. The pandemic has made some aspects of it more difficult. However, a well-crafted risk management tool like Edge PGI can help companies clear hurdles and develop profitable green projects that will be sorely needed in the coming years.
Q: Can you give us a timeframe to put PGI in place for green tech deal?
A: Once the feasibility work is done we can have the necessary policies in place in a matter of weeks.