Green Receivables Fund (Green FIDC)

Brazil has one of the most successful renewable energy markets in Latin America, with highly experienced developers and a robust demand for projects. The vast majority of projects have been financed by BNDES – the Brazilian Development Bank – who have provided long-term financing at very favourable terms. Since 2003, the bank has financed more than 90% of the total investment for wind power generation. However, given new fiscal and strategic priorities, BNDES is scaling back – dropping lending for renewable energy by more than 35% in 2016, to reach its lowest level since 2007.

As BNDES pulls back, new sources of finance are needed, particularly from the private sector. However, the commercial market faces many barriers. This is especially the case with long-term bank financing, where banks are reluctant to allocate their portfolios over the long-term due to liquidity, diversification and macroeconomic risks. In 2016, Brazil had contracted capacity of almost 9 GW of wind and 3 GW of solar PV that is expected to come online within two to three years, and an additional 3-4 GW is expected to be contracted annually through auctions. Financing is critical for this pipeline to be fulfilled, and Brazilian developers are eager to find new solutions.

Operational renewable energy projects that have a power purchase agreement (PPAs) with a creditworthy counterparty can deliver safe and consistent returns over the long-term. However, there are barriers to investing in individual projects such as transaction costs and liquidity and diversification risks. These can be overcome by packaging cash flows from projects into a tradable instrument.

The Green FIDC will package and securitize the cashflows of renewable energy projects and sell shares in local capital markets, providing long-term finance for projects.

The Green FIDC builds on an existing, and regulated instrument in Brazil – Fundo de Investimento em Direitos Creditórios (FIDC) – used to securitize receivables from business and consumer loans. This instrument aims to be the first securitization of wind and solar PV receivables using a FIDC. By securitizing, the Green FIDC can reduce transaction costs, and increase liquidity and diversification. In doing so, it will open up the market to much wider range of private investors; in particular Brazilian institutional investors who can provide long-term capital in local currency.

By increasing the availability of long-term financing, the Green FIDC can increase the deployment of renewable energy. This would have the impact of lowering grid emissions, and contributing social and environmental benefits in Brazil from increased deployment of clean energy.

Design

The Green FIDC is a fund that purchases receivables from “green” projects and pays steady, long-term returns to investors. Initially it will focus on wind and solar PV projects but can later be replicated in other sectors.

The FIDC would go through two steps in order to match the risk profile of the FIDC to the risk tolerance of investors and their cost of capital.

  1. During the construction phase, the FIDC would be capitalized by the project developer, equipment provider, EPC contractor and concessional finance provider. Concessional finance is needed in initial stages to help prove the concept and provide construction financing.
  2. Once a project is operational, the FIDC would sell shares, secured by PPA receivables to fixed income investors. These funds would be used to retire the shares from the equipment provider, EPC contractor and concessional capital as needed. The developer shares would remain as junior shares to credit-enhance and protect senior investors. Rating agencies would be used to rate the credit quality of the FIDC and certify its climate and environmental benefits.

This process would be repeated and capital recycled into new FIDCs by the sponsors. Because the FIDC would be registered with the Brazilian Securities and Exchange Commission (CVM), the structure and documentation would be made public and could be replicated by other sponsors in other sectors.

Cover image courtesy of EBC Agencia Brasil Fotografias, via Creative Commons