BAKER & MCKENZIE has advised Camco International Limited on one of the world’s first structured finance transactions in the international carbon market.
Camco is a developer of Clean Development Mechanism (CDM) projects under the Kyoto Protocol. The transaction involved Standard Bank Plc auctioning off carbon credits — known as Certified Emission Reductions (CERs) — which had been pooled from a number of Camco’s CDM projects.
Baker & McKenzie partner Paul Curnow said that the transaction was four times over-subscribed; and the majority of bidders were those with compliance obligations under the European Union Emissions Trading Scheme.
An interesting aspect of the transaction, Curnow said, was the fact that Standard Bank provided an up-front cash payment of ¤15 million ($26 million) for future CER deliveries under the transaction.
“Standard Bank has pre-financed the projects, so that Camco has the cash flow to make those payments through to the sellers as the credits are delivered,” he explained.
“The interesting thing was that it was done on a limited recourse basis. It wasn’t full recourse financing — meaning Standard Bank took on some of the delivery risk. A lot of that primary risk you see around projects because they might not deliver, they might under-deliver — all those sorts of issues.”
According to Curnow, the transaction was complex in that it required back-to -back primary, secondary and tertiary reduction purchase agreements. “So there was quite a complex sequencing of agreements that all had to match up, so that credits flowed through those contractual arrangements, and [that detailed] how the risks were shared amongst the various parties,” he said.
Curnow believes that, in time, sophisticated structured finance transactions will creep onto the Australian carbon market.
“It’s an interesting deal because we see it as the way the market is developing and maturing, where you bring in traditional financing techniques into the carbon market. We saw it as one of the first structured carbon finance deals to date and it’s a taste of what’s to come once the Australian scheme is up and running,” Curnow said.
In particular, he believes Australian banks will be keen to play a role in providing liquidity in the market — to provide funding for developers of CDM projects as well as to Australian companies who are soon to incur a liability under the Carbon Pollution Reduction Scheme (CPRS) and who will need to access CERs.
“[Under the CPRS] there’s going to be a quantitative limit on the number of CERs that can be imported and surrendered for compliance purposes — anything between 10 to 20 per cent I expect,” Curnow explained.
“But even at that number we are talking about tens of millions of credits from CDMs that could flow into Australia. So certainly Australian buyers, in my expectation, will become big buyers of CERS from the CDM.”
The Baker & McKenzie team was lead by Curnow and general associate Lachlan Tait from the firm’s Sydney office. Partner Bruce Taylor and senior associate Jastej Bains from the Melbourne banking and finance team advised in relation to structured finance issues. Members of the firm’s Sydney and London tax teams were also involved.