Session 6 Christopher Kaminker
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3rd Annual OECD Green Investment Financing Forum
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Session 6 Christopher Kaminker
- 1. Christopher R. Kaminker Economist – Project Manager Organisation for Economic Co- operation and Development (OECD) christopher.kaminker@oecd.org CONFIDENTIAL. This presentation is solely for the use of the intended audience. No part of it may be circulated, quoted or reproduced without prior written approval from the OECD. This presentation represents the views of the author alone and does not represent opinions, estimates or forecasts of the OECD or its member countries. This material was used during an oral presentation; it is not a complete record of the discussion. http://www.oecd.org/cgfi/quantitative-framework-bond-contributions-in-a-low- carbon-transition.pdf
- 2. 2015 green bond issuance Region: Global Region: China, Japan, EU, US 2035 annual low-carbon debt financing needs Region: China, Japan, EU, US 2035 annual low-carbon investment needs Region: China, Japan, EU, US 2035 annual low- carbon bond issuance potential scenarios 2014 total bond issuance Region: China, Japan, EU, US A framework for understanding scenarios
- 3. Methodology: Steps taken in developing a quantitative model and analytical framework Investment need • classify investment needs by sectors and regions • use technology and project profile to classify as needing public, private, multilateral finance • determine projects' life-cycle, risk-return profile (technology maturity, competition, policy and supporting measures (Fit and PPA) • determine projects’ possible capital structure under different scenarios Debt finance • determine debt finance from capital structure identified above • determine portion which can be refinanced by debt across project life cycle • determine refinancing and restructuring needs Bond Market • identify scope for bonds (new finance and refinance) by type (Corporate, Project, SSA, Sovereign and Municipal) • use past trends and potential future policy developments to derive scenarios by bond type • use bond maturity profile by type of bonds to derive recycled and new injection of funds in bond market needed each year Implication for II asset allocation • analyse needs of Institutional Investors in the context of expanding green bond investment opportunities • propose relevant policy measures to enable greater participation of II
- 4. 2,262 490 29 18 43 19 381 673 231 1,099 720 0 500 1,000 1,500 2,000 2,500 Total investment Bonds Municipal and sovereign SSA Corporate Project ABS and CLO Loans Financial sector bonds Equity Total bonds Financing by type of capital and bond (USD billions) Annual basis in the 2031-2035 period
- 5. 5 Potential evolution of the market: Annual bond issuance amounts and size of the market (2 scenarios: baseline and high securitisation) 100 300 500 700 900 1,100 1,300 1,500 1,700 1,900 -500 500 1,500 2,500 3,500 4,500 5,500 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Annualbondissuanceinfour regions($bn) bondsoutstandinginfourregions ($bn) Amount outstanding Issuance Note: Error bars represent the enhanced securitisation scenario, based on a 10% increase in asset securitisation rate across all sectors over the baseline scenario, which incorporates a more conservative asset securitisation assumption. “Outstanding” refers to cumulative amount of bonds issued that have not yet reached redemption or maturity.
- 6. Asset-backed and financial sector bonds have the largest potential to scale 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 BondsintheUS,EUJapanand China-amountoutstanding($bn) Municipal and sovereign SSA Corporate Project bonds ABS and CLO Financial sector 0 1,000 2,000 3,000 4,000 5,000 6,000 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 2015 2016 2017 2018 2019 2020 2021 2022 2023 BondsintheUS,EUJapanand China-amountoutstanding($bn) Municipal and sovereign SSA Project bonds ABS and CLO 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 BondsintheUS,EUJapanand China-amountoutstanding($bn) Municipal and sovereign SSA Corporate Project bonds ABS and CLO Financial sect 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 2015 BondsintheUS,EUJapanand China-amountoutstanding($bn) Municipal and Project bonds 0 500 1,000 1,500 2,000 2,500 3,000 3,500 2015 2016 2017 2018 2019 2020 2021 2022 BondsintheUS,EUJa China-amountoutstandi Municipal and sovereign SSA Project bonds ABS and CLO 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Bonds in the US, EU Japan and China - amount outstanding ($bn) MunicipalandsovereignSSA ProjectbondsABSandCLO 0 500 1,000 1,500 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Bondsinth China-amou Municipal and sovereign SSA Corporate Project bonds ABS and CLO Financial sect 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 2015 BondsintheUS,EUJapana China-amountoutstanding($b Municipal and Project bonds0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 2015 2016 2017 2018 BondsintheUS,EUJapanand China-amountoutstanding($bn) Municipal and sovereign Project bonds 0 500 1,000 1,500 2,000 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 BondsintheU China-amount Municipal and sovereign SSA Corporate Project bonds ABS and CLO Financial sector
- 7. Potential and speed of scale-up for bonds outstanding varies by type of bond, sector and sub-sector (USD bn)
- 8. 8 A snapshot of the Japanese market: potential annual issuance and outstanding to 2035 (USD billions) 0 50 100 150 200 250 300 Municipal and sovereign SSA Corporate Project bonds ABS and CLO Financial sector 128 15 4 2 2 1 6 34 11 79 26 0 20 40 60 80 100 120 140 Total investment Bonds Municipal and sovereign SSA Corporate Project ABS and CLO Loans Financial sector bonds Equity Total bonds Annual issuance in 2031-2035 period Bonds outstanding to 2035
Hinweis der Redaktion
- 1) To describe why policy makers are focusing on institutional investors, here is an illustrative picture of the landscape of investment financing for green infrastructure and where it would come from in the OECD area. (NB. We pulled this together based on recent reports that we were involved in for the G20). Of course, individual country contexts matter and the picture could look different from Australia to the United States. (this picture is broadly representative of the European landscape). In developing countries the picture would be roughly reversed with the public and quasi public sector (state owned banks and corporates) financing 2/3. In the OECD the public sector finances about a third (including national development banks). 2) 2/3 come from the private sector and this is split roughly 50/50 between corporate sources (the balance sheets of utilities and project developers, etc) and the financial sector. 3) The financial sector is around 95 percent reliant on bank asset financing with non-bank entities including institutional investors financing the remainder. Asset financing could be in the form of project finance or financial arrangements specific to individual projects, which are common for power and infrastructure investments in general. This is split into investor categories, but different entities will be involved in the same type of investment...for instance, within project finance, roughly 63% in the OECD in 2012 was financed through debt, including loans from commercial and public banks, as well as debt finance provided for projects by institutional investors and publicly traded companies 4) You can see that such levels of investment cannot be financed by traditional public sources alone. The impact of the financial crisis and global deleveraging has exacerbated the situation, further reducing the scope for public investment in infrastructure within government budgets. 5) The scope for utility companies to expand their balance sheets to increase the capacity of investment in green infrastructure is constrained by the willingness of institutional investors (and others) to purchase new debt and equity issued from the utility companies. Currently, their balance sheets are under pressure and filled with existing portfolios of projects. 6) The financial crisis has affected the maturity transformation process in financial markets and the ability of banks to channel long-term financing. Banks have been prompted to reduce investments across illiquid asset classes, because of newly exposed funding vulnerabilities and new regulations such as Basel III, aimed at improving their capital and liquidity positions. As a result, banks are less willing or able to meet the long-term funding needs of borrowers and their new investments. Structural weaknesses in the banking sector are also leading to “bad” deleveraging, particularly in Europe, in the form of restrained credit growth. This is particularly relevant because EU banks that have been disproportionately affected by sovereign debt crisis of recent years had been large domestic and international “specialist” financiers of infrastructure which typically requires more know-how and carries longer maturities and has been harder to replace. 7) In a nutshell, this is a key reason why policy makers have been focusing on increasing investment by institutional investors with their $83tn in assets in the OECD.
- 1) To describe why policy makers are focusing on institutional investors, here is an illustrative picture of the landscape of investment financing for green infrastructure and where it would come from in the OECD area. (NB. We pulled this together based on recent reports that we were involved in for the G20). Of course, individual country contexts matter and the picture could look different from Australia to the United States. (this picture is broadly representative of the European landscape). In developing countries the picture would be roughly reversed with the public and quasi public sector (state owned banks and corporates) financing 2/3. In the OECD the public sector finances about a third (including national development banks). 2) 2/3 come from the private sector and this is split roughly 50/50 between corporate sources (the balance sheets of utilities and project developers, etc) and the financial sector. 3) The financial sector is around 95 percent reliant on bank asset financing with non-bank entities including institutional investors financing the remainder. Asset financing could be in the form of project finance or financial arrangements specific to individual projects, which are common for power and infrastructure investments in general. This is split into investor categories, but different entities will be involved in the same type of investment...for instance, within project finance, roughly 63% in the OECD in 2012 was financed through debt, including loans from commercial and public banks, as well as debt finance provided for projects by institutional investors and publicly traded companies 4) You can see that such levels of investment cannot be financed by traditional public sources alone. The impact of the financial crisis and global deleveraging has exacerbated the situation, further reducing the scope for public investment in infrastructure within government budgets. 5) The scope for utility companies to expand their balance sheets to increase the capacity of investment in green infrastructure is constrained by the willingness of institutional investors (and others) to purchase new debt and equity issued from the utility companies. Currently, their balance sheets are under pressure and filled with existing portfolios of projects. 6) The financial crisis has affected the maturity transformation process in financial markets and the ability of banks to channel long-term financing. Banks have been prompted to reduce investments across illiquid asset classes, because of newly exposed funding vulnerabilities and new regulations such as Basel III, aimed at improving their capital and liquidity positions. As a result, banks are less willing or able to meet the long-term funding needs of borrowers and their new investments. Structural weaknesses in the banking sector are also leading to “bad” deleveraging, particularly in Europe, in the form of restrained credit growth. This is particularly relevant because EU banks that have been disproportionately affected by sovereign debt crisis of recent years had been large domestic and international “specialist” financiers of infrastructure which typically requires more know-how and carries longer maturities and has been harder to replace. 7) In a nutshell, this is a key reason why policy makers have been focusing on increasing investment by institutional investors with their $83tn in assets in the OECD.
- 1) To describe why policy makers are focusing on institutional investors, here is an illustrative picture of the landscape of investment financing for green infrastructure and where it would come from in the OECD area. (NB. We pulled this together based on recent reports that we were involved in for the G20). Of course, individual country contexts matter and the picture could look different from Australia to the United States. (this picture is broadly representative of the European landscape). In developing countries the picture would be roughly reversed with the public and quasi public sector (state owned banks and corporates) financing 2/3. In the OECD the public sector finances about a third (including national development banks). 2) 2/3 come from the private sector and this is split roughly 50/50 between corporate sources (the balance sheets of utilities and project developers, etc) and the financial sector. 3) The financial sector is around 95 percent reliant on bank asset financing with non-bank entities including institutional investors financing the remainder. Asset financing could be in the form of project finance or financial arrangements specific to individual projects, which are common for power and infrastructure investments in general. This is split into investor categories, but different entities will be involved in the same type of investment...for instance, within project finance, roughly 63% in the OECD in 2012 was financed through debt, including loans from commercial and public banks, as well as debt finance provided for projects by institutional investors and publicly traded companies 4) You can see that such levels of investment cannot be financed by traditional public sources alone. The impact of the financial crisis and global deleveraging has exacerbated the situation, further reducing the scope for public investment in infrastructure within government budgets. 5) The scope for utility companies to expand their balance sheets to increase the capacity of investment in green infrastructure is constrained by the willingness of institutional investors (and others) to purchase new debt and equity issued from the utility companies. Currently, their balance sheets are under pressure and filled with existing portfolios of projects. 6) The financial crisis has affected the maturity transformation process in financial markets and the ability of banks to channel long-term financing. Banks have been prompted to reduce investments across illiquid asset classes, because of newly exposed funding vulnerabilities and new regulations such as Basel III, aimed at improving their capital and liquidity positions. As a result, banks are less willing or able to meet the long-term funding needs of borrowers and their new investments. Structural weaknesses in the banking sector are also leading to “bad” deleveraging, particularly in Europe, in the form of restrained credit growth. This is particularly relevant because EU banks that have been disproportionately affected by sovereign debt crisis of recent years had been large domestic and international “specialist” financiers of infrastructure which typically requires more know-how and carries longer maturities and has been harder to replace. 7) In a nutshell, this is a key reason why policy makers have been focusing on increasing investment by institutional investors with their $83tn in assets in the OECD.
- 1) To describe why policy makers are focusing on institutional investors, here is an illustrative picture of the landscape of investment financing for green infrastructure and where it would come from in the OECD area. (NB. We pulled this together based on recent reports that we were involved in for the G20). Of course, individual country contexts matter and the picture could look different from Australia to the United States. (this picture is broadly representative of the European landscape). In developing countries the picture would be roughly reversed with the public and quasi public sector (state owned banks and corporates) financing 2/3. In the OECD the public sector finances about a third (including national development banks). 2) 2/3 come from the private sector and this is split roughly 50/50 between corporate sources (the balance sheets of utilities and project developers, etc) and the financial sector. 3) The financial sector is around 95 percent reliant on bank asset financing with non-bank entities including institutional investors financing the remainder. Asset financing could be in the form of project finance or financial arrangements specific to individual projects, which are common for power and infrastructure investments in general. This is split into investor categories, but different entities will be involved in the same type of investment...for instance, within project finance, roughly 63% in the OECD in 2012 was financed through debt, including loans from commercial and public banks, as well as debt finance provided for projects by institutional investors and publicly traded companies 4) You can see that such levels of investment cannot be financed by traditional public sources alone. The impact of the financial crisis and global deleveraging has exacerbated the situation, further reducing the scope for public investment in infrastructure within government budgets. 5) The scope for utility companies to expand their balance sheets to increase the capacity of investment in green infrastructure is constrained by the willingness of institutional investors (and others) to purchase new debt and equity issued from the utility companies. Currently, their balance sheets are under pressure and filled with existing portfolios of projects. 6) The financial crisis has affected the maturity transformation process in financial markets and the ability of banks to channel long-term financing. Banks have been prompted to reduce investments across illiquid asset classes, because of newly exposed funding vulnerabilities and new regulations such as Basel III, aimed at improving their capital and liquidity positions. As a result, banks are less willing or able to meet the long-term funding needs of borrowers and their new investments. Structural weaknesses in the banking sector are also leading to “bad” deleveraging, particularly in Europe, in the form of restrained credit growth. This is particularly relevant because EU banks that have been disproportionately affected by sovereign debt crisis of recent years had been large domestic and international “specialist” financiers of infrastructure which typically requires more know-how and carries longer maturities and has been harder to replace. 7) In a nutshell, this is a key reason why policy makers have been focusing on increasing investment by institutional investors with their $83tn in assets in the OECD.