Recognising the significant challenge posed by tackling climate change, the UK was the first major global economy to legislate a commitment to achieving net-zero greenhouse emissions by 20502. Achieving this ambitious target will require substantial investment in sustainable energy, with a large proportion of this investment expected to be funded through private market debt financing.
Banks have traditionally been the primary lenders to the sustainable energy sector, providing short-term financing for green energy and energy efficiency projects. However, increasing capital requirements for banks have placed limits on their ability to lend, with many required to syndicate existing loans before participating in new financings.
To address this challenge, MIDIS partnered with NatWest to deliver an innovative, long-term, capital management solution – enabling the recycling of capital for further investment in the sustainable energy sector without the need to reduce NatWest’s loan book.
The capital relief trade structured by MIDIS saw it invest on behalf of a client in a synthetic securitisation of a £1.1 billion portfolio of project finance loans held by NatWest.
Comprised of loans to 24 projects across the UK, the portfolio includes onshore and offshore wind, solar PV, smart meters, energy from waste, and biomass power. Collectively, the projects have enough capacity to power the equivalent of 4.6 million UK households with clean energy – with the CO2e avoided from the portfolio equivalent to taking 2.3 million cars off the road3.
By transferring some of the credit risk from the loan portfolio to a MIDIS client with less restrictive capital requirements, MIDIS enabled NatWest to release a significant amount of capital for further lending to the local sustainable energy sector. At the same time, MIDIS secured exposure to a debt portfolio with an attractive risk/return profile.
Reducing carbon emissions
Bruce Riley, Head of Project Finance, Natwest
Delivering attractive investment opportunities
Tom van Rijsewijk, Managing Director
The successful transaction represented the first exclusively UK ESG synthetic securitisation from a local financial institution, with all underlying loans meeting the Loan Market Association’s Green Loan Principles1.
The innovative nature of the transaction saw it recognised as Impact Deal of the Year4 and could offer a model for banks to play a greater role in the fight against climate change going forward.
All information current as at November 2020, unless otherwise stated.
2 UK Becomes first major economy to pass net zero emissions law, Department for Business, Energy & Industrial Strategy 2019
3 Green Investment Group Analysis, 2020
4 Impact Deal of the Year, Capital Relief Trades Awards 2020, Structured Credit Investor