Change of cli­mate for car­bon credit notes?

Finweek English Edition - - Cover Story -

IF IN­VESTORS ARE in­creas­ingly pay­ing at­ten­tion to en­vi­ron­men­tal is­sues, then the JSE’s only gen­uine “green” list­ing – the Ster­ling Water­ford Car­bon Credit Note (CCN) – is cer­tainly not con­firm­ing such a trend (yet). Trade in the CCN is scarce and Ster­ling Water­ford had a tough job get­ting the in­stru­ment listed de­spite its first note (which launched in April 2005 and ma­tured in June 2008) spin­ning an en­vi­able re­turn of 250% in rand and 140% in US dol­lars.

Ster­ling Water­ford di­rec­tor Greg Pater­son-Jones notes: “Our tim­ing was aw­ful, with our mar­ket­ing co­in­cid­ing with the on­set of the global fi­nan­cial cri­sis. With the mar­ket re­fus­ing to take any risk, we re­ally bat­tled to close in­vestors – es­pe­cially among in­sti­tu­tions. Our road show took place in the same week Lehman col­lapsed.”

Ster­ling Water­ford’s sec­ond CCN at­tracted in­vest­ment of only around R80m on list­ing in late 2008 – which would rank the in­stru­ment, in terms of size, along­side some of the small in­vest­ments on the JSE’s AltX mar­ket.

Pater­son-Jones says while Ster­ling Water­ford’s first CCN at­tracted a few in­sti­tu­tions, the take-up of the sec­ond CCN was mainly by smaller hedge fund spe­cial­ists and spe­cialised in­vest­ment com­pa­nies. The slack de­mand for the CCN is quite ironic – es­pe­cially in a time of mar­ket turmoil. The in­stru­ment isn’t cor­re­lated to mar­ket move­ments and – for lo­cal in­vestors – it of­fers a rand hedge, be­cause the un­der­ly­ing in­vest­ment is priced in euro.

On paper, the CCN is the per­fect foil for mar­ket turmoil. Pater­son-Jones reck­ons the mar­ket hasn’t quite cot­toned on to CCNs. “Lo­cal in­vestors, for the most part, sim­ply don’t un­der­stand CCNs. There’s also an over­rid­ing sense of con­ser­vatism in the mar­ket. At times like these, peo­ple tend to avoid any­thing with an ‘ex­otic’ con­no­ta­tion.”

Is it per­haps a case of be­ing too far ahead of the curve? Pater­son-Jones says there’s con­sid­er­able value in Ster­ling Water­ford be­ing “first to mar­ket” with CCNs on the JSE. “SW has es­tab­lished a brand… per­haps even stolen a march on pos­si­ble com­peti­tors.” He notes there’s great longer term po­ten­tial – point­ing out trad­ing value in all Euro­pean Emis­sions In­stru­ments (or “car­bon,” as the mar­ket calls it) are equiv­a­lent to around 50% of the JSE’s to­tal trad­ing value.

But Pater­son-Jones con­cedes that un­til SA has a dereg­u­lated power gen­er­at­ing mar­ket and a reg­u­lated do­mes­tic cap­ping of emis­sions, there’s limited scope to build more in­ter­est in car­bon in­stru­ments. “At the moment we only have a few lo­cal com­pa­nies, such as Sa­sol, Om­nia and Sappi that have their own emis­sion re­duc­tion projects. It’s not top of mind for the rest of the mar­ket, as it is in Europe.”

De­spite slug­gish in­ter­est in the sec­ond CCN, Pater­son-Jones stresses Ster­ling Water­ford will be look­ing at con­tin­u­ing to is­sue new notes. “In a bull mar­ket, list­ing a CCN is very vi­able for the is­suer, as the vol­ume that can be placed is larger. In a bear mar­ket it’s mar­ginal for the is­suer, de­spite the pos­i­tive re­turn pro­file. How­ever, as long as the notes con­tinue to pro­vide good re­turns and a use­ful mar­ket hedge, we’ll con­tinue to of­fer them.”

Nat­u­rally, de­mand for up­com­ing is­sues could be de­ter­mined by the per­for­mance of the ma­tur­ing CCN (it ma­tures at yearend 2012). With re­gard to the cur­rent CCN list­ing, Pater­son-Jones says while per­for­mance has been flat there’s ev­ery chance of an up-tick near the end of the note’s fouryear term on the back of phys­i­cal de­mand from com­pa­nies at the end of the com­pli­ance pe­riod.

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