Lecture 10 Flashcards
(15 cards)
Securitization definition
A transaction deriving its value on a legal structure imposed on collateral assets otherwise non-tradable
e.g. pool of student loan
Similarities between Securitization and Debt
Funded in Capital Markets
pricing
Non-Dilutive to Shareholders
Often Arranged by Banks
Funding based on asset levels
Differences between Securitization and Debt
Segregation – true sale of assets
Different Credit Risk - rating
Bankruptcy remote
Off Balance Sheet
No Repayment of Principal
Can be complicated
Corporate objectives
Short-term - Escape a liquidity crisis
Medium-term - Enhance Return on Capital
Long-term - Enhance Sustainability
systemic objectives
Short-term - Risk Transfer and Sharing
Medium-term - Financial Stability
Long-term - Enhance Sustainability
The UN Definition of non-Sustainability
- Actions impairing the Environment (E)
- Action impairing Social equity (S)
- Actions impairing corporate Governance efficiency (G)
definition of sustainable finance
Sustainable Finance defines the incorporation of environmental,
social, and governance (ESG) factors into the investment strategies of
financial institutions acting as investors in sustainable assets and
financers of sustainability-related projects
objective of sustainable finance
Use finance to incentivize corporations and the public sector to adopt more sustainable practices and policies
Project – Specific Bonds
The issuer commits to use the proceeds to finance a project aligned with specific ESG targets
Sustainability-linked (or KPI) bonds
The borrower agrees to achieve pre-determined sustainability policy targets as part of the financial conditions of the bond
How do we measure Corporate ESG behavior
Degree of ESG compliance
Likelihood of ESG failure
Effect-based metrics
what is the objective of sustainability bonds
to promote sustainability
What is the effect of ESG related breaches
Increased coupon payments, typically by 25bps (margin ratchets)
violation does not amount to an ‘event of default, no default consequences
instrument might lose the ‘sustainability’ certification necessary to market it and sell it to investors
What is the point of Margin Ratchets
The real purpose of margin ratchets does not seem to be to protect a financial risk for the lender or to incentivize real sustainability change
Instead, they minimize the risk that the non-attainment of ESG targets would lead to a withdrawal of the ESG certification
4 key principles for a green bond
proceeds of the bond must be exclusively applied to
finance green projects
Clear Process for Project Evaluation
Management of Proceeds in separate account
maintain readily up to date info
