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Natural Capital Management - Investment Prospectus

Natural Capital Management - Investment Prospectus
Published on: Mar 3, 2016
Published in: Business      

Transcripts - Natural Capital Management - Investment Prospectus

  • 1. ABOUT NATURAL CAPITAL MANAGEMENT: Natural Capital Management (NCM) is a leading, environmentally and socially aware investment management company, focussed on improving the sustainability and financial viability of Australia’s agricultural industry. The NCM Agricultural Fund seeks to provide cheaper funding - through securitised green bonds - to Australian farmers seeking to transition towards more environmentally friendly practices and sustainable business models, whilst providing institutional investors with not only an attractive investment proposition but an opportunity to support environmentally sound projects. INVESTMENT THESIS: Agriculture forms a critically important pillar of the Australian economy, at the 2010-11 census the value of agricultural production in Australia was AU$46bn. Australia’s economic strength has for many years been on the strength of a mining boom, however, Australia’s proximity to Asia coupled with its comparative strength in food production, position the agricultural sector perfectly to move from the mining boom to the dining boom and to become the ‘Food Bowl of Asia’. Delivering enhanced food security in a world whose demand for food is forecast to grow exponentially is critical with global demand for food forecast to rise 50% by 2030 and 70% by 2050.1 Real signs are emerging, however, that global warming and unsustainable farming practices are placing undue strain on farms. Given the criticality of the sector to billions of people throughout the world, efforts must be instigated to assist Australian farmers to transition to more sustainable farming practices. NCM believes that facilitating the tranisition toward more sustainable farming models presents an opportunity to leverage this next wave of Australia’s future. CHALLENGES TO TRANSITIONING FARMING PRACTICES: In order to significantly increase agricultural production capacity to meet growing global demand - and do so sustainably - the industry requires increased access to capital to fund transitionary programs. Finance and expertise to undertake such programs, however, are not readily available to farmers, particularly when current assets are often already secured against existing finance obligations. This is the niche that NCM fills with a unique funding mechanism backed by rigorous due diligence and a sustainable improvement plan. INVESTMENT OPPORTUNITY: Socially responsible investment funds have grown in Australia by 51% year on year to just over $25 billion in assets under management in 2013 and continue to outperform the broad market. To date, few opportunities have existed for these funds to invest in the Agricultural sector beyond direct farm investments. By pooling these investments, NCM offers sustainable investment opportunities in this growing market sector. As Green Bonds become an increasingly important component within institutional portfolios, NCM believes this innovative structure opens new capital to sustainable farming whilst transforming Australia’s agriculture sector. Globally, the flow into green bonds has been significant with the market forecast to grow by $40bn this year and $100bn next year alone. SIMPLE, YET INNOVATIVE: THE NATURAL CAPITAL MANAGEMENT AGRICULTURAL FUND NCM proposes to fund cheaper access to finance for Australian farmers through securitised green bonds. In doing so, the fund aims to transform Australia’s farming practices to include lower/no carbon emissions, organic farming, switching to solar or wind power and pollution reduction programs. The fund therefore provides institutions with an innovative way to invest in Australia’s growing farming sector whilst meeting sustainable investment criteria. The impact of the fund is twofold: through innovative finance, NCM can help transform the Australian farming sector to be more sustainable, reduce/eliminate their carbon footprint or switch to organic farming free of pesticides and chemicals. Further, through providing cheaper sources of funding than traditional banks, NCM can help support behavioural changes in farming practices with those who don’t a current ROI in environmentally sustainable farming. Loans to farmers will be full-recourse between AU$250k and AU$2.5mn. Underwriting criteria will define funding limits available to farmers. Figure 1 below outlines the NCM process, including cash flows. OUR INVESTMENT CRITERIA: Australian farmers who wish to transform their farms and business models to sustainable, environmentally friendly farming practices will apply to NCM. In doing so, NCM will conduct thorough due diligence on the proposal, including a comprehensive improvement plan and business case with experts. As defined in step 2 below, NCM completes thorough due diligence and underwriting processes, including monitoring, of approved loans to ensure they meet our high environmental standards. To be approved, applicants must pass through one or more of the following screens to be eligible for finance: transitioning to organic farming, reducing carbon emissions, pollution elimination, overstocking, moving from illegal or ethically questionable practices, soil improvement, solar/wind power, reforestation, recycling programs and water improvement. FARMERS APPLY 1 2 3 4 65 NCM DUE DILIGENCE AND UNDERWRITING FUNDING APPROVED WAREHOUSE FACILITY NCM SPV CREDIT ENHANCEMENT LOANS SECURED CASH GREEN BONDS CASHCASH INVESTORS FIGURE 1: THE NCM NARRATIVE: HOW WE ARE CHANGING AUSTRALIAN FARMING 1 United Nations Department of Economic and Social Affairs, International Decade for Action ‘Water for Life’ 2005-2015, retrieved on February 24th from: http://www.un.org/ waterforlifedecade/food_security.shtml
  • 2. OUR FINANCIAL INSTRUMENT: USING SECURITISED GREEN BONDS TO REDEFINE AUSTRALIAN FARMS AND INVESTING Capital Structure: NCM will issue green bonds as an asset backed security to institutional investors. The issue will consist of two tranches, Class A and Class B notes. NCM will retain the Class B notes as a credit enhancement to the Class A noteholders. NCM proposes to obtain ratings for Class A notes from S&P and believe these will be investment grade (BBB+). Having the Class A note rated will widen the potential investor base to include institutions who are often mandated to own rated securities. As Class B notes will be retained, they do not require ratings. Additional credit enhancement for Class A noteholders will come from structured excess yield, funded liquidity reserve and over-collaterisation with “lien” over eligible property, farming equipment or stable income streams over farm produce. NCM will seed the equity component of the fund from Westpac Bank which has won numerous green awards. Westpac is ranked number 1 bank on the Dow Jones Sustainability Index. NCM has a warehouse facility to fund the loans thus reducing costs whilst the fund is small. NCM will securitise the loans and issue as green bonds when the warehouse facility reaches AU$20mn. NCM will further de-risk the fund through grants. The Australian Government Department of Agriculture provides innovation grants to leading organisations to reduce costs, increase sustainability and drive returns at the farm gate. This funding facility will support lower levels of collateral in the early stages within the fund and will be used as initial equity/seed which is currently AU$5mn. Essentially, NCM will act as an “intermediary” and accept these grants on behalf of the projects financed. This reduces income stream risk for the fund and note investors. The agricultural fund will provide tax preferencing as concessional pass through to noteholders, with the Australian Governments Department of Environment providing tax concessions for entities who preserve and protect the environment. We believe this is compelling opportunity for investors with a much more tax effective structure. NCM proposes a floating rate structure to provide a natural hedge against inflation and to reduce interest rate risk. Through analysis, NCM believes the IRR of the fund will be approximately 10%. It is expected that the rate charged to farmers will be BBSW + 500bps (pending risk profile), and the Class A note coupon + 350bps to investors. Excess spread is therefore expected to be 150bp. Cash flows will come from farms paying interest on loans. The fund will generate additional revenue by taking 30bp of the revenues generated from any sales of products linked to the original green loan purpose. This revenue will be used to support the administration of the fund and its business. Ongoing costs to manage the fund are anticipated at 30bps. Trust expenses are expected to be 30bp, meaning that 120bps will be available to be distributed to the fund as the residual income holder which will increase the equity component within the fund over time. Warehouse facility fees have been agreed through Westpac as BBSW + 350bps. To reduce transaction costs, NCM will utilise the Climate Bond Initiative (Forestry and Agriculture) to standardise and verify the credentials of the fund so to provide more security to institutional investors. SCALABILITY At the Global Forum for Food and Agriculture in 2014, UNEP Executive Director and UN Under-Secretary-General, Achim Steiner, highlighted the distinct need for the world’s agricultural production to shift to more sustainable patterns in order to feed the world’s rapidly growing population.2 This highlights a very real opportunity for NCM to expand operations internationally, particularly in Africa and the Americas. Further synergies involve using NCM as a knowledge management resource. We believe there is significant scalability through sharing education, learning and development through to pooling knowledge with NCM clients. ENVIRONMENTAL AND SOCIAL IMPACT: Australia enjoys a clean and green image on the global stage, however Australia’s natural capital is showing signs of severe decline, with environmental indictors of soil loss, salination, groundwater reserves and waterway health all showing signs of stress. If Australia is to take advantage of its potential for agriculturally led economic growth, famers and farming practices need to change. At the same time, farming communities are being put under severe financial strain, with droughts, floods and declining environmental conditions leaving them with serious social issues such as lower living standards, poorer health outcomes, fewer educational and employment opportunities and a higher prevalence of divorce and suicide. Providing greater economic support to persons within rural & regional areas experiencing difficult circumstances such as drought or floods in rural areas, thereby alleviating financial stress, are seen by experts as key to breaking the trend.3 NCM therefore aims to shift the economic, social and environmental bar through relieving the strain on farmers while solving environmental problems. IDENTIFY PROJECTS THROUGH: PREPARE SUSTAINABILITY IMPROVEMENT PLAN COVERING: PREPARE FINANCIAL INVESTMENT PLAN & LEGAL AGREEMENTS BUSINESS CASE, INCLUDING ROI FACTORS: APPLY FUNDS AND MONITOR STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 • Industry associations • Existing financiers eg banks • Direct application • Energy efficiency and carbon emissions • Water efficiency and waste water treatment • Waste minimisation and management • Chemical use reduction • Minimising pollution • Soil management • Restoration of the natural environment • Agree financial and legal covenants • Assess financial viability of the project including forecasts • Reduced energy, water and waste costs • Lower chemical costs including fertiliser • Higher long term yields • Environmental certification • Higher asset value • Futureproofed for regulatory change • Execute plans and monitor covenants • Evaluate project success FIGURE 2: NATURAL CAPITAL MANAGEMENT – SUSTAINABLE INVESTMENT METHODOLOGY FUND DETAILS Fund Name Natural Capital Management Agricultural Fund Instrument Securitised Green Bonds Geography Australia Target Investors Superannuation (Pension) and Endowment Funds S&P Rating Investment Grade (BBB+) Coupon Rate BBSW + 350bps Terms 3 to 5 years IRR 10% Fund Size Initial size AU$25mn THE NCM IMPACT Environmental: reduced energy and water use, waste generation, chemical use, carbon emissions, biodiversity, soil and waterway health Social: reduced financial stress, mental health Economic: cheaper funding source, ability to increase farm revenue, redefine farm business models, leverage Asian growth INVESTMENT RISKS Risk Mitigation Strategy Loan default Risk Initially mitigated by a financial due diligence process, and the application of an expected Loss Given Default rating to each borrower on application (incorporated into borrower interest rate). There will also be early warning triggers via financial covenants, which give NCM time to work with borrowers to restructure funding arrangements if required. Natural Disaster & Commodity Price Risk This can be mitigated by having a loan portfolio diversification strategy in place, ensuring diversification by commodity and/or region. 2 UNEP 2014, Shifts Towards Sustainable Agriculture Needed to Meet Demands of 9 Billion by 2050, United Nations Environment Programme, http://www.unep.org/newscentre/default. aspx?DocumentID=2758&ArticleID=10694#sthash.ojQzAMSz.dpuf 3 Kairi Kõlves, Allison Milner, Kathy McKay & Diego De Leo (eds) (2012): Suicide in rural and remote areas of Australia. Australian Institute for Suicide Research and Prevention, Brisbane.

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