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New Instruments for Sustainable Investment:Global Development Bonds and SolarBank

Triple Bottom Line Investing Conference Messe Frankfurt - November 2-4, 2005

Michael T. EckhartPresident, American Council On Renewable Energy (ACORE)

President, Solar International Management, Inc.

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Contents

1. Sustainable development

2. Indicative financing trends to developing countries

3. Global Development Bonds – an asset class or subclass

4. SolarBank – a specific fund

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A Question of Vision:End of an era …Beginning of an era

PEAK OIL

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A Question of Accepting Responsibility for the Consequences of Our Actions

Changes in Atmospheric Concentrations - A Thousand Year History -

Source: IPCC Third Assessment Report (2001)

Atm

osph

eric

con

cent

ratio

n N

2O (

pbb)

310

290

270

2501000 1200 1400 1600 1800 2000

Atm

osph

eric

con

cent

ratio

n C

O2

(ppm

)

360

340

320

300

280

260

1000 1200 1400 1600 1800 2000 1000 1200 1400 1600 1800 2000

Source: NREL

Kyoto Protocol went intoEffect in 2005. The USis coming along … but Slowly.

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Sustainable DevelopmentA Perspective

"Development that meets the needs of the present without compromising the ability of future generations to meet their own needs”

World Commission on Environment and Development, 1987

- Map of the World Proportional to Population --

The US is Having a Difficult Time Defining Its Role in This

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SolarBank…A Finance Structure for Solar Energy

- Combining Public and Private Sector Interests -

Foundations:• Seed funding• Equity / sub-debt• Guarantees

End Users – The Poor• Long term financing• Low interest rate• Convenient access

Institutional and Individual Investors• Sources of debt funds• SolarBank Bonds / Notes• Market rate of return• Less: contributions

SolarBank FundHybrid

Profit / Nonprofit“Fannie Mae of Solar”

Retail lenders / lessors:• Volume• Returns

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International Commercial Bank Lending and Capital Markets Financing for Developing Countries

0

20

40

60

80

100

120

140

160

1997 1998 1999 2000 2001 2002 2003 2004

Gross Annual Volumes (in billions of US$)

Bank Lending Capital Markets

Source: J. Robert Sheppard, J.R. Sheppard & Company LLC, , from World Bank, IFC, 20004 and 2005

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-40

-20

0

20

40

60

80

100

1996 1997 1998 1999 2000 2001 2002 2003 2004

Net Annual Volumes (in billions of US$)

Public Sector Private Sector

Debt Flows to Public-Sector and Private-Sector Borrowers in Developing Countries

Source: J. Robert Sheppard, J.R. Sheppard & Company LLC, , from World Bank, IFC, 20004 and 2005

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International Finance CorporationA Loan / B Loan Lending Program

0

1000

2000

3000

4000

5000

FY 2000 FY 2001 FY 2002 FY 2003 FY 2004

A Loans B Loans

Source: J. Robert Sheppard, J.R. Sheppard & Company LLC, , from World Bank, IFC, 20004 and 2005

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Infrastructure Finance: Total Debt and Equity

0

10

20

30

40

50

60

70

80

90

1997 1998 1999 2000 2001 2002 2003

Total Infrastructure Finance(in billions of US$)

Infrastructure Finance

Source: J. Robert Sheppard, J.R. Sheppard & Company LLC, , from World Bank, IFC, 20004 and 2005

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The Need for Infrastructure Funding…A Shortage of $100 Billion to $300 Billion per Year

Lower Upper

Estimate Estimate

Estimated Annual Funding Requirement for Infrastructure:• Electric Power: US$ 140 B US$ 160 B• Water 111 B 180 B• Transportation: 125 B 165 B• Telecommunications: 58 B 105 B

Total Need 434 B 610 B

Estimated Current Sources:• Current self-funding: 200 B 200 B• ODA: 60 B 60 B• Private participation: 50 B 50 B

Total Sources 310 B 310 B

Gap US$ 124 B US$ 300 BSources: Source: J. Robert Sheppard, J.R. Sheppard & Company LLC Based on (a) Estimates prepared by The World Bank and (b) calculations made from World Bank data, except upper estimate for water is from the Camdessus Report (telecommunications estimates for 2005 - 2010)

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Lack of Participation by US Institutional Investors

Current Capital Under Management (2004):

• US Pension fund assets $ 7,775 B• US Life Insurance Companies 4,160 B• US Mutual Funds 963 B

Total Sources $12,898 B

Current Participation by US Institutional Investors:Estimated Foreign Securities Holdings (2004):

• Pension funds $ 15 B• Insurance companies 92 B• Mutual funds 37 B• Banks & savings institutions 30 B• All other 48 B

Total Foreign Uses $ 222 B

Sources: J. Robert Sheppard, J.R. Sheppard & Company LLC based on (a) Foreign securities holdings: calculated from Federal Reserve data and Merrill Lynch report on world bond market (b) total asset data: Watson Wyatt (pension);Insurance Information Institute (insurance); Investment Company Institute (mutual funds)

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An Historic Inability to Link US Institutional Investors with the Developing Countries...a Systemic Problem…

USG

InstitutionalInvestors

LocalFinancial Institutions

SustainableDevelopmentProjects

Host Governments

• Fiduciary Duty• Rated Bonds• Liquid Stocks• Track Record• Quarterly Reviews

• Development Challenges• Political Risks• Currency Devaluation Risks• Credit Risks• Project Risks

THIS NEEDS TO BE ADDRESSED AND RESOLVED

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Framework for Solutions…

USG

InstitutionalInvestors

LocalFinancial Institutions

SustainableDevelopmentProjects

Host Governments

Global Development Bond Team:• David de Ferranti• John E. Mullen• Daniel Bond• Robert Sheppard• Reid Detchon• Mohamed El Ashry• Michael Eckhart

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Description:

Global Development BondsGDB Concept:

• A new asset class, or sub-class within Fixed Income Securities

• Objective: to mobilize capital from US investors, especially institutional investors, for “sustainable development”

• Defining characteristics:– Qualifying Countries– Qualifying Uses– Qualifying Issuers / Managers

• License and Monitor (not case-by-case) by candidate participating agencies:

– OPIC– Export-Import Bank– Millennium Challenge Corporation– Securities & Exchange Commission

Implementation:

• Private sector credit enhancement:– Special purpose vehicles– Diversification: geographical, asset

type, originator diversity– Over-collateralization– Tranches -- 3 to 5 or more, e.g. highest

rated AAA, lowest = equity

• Government Enhancements to reach BBB:– Political risk insurance– Foreign exchange risk mitigation– Currency convertibility– Currency devaluation facilities

• Structural alternatives under consideration to reach AAA rating:

– Single purpose Surety Corp. – Monoline insurers: BBB to a AAA

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Building on the CDO Technique…

USG

“Global DevelopmentFunding Corp I”

InstitutionalInvestors

LocalFinancial Institutions

SustainableDevelopmentProjects

Senior Notes

80-90% of Senior Notes

SecuredNotes / BondsRated Aaa/AAA

Local Currency

$

Host Governments

(Issuer) (Originator)

Collateralized Debt Obligation (CDO)- Specialty, one-off, Special Purpose Vehicles (SPV)- 25 to 50 Loans in a fund- $100 million - $1 billion per fund- Over-collateralized, tranched- Key = track record of the Manager

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Adding Minimal US Government Enhancement…Via a Surety Corp Structure

OPICGlobal DevelopmentSurety Corp.

“Global DevelopmentFunding Corp I”

InstitutionalInvestors

LocalFinancial Institutions

SustainableDevelopmentProjects

Senior Notes

80-90% of Senior Notes

SecuredNotes / BondsRated Aaa/AAA

Local Currency

$

Host Governments

(Guarantor)

(Issuer) (Originator)

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Prospective GDB Implementation Structure…

A Systemic Solution

OPICGlobal DevelopmentSurety Corp.

“Global DevelopmentFunding Corp I”

Management Co.

PlacementAgent

InstitutionalInvestors

LocalFinancial Institutions

SustainableDevelopmentProjects

Senior Notes

80-90% of Senior Notes

Fee

Blanket Insurance

Fee

Guarantee

SecuredNotes / BondsRated Aaa/AAA

Local Currency

50% Host Governments50% Institutional InvestorsShareholders:

Features: Rated Aaa/AAA based on:1. OPIC Blanket Insurance2. Currency Devaluation Fund3. Contingent Equity from Shareholders

There could potentially be dozens or hundreds of “Global Development Funding Corp” housedwithin US financial firms

$ $

Host Governments

(Guarantor)

(Issuer) (Originator)

FeeEquity

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A Simplified Plan to Get GDBs Started…

OPIC

“Global DevelopmentFunding Corp I”

InstitutionalInvestors

LocalFinancial Institution

SustainableDevelopmentProjects

Senior Notes

80-90% of Senior Notes

Local Currency

$

Host Governments

(Issuer) (Originator)

MonoLine

SecuredNotes / BondsRated Aaa/AAA

First GDB Fund:. OPIC Blanket Package. Monoline cooperative Insurance Package. Approximately $1 Billion Portfolio. Mid-2006

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A GDB Fund for Solar Energy Markets…

SolarBankSolarBank

OPIC

SolarBank

InstitutionalInvestors

LocalFinancial Institutions

Solar Electricity

Senior Notes

80-90% of Senior Notes

Local Currency

$

Host Governments

(Originator)

MonoLine

SecuredNotes / BondsRated Aaa/AAA

(Issuer)

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Thank You

American Council On Renewable Energywww.acore.orgwww.acore.org

AndSolar International Management, Inc.

www.SolarBank.com

Michael Eckhartmeckhart@acore.org

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