Pioneer Capital Structure For Vietnam School Clean Water

The World Bank announced earlier this year a novel capital structure to fund clean drinking water in Vietnam schools. Some 8,000 schools with several million pupils will benefit from the project.

The new water filter technology will bring both health and environmental benefits as it replaces the old wood-boiled water practice, thereby lowering both deforestation and CO2e emissions.

The Vietnam project manager will arrange purchase and installation of some 300,000 water filter units. Because the project displaces fossil fuel, the CO2e verification not-for-profit organisation, VERRA, will provide assurance that the related carbon credits can be sold on the Voluntary Carbon Market.

The arrangement depends on the sale of these verified carbon units, as the sale proceeds are paid to Citi Bank, which sits at the heart of the funding structure. Citi in turn have entered into a forward flow agreement with IBRD part of the World Bank.

Under this agreement, Citi agrees to pay IBRD an amount linked to the number of verified carbon units generated by the project. This is used by IBRD to fund the servicing of a $50 mill AAAp 5-year bond, listed on the Luxembourg stock exchange.

The bond investors will receive the principal repayment and an investment return at a minimum of 0.52%. The return however, can vary upwards and may reach a total of 4.84%.

Under the structure, the Vietnam schools, the suppliers of the water purifiers and the project manager, bears no risk.

The bond investors are exposed to operational risk in that the investment return is linked to the number of verified carbon units generate by the project.

Citi is bearing some risk too. That is the risk that the sales proceeds of the carbon credits is less than the performance linked interest due to the ultimate bondholders.
Note, however, that this is not an operational risk, only a financial one, presumably one that Citi can hedge by open market operations in the voluntary carbon market.

This is a small transaction in terms of the money value compared to the huge amounts badged as green or ESG bonds seen elsewhere. Citi recognise this and their public statements speak of this as an “inaugural” transaction. Indeed, the capitalised interest on $50mill over 5 years is in round terms the project value flowing to the Vietnam schools.

Nonetheless, this structure splits operational risk from finance risk, and ensures to that the beneficiaries are risk protected. The role of VERRA in the verification process is central to the credibility of the carbon units being sold on the voluntary carbon markets.

Soon we might expect to see projects of much greater money value with corresponding bigger impact on environmental metrics, such as deforestation and emissions.

While complex, this creative structure is therefore to be much welcomed.

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