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Design of Green FIDC to finance green projects in Brazil through securitization of receivables

Design of Green FIDC to finance green projects in Brazil through securitization of receivables

Overview: Convergence awarded a proof of concept grant to Albion Capital and Climate Policy Initiative (CPI) in Q3 2018 to develop a new Green FIDC (Portuguese for Green Receivables Fund) and to support the research, structuring, and fundraising activities required to bring green projects to the Brazilian capital markets.

The Green FIDC builds on a specific type of special purpose vehicle (SPV) available within the Brazilian legal framework - the FIDC - specifically used for securitizations (pooling of contractual debt and issuance of asset-backed securities to investors), which had historically been limited to commercial and residential mortgages, credit card debt, and auto loans.

Green projects – in particular renewable energy and energy efficiency projects – are a crucial component of Brazil’s 2030 climate goals. The country aims to increase energy efficiency by 10% and for non-hydro renewables to account for 23% of total power generation. At the same time, the recent recession and fiscal restraints led the Brazilian National Development Bank (BNDES) to dramatically reduce lending to the sector by 63% between 2013 and 2017, resulting in a significant gap in low-cost and long-term financing for green projects.

The Green FIDCs will disintermediate access to green projects to Brazilian capital markets by securitizing receivables from renewable energy and/or energy efficiency projects, for example, PPAs, rental contracts, and usage charges.

In 2017, the concept was selected for development by the Brasil Innovation Lab for Climate Finance, a regional program of the Global Innovation Lab for Climate Finance, with CPI serving as secretariat and analytical provider. A pilot Green FIDC in the residential solar market has been progressing successfully, and Albion Capital and CPI have a project pipeline of close to BRL 1 billion.

Design question and learning potential for the market: How can a proven capital market instrument in Brazil (the FIDC) be applied to raise financing from the local markets for development projects, particularly green projects?

The Green FIDC mechanism will attract local institutional investors in Brazilinto climate-related projects. This is significant because Brazil is not only a large financial market but also a critical geography. The Green FIDC mechanism raises funding for green projects in two stages. First, capital is raised in a junior tranche from project developers and in a mezzanine tranche from public funders to finance the development and construction of green projects. Then, once underlying projects are operational, they are refinanced through the issuance of senior tranches in the Brazilian capital markets to local private investors. See illustrative structure below:

Green FIDC Structure

If successful, this model could be replicable across other development sectors in Brazil without the associated initial and steep learning curve. Further, it would also allow other jurisdictions to learn from and implement similar securitization legislation, allowing their own capital markets to finance green infrastructure projects.