Overview: ADM Capital and ADM Capital Foundation were awarded a proof of concept grant in 2016 Q3. ADM Capital will use the Convergence Design Funding to finalize the design of a Tropical Landscapes Finance Facility (TLFF) and Tropical Landscapes Bond (TLB) to provide long-term financing for renewable energy and smallholder livelihood projects in Indonesia. ADM Capital and ADM Capital Foundation have partnered with UNEP, ICRAF and BNP Paribas to design and implement the structure. The TLFF will include a loan fund and a grant fund. The TLFF will be backed by contingent funding commitments from development finance institutions and aid agencies to support lending activity and mitigate the credit risk of underlying projects. The grant fund will help cultivate a bankable project pipeline and provide technical assistance to ensure each project achieves intended impact. Once projects reach maturity and begin to generate cash flows, they will be aggregated and packaged in a bond program that will help recycle loan capital for further TLFF lending. The TLFF structure is illustrated below.
Design question and learning potential for the market: How can a financing facility be structured with contingent funding commitments to support lending activity for early-stage, high-risk development projects? How can a bond program be used to recycle capital for the financing facility?
The TLFF proposes a novel approach to risk management of underlying projects. Project credit risk will be dealt with in two phases – “Construction Phase” and “Harvest Phase”. Given the expected risk profile of projects during the Construction Phase (i.e., most will be high risk and early stage), each project will be secured on a deal-by-deal basis to ensure acceptable risk. Most projects are expected to have typical project-specific security (e.g., asset collateral, an off-take agreement, corporate guarantee, and/or DFI guarantee). During the Construction Phase, TLFF will be funded by a revolving credit facility managed by ADM Capital. The credit risk on this will be shared by contingent funding commitments from development funders acting as additional credit guarantees. Contingent funding commitments may be drawn down by the fund manager if there is a default event for a specific project, and in that case would be used to repay the revolving credit facility. Once the Construction Phase is complete, the projects move to a lower risk “Harvest Phase” where they have sustainable cash flows. At this point, BNP Paribas will package and aggregate loans into a medium term note program, which will be used to recycle capital for TLLF lending. This approach to risk management, if successful, could be replicated by financial institutions across emerging markets to lend to high risk projects, and crowd in institutional investment to recycle capital for further lending once projects reach maturity.