Impact Deal of the Year: Project Grasshopper

NatWest has raised the bar for impact investment capital relief trades with December 2019’s Project Grasshopper. A number of sector firsts - from its collateral to structural features - combined with a close fit to the bank’s broader strategy make the deal a new benchmark.

Project Grasshopper is the only 100% green significant risk transfer transaction executed in the market to date, referencing a portfolio entirely consisting of 36 UK power projects across a range of green technologies, and was carried out for both capital relief and credit risk management purposes. Macquarie Infrastructure Debt Investment Solutions, in conjunction with BAE Systems Pension Funds Investment Management, invested in the securitisation.

Grasshopper’s around £78m of capital relief was achieved in two distinct ways, utilising funded and unfunded structural features. First, through a fully funded financial guarantee on the junior tranche of the reference portfolio via a CLN. Second, through an unfunded second loss insurance policy on the mezzanine tranche, which in itself served to open up the SRT sector to the European insurance market – a new and highly liquid investor base.

The deal is the UK’s first fully ESG-compliant synthetic securitisation that provides credit protection against a reference portfolio of sustainable energy project finance loans. The £1.1bn portfolio includes loans to onshore and offshore wind, solar, smart meters, energy from waste and biomass power projects. The reference portfolio’s annual electricity generation is anticipated to power the equivalent of 4.6 million households, with the CO2e avoided equivalent to taking 2.3 million cars off the road.

Given the global importance in transitioning to a low carbon economy, clean energy projects are a core area of targeted growth for NatWest. Benedetto Fiorillo, head of portfolio risk mitigation at the bank, explains: “The attractiveness of the deal is evident in that it facilitates capital relief and provides ESG assets for investors. However, as importantly, Grasshopper also enabled us to recycle the capital to support investment in the renewables sector.”

Fiorillo continues: “At the same time, it allows the bank to move towards carbon neutrality as per the United Nations Environment Programme Finance Initiative Principles for Responsible Banking, of which we are a signatory, and align our business to the UN Sustainable Development Goals and the 2015 Paris Agreement. Ultimately, the deal provided us with an ideal combination of a stand-alone business opportunity with the means of achieving a future goal to reach standards our management have set for the whole business.”

In addition, Grasshopper featured a number of structural highlights, including: a three-year replenishment period to support new origination; a 10% clean-up call; and a regulatory call option. But most notable is that at 20 years, the transaction is the longest tenor synthetic risk transfer deal in the UK market, with a WAL of 13 years. The resultant long-term capital relief such a tenor allows was implemented to enable NatWest to achieve greater flexibility in further originating long-dated green projects.

Honourable mention: CITAH 2019
The US$946m CITAH (Citi Affordable Housing) 2019 securitised 96 affordable housing loans that finance more than 11,500 Low Income Housing Tax Credit (LIHTC) programme rental units. The dual-tranche deal, issued by Citi and structured in conjunction with Newmarket Capital, innovatively engaged municipal bond buyers in a socially responsible investment structure.

With Newmarket’s impact-focused IIFC strategy as the junior investor, CITAH 2019 enabled Citi to achieve funding and capital relief to maximise future resources for financing affordable housing. The senior notes were oversubscribed, offering investors tranched exposure to US affordable housing for the first time. Additionally, the transaction was structured to ensure that the tax advantages of the underlying loans were passed along to each investor tranche.

The US LIHTC programme has provided housing for approximately 6.7 million families since inception in 1986, but even after 35 years of funding affordable housing, there continues to be a shortfall of around 7.4 million units. Newmarket and Citi sought to help fill this gap with the CITAH transaction and in doing so exemplified the ways in which capital markets can innovate to address urgent social needs.

For complete coverage of SCI’s 2020 CRT Awards, click here.