China’s First Emissions-Tied Notes to Unlock Carbon Asset Value

CGN Wind Energy Ltd. plans to introduce China’s first structured notes linked to the price of carbon offsets in a move that may increase participation in the country’s fledgling emissions-trading market.

The Beijing-based company plans to sell 1 billion yuan ($161 million) of five-year notes on May 8, according to a May 5 statement posted to the Shanghai Clearing House website. The securities’ return will have fixed- and floating-rate components, with the latter linked to the carbon offset price.

“In the past, companies couldn’t really use their carbon assets to get fundings because banks don’t recognize it,” Charlie Cao, an analyst at Bloomberg New Energy Finance in Beijing said by phone today. “We may see a trend of more companies willing to issue products on the back of carbon because it will reduce their funding costs.”

China, the world’s largest emitter, has started six of seven planned pilot programs designed to use carbon exchanges to reduce greenhouse gases linked to climate change. While the programs cover emissions of more than 1 billion metric tons a year, trading volume is limited by the absence of futures and other derivatives that would increase liquidity, Cao said.

The notes’ yield will consist of a fixed return, to be determined by a book building process, and a floating-rate component which will add an additional 5 to 20 basis points, depending on the carbon offset price, according to the statement.

The securities, underwritten by Shanghai Pudong Development Bank Co. and China Development Bank Corp., will be sold to institutional investors through China’s interbank bond markets, according to the statement.

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