Carbon credit note: Back on JSE

Johannesburg - Investors enjoyed a 250% return on the first issue of the Sterling Waterford carbon credit note which reached expiry in June 2008. The company has now issued a second instalment of the note and there is the potential for similar returns on this second tranche.

Sterling Waterford is a niche market financial services provider that develops products are the rapidly growing carbon credit market.

"Analysts believe that when the product matures in 2012, the instrument could be valued at around €40," said Gregor Paterson-Jones, a director of Sterling Waterford.

The instrument is expected to be priced at around €15 when it lists on the market in October.

The carbon credit note is an instrument that allows South African investors the ability to invest in the lucrative carbon credit market and enjoy the rand hedge characteristics of the instrument, without affecting their offshore allowances.

Companies that leave a large carbon footprint (pollution), for example Sasol in South Africa, are expected to comply with international levels of carbon emissions.

Should the business exceed these emissions limits, the company must invest in projects to counter their carbon exposure or buy credits to make up any shortfall.

Paterson-Jones said all indicators for the second note were bullish as the carbon credit market was the fastest-growing financial market in the world, with estimated growth in trade globally predicted to exceed $20 trillion a year by 2020 (according to Richard Sandor, chairperson and CEO of the Chicago Climate Exchange and co-owner of the European Climate Exchange). It is also the only market not to have been affected by the global economic downturn.

"There is regulated demand and the market is short of supply," said Paterson-Jones.

Liquidity

One of the major problems that faced the initial tranche of carbon credit notes was a lack of liquidity in the market.

As the first tranche neared maturity, the major shareholders bought out many of the minority holders, reducing liquidity and the ability to trade in the instruments.

This time around Sterling Waterford has increased the issue size by around five times in an effort to secure additional retail and institutional investors.

"We have also entered into a distribution agreement with Momentum to help us target more retail and high net worth individuals," said Paterson-Jones.

With this issue of the carbon credit notes, Sterling Waterford have also confirmed that they will be a market maker to ensure that the instrument can be readily traded.

- Fin24.com