This glossary explains Green Deal and Green Deal finance terms used in the post, Green Deal: a public private partnership too far
Green Deal Provider
“Green Deal Providers will be ultimately responsible for all aspects of the Green Deal offer from marketing and selling, assessment and advice, installation and ongoing guarantees and warranties.”
Green Deal Providers will:
- Contract with customers to install carbon-saving retrofits and make sure that assessments and installations are carried out by accredited businesses.
- Enter a loan contract with the customer, with customer repayments over an agreed period (up to 25 years), paid as part of the electricity bill, out of savings that result from the energy efficiency measures and/or installation of renewable energy.
- Receive payments that energy supply companies will pass on from customers’ energy bill payments
Green Deal Finance Glossary
1.’Also referred to as a “bankruptcy-remote entity” whose operations are limited to the acquisition and financing of specific assets. The SPV is usually a subsidiary company with an asset/liability structure and legal status that makes its obligations secure (in other words, it has to repay its debts) even if the parent company goes bankrupt .
2.’ A subsidiary corporation designed to serve as a counterparty for swaps and other credit sensitive derivative instruments. Also called a “derivatives product company.”
“Thanks to Enron, SPVs/SPEs are household words. These entities aren’t all bad though. They were originally (and still are) used to isolate financial risk.
A corporation can use such a vehicle to finance a large project without putting the entire firm at risk. Problem is, due to accounting loopholes, these vehicles became a way for CFOs to hide debt. Essentially, it looks like the company doesn’t have a liability when they really do. As we saw with the Enron bankruptcy, if things go wrong, the results can be devastating.’
“Traditionally, the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed. Recently, swaps have grown to include currency swaps and interest rate swaps.”
“If firms in separate countries have comparative advantages on interest rates, then a swap could benefit both firms. For example, one firm may have a lower fixed interest rate, while another has access to a lower floating interest rate. These firms could swap to take advantage of the lower rates.”
“Privately held negotiable bilateral contracts that allow users to manage their exposure to credit risk. Credit derivatives are financial assets like forward contracts, swaps, and options for which the price is driven by the credit risk of economic agents (private investors or governments).
Investopedia explains ‘Credit Derivative’
“For example, a bank concerned that one of its customers may not be able to repay a loan can protect itself against loss by transferring the credit risk to another party while keeping the loan on its books.”
“A form of financing in which large capital expenditures are kept off of a company’s balance sheet through various classification methods. Companies will often use off-balance-sheet financing to keep their debt to equity (D/E) and leverage ratios low, especially if the inclusion of a large expenditure would break negative debt covenants.”
Investopedia explains ‘Off-Balance-Sheet Financing’
“Contrast to loans, debt and equity, which do appear on the balance sheet. Examples of off-balance-sheet financing include joint ventures, research and development partnerships, and operating leases (rather than purchases of capital equipment).
Operating leases are one of the most common forms of off-balance-sheet financing. In these cases, the asset itself is kept on the lessor’s balance sheet, and the lessee reports only the required rental expense for use of the asset. Generally Accepted Accounting Principles in the U.S. have set numerous rules for companies to follow in determining whether a lease should be capitalized (included on the balance sheet) or expensed.
This term came into popular use during the Enron bankruptcy. Many of the energy traders'{sic} problems stemmed from setting up inappropriate off-balance-sheet entities.”
“A bond covenant preventing certain activities, unless agreed to by the bondholders. Negative covenants are written directly into the agreement creating the bond issue, are legally binding on the issuer, and exist to protect the best interests of the bondholders. Also referred to as ‘restrictive covenant’.”
Investopedia explains ‘Negative Covenant’
“Think of a negative covenant as a promise not to do something. Usually, negative covenants limit the amount of dividends a firm can pay to shareholders and restrict the ability of the firm to issue additional debt. Generally, the more negative covenants exist in a bond issue, the lower the interest rate on the debt will be since the restrictive covenants make the bonds safer in the eyes of investors.”
Capital market debt (Wikipedia)
“A capital market is i a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, (Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River,: Pearson Prentice Hall. pp. 283. ISBN 0-13-063085-3.[dead link]) as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Money markets and capital markets are parts of financial markets. Financial regulators, such as the UK’s Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties.
Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.”
“A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings.
Also known as a ‘junior security‘ or ‘subordinated loan‘.”
Investopedia explains ‘Subordinated Debt’
“In the case of default, creditors with subordinated debt wouldn’t get paid out until after the senior debtholders were paid in full. Therefore, subordinated debt is more risky than unsubordinated debt
“Borrowed money that a company must repay first if it goes out of business. Companies have a number of options for obtaining financing, including bank loans and the issuance of bonds and stocks. Each type of financing has a different priority level in being repaid if the company decides to liquidate. If the company goes under, the holders of each type of financing have different levels of rights to the company’s assets.”
Investopedia explains ‘Senior Debt’
“If a company goes bankrupt, senior debtholders, who are often bondholders or banks that have issued revolving credit lines, are most likely to be repaid, followed by junior debt holders, preferred stock holders and common stock holders. Senior debt is secured by collateral, and that collateral can be sold to repay the senior debt holders. As such, senior debt is considered lower risk and carries a relatively low interest rate. Even though senior debtholders are the first in line to be repaid, they will not necessarily receive the full amount they are owed in a worst-case scenario.”
“A financial instrument that represents: an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. A security is a fungible [interchangeable], negotiable financial instrument that represents some type of financial value. The company or entity that issues the security is known as the issuer.
For example, the issuer of a bond issue may be a municipal government raising funds for a particular project. Investors of securities may be retail investors – those who buy and sell securities on their own behalf and not for an organization – and wholesale investors – financial institutions acting on behalf of clients or acting on their own account. Institutional investors include investment banks, pension funds, managed funds and insurance companies.”
Investopedia explains ‘Security’
“Securities are typically divided into debt securities and equities. A debt security is a type of security that represents money that is borrowed that must be repaid, with terms that define the amount borrowed, interest rate and maturity/renewal date. Debt securities include government and corporate bonds, certificates of deposit (CDs), preferred stock and collateralized securities (such as CDOs and CMOs).
Equities represent ownership interest held by shareholders in a corporation, such as a stock. Unlike holders of debt securities who generally receive only interest and the repayment of the principal, holders of equity securities are able to profit from capital gains.
In the United States, the U.S. Securities and Exchange Commission (SEC) and other self-regulatory organizations (such as the Financial Industry Regulatory Authority) regulate the public offer and sale of securities.”