Market Overview

the Market

Section 1: the Market Niche
Section 2: Green Financing Gap
Section 3: EUR & USD Green Bonds

 

Market Overview

This page contains an overview of the debt market, the CDS market dynamics and our addressable market.

Section 1: Global Debt Market

The Bank of International Settlements publishes regular statistics on the  global debt market. Due to the specific issues concerning financial institutions debt (both from structural and accounting standpoint) the BIS statistical reports distinguish between financial debt and core (non-financial) debt. We will concentrate on the latter as the underpinning of the real sector of the global economy.

In the last 5 years the global core debt has increased from around $155 trillion to almost $192 trillion, while the global GDP has soared from from $116 trillion to less than $142 trillion.

This dynamics illustrates both structural imbalances in the global economy, as well as heighten fragil-ity of the mid-to-longer term credit extension.

Section 2: The CDS dynamics

Credit Default Swaps used to underpin the hedging strategies of numerous financial institutions and players up to 2008. Changes to the regulations have caused sharp decline of the CDS coverage from $61 trillion in 2007 to less than $7.5 trillion in 2019.

The introduction of Central Counterparties (CCPs) in 2009-10 as a measure to increase the certainty on the market failed. A multi-lateral clearing facilities do not appear to have convinced investors that they have effective hedging option.

Section 3: Underserved and addressable market

 

It is obvious that there is a substantial debt out there that under 2007 regulatory conditions would have used CDS as a hedge, but currently isn’t due to the lack of certainty on the market. Further it is also obvious that not all debt would find it financially feasible to use Deriveum as an instrument to back the CDS.

To estimate our addressable market we have taken only the high-yielding debt (non-investment grade) from developing markets, as well as extremely high-yield debt (B or lower) from developed North American markets, as well as the high-yield debt from the European market (due to the negative interest rates in Europe). We have subtracted from that debt the exposure already provisioned in the current CDS contracts.

Reflecting the fact that not all debt is ready to be securitized we have made adjustments on the amount of debt based on the financial maturity of each jurisdiction (sovereign debt was not adjusted, but certain jurisdictions such as Italy and Greece were discounted due to their financial stability).

As a result we estimate that our addressable market – debt that would have used CDS if it was efficient hedge on one hand, and with substantial difference between yield and reference rate – is approximately $7.1 trillion in 2019.

As we are hard-caped by the regulators to have maximum exposure of around $80 billion we may not reach over 1.13% of our addressable market.

Section 4: Green Financing Gap

 

Scientific research shows two important issues. Firstly, green and lower carbon footprint technologies are still new and have a bit of uncertainty when talking about their adoption on large scale ups. Secondly, that risk is appreciated by investors that demand higher interest from green projects. This dynamic naturally makes it more difficult for green projects to compete with already established technologies.

Governments try to weight in to make the shortfall, but their very substantial efforts are insufficient. The Commission has estimated that the investment in the Economic Transformation annually should be almost €600 billion/year. Out of those only 40% could be provided by public funds.

This shortfall will move the focus on the already developed European green bonds market. There is rather spectacular increase of the green bonds segment – in Europe alone 2021 will be the third year when new issuance will surpass €100 billion. There are quite diverse issuers – both private and public, with investors being predominantly private, with some mutual/pension funds.

This market would need to increase at least two-fold in the coming years to match the needs for a Green Transformation in Europe. That increase will need to be facilitated through well measured government interventions.

Please contact us for further details on the market overview.

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