Trade finance house of the year: Tramontana Asset Management

Energy Risk Awards 2022: Tramontana provides innovative financing by matching corporates with investors wanting transition exposure

L-R: Paul Jackman and Bharath Manium, Tramontana

Risk.net montage

In the increasingly volatile market conditions of 2021, Tramontana Asset Management developed and deployed trade finance solutions to satisfy corporate demand for financing. These solutions have simultaneously provided a growing number of institutional investors with the opportunity to participate in the energy transition. For its innovative work in making the carbon markets accessible to mainstream investors and providing corporates with better access to financing, Tramontana has won Energy Risk’s 2022 Trade finance house of the year award.

As a specialist investment company, Tramontana develops hedging and financing solutions for corporate clients, partnering with large institutional investors to fund these transactions. The team of eight people has built up more than $5 billion in assets under management since its 2014 launch, focusing on the energy transition and carbon-backed financing.

Managing directors and co-founders of Tramontana, Paul Jackman and Bharath Manium, believe a successful transition to a low-carbon economy requires the full support of global capital markets. The company took a large step towards that goal last year when it completed a significant financing transaction that served both a corporate hedger and a large financial institution looking for exposure to the energy transition space.

Tramontana works with corporate clients to help implement effective hedging strategies that are unconstrained by the liquidity limitations of futures markets based on the European Union’s Emissions Trading Scheme. This particular solution was developed to minimise hedging slippage and reduce the balance sheet burden of managing the margining requirements of on-exchange hedge positions.

“Our solution involves issuing secured ring-fenced notes, purchased by our financing partners, and acquiring carbon from the market, says Jackman. “The carbon certificates are held in a registry account for the duration of the note – this could be a three-, five- or seven-year note, depending on the transaction. The corporate client then buys the carbon certificates at the end of that tenor.”

The solution, which Jackman describes as “a scalable, multi-issuance programme”, repackages energy transition-related assets as standard notes so they can be held in clearing systems such as Euroclear and Clearstream. Physical energy assets cannot be held in clearing systems, an issue that has traditionally left many institutional investors reluctant to participate in this growing market. This solution solves the accounting, regulatory and management challenges of holding such assets.

Furthermore, to provide investors such as pension funds and insurers with pure-play investments in this space, Tramontana mitigates non-carbon-specific risks such as credit risk via hedging and various collateralisation solutions.

As a result, Tramontana has been able to build a deeper and wider liquidity pool to fund such transactions by attracting wider investor interest, such as the specialist UK pension firm it worked with for the first time last year. According to Manium and Jackman, the growth in investor interest has seen Tramontana’s typical transaction size increase by more than 40% year on year.

“Our financing partners are sophisticated institutions who are familiar with structured finance and comfortable with the associated documentation and operational complexity,” explains Manium. “The key objective in our attempt to widen market participation in our products, was to make them more accessible to insurance and pension fund investors, who have traditionally been less active in structured finance linked to the energy transition.”

Although interest in green investments has undoubtedly grown in recent years, Tramontana’s trade finance solution aims to enable greater access to the market, boosting opportunities for corporate hedgers.

“The energy transition is a topic everyone is discussing. Many companies are putting targets in place for investing in environmental, social and governance strategies, and so investments like these are integral to that kind of strategy,” says Manium. “But I think the situation we currently find ourselves in is that there is a lot of demand from investors but not enough assets.”

Jackman adds: “Tramontana’s carbon-backed securities programme enables non-specialist investors to access energy transition markets and has opened the door to a significantly deeper pool of investor capital to be deployed in the energy transition space.”

The investment firm has clearly achieved its aim of boosting access to carbon markets for the wider capital markets, in turn significantly increasing its corporate clients’ access to capital for trade finance and risk management activities.