Emissions house of the year: Tramontana Asset Management

Energy Risk Awards 2023: Tramontana expands its carbon-backed financing issuance bringing much-needed working capital to corporates

L-R: Paul Jackman and Bharath Manium, Tramontana
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Each year growing numbers of corporations are committing to net zero and other decarbonisation goals. These require significant investment and risk management, something that became particularly challenging last year due to geopolitical tensions and market volatility. While rising interest rates increased the cost of servicing debt on decarbonisation projects, elevated and volatile energy prices led to hikes in margin calls, which made hedging more expensive. In addition, carbon market liquidity remained thin for longer-dated tenors.

Tramontana Asset Management, winner of Energy Risk’s 2023 Emissions house of the year award, addressed all these issues in a series of innovative deals using its unique carbon-backed financing platform. During 2022, the firm increased the number and scale of its deals, extended the tenor of its transactions and executed a record notional amount. It also structured a unique facility that allows institutional investors to fund corporates’ margin requirements on futures hedges.

“Our reach has grown year-on-year since entering this space in 2019,” says Bharath Manium, co-founder of Tramontana. “Last year, we made substantial progress extending energy transition financing opportunities to the wider capital markets.”

By issuing notes backed by carbon allowances, Tramontana empowers capital market participants to invest in a pureplay energy transition asset, which in turn, brings much-needed diversified sources of funding to corporates. This proved particularly helpful during the challenging high price conditions of 2022.

“These ring-fenced fixed-income investments offer investors a collateralised product at attractive yields while also bringing new capital to the market to help meet corporate clients’ increased financing needs,” Manium says. “It also improves price discovery and liquidity in the European carbon markets and increases the ability of corporate clients to risk-manage their carbon exposure.”

Tramontana’s issuances last year included: notes structured for corporates in the energy transition space, backed by EU allowances (EUAs) from the EU Emissions Trading Scheme (EU ETS) which eliminate funding risk and slippage associated with rolling futures contracts to the target hedge maturity; and EUA-backed notes executed with investment banks, providing banks’ trading desks with liquidity in deferred carbon exposure, which enhances their market-making capabilities.

Tramontana also worked with institutional clients to structure appropriately sized notes backed by UK Allowances that are issued by the UK Emissions Trading Scheme that launched in 2021.

“The smaller market means liquidity and price discovery are significantly thinner than in the EU ETS, however the more ambitious reduction factor increases the need for corporates and trading desks to hedge their forward exposure,” says Paul Jackman, co-founder of Tramontana.

One of the firm’s most noteworthy deals last year, executed with a major utility, allowed the corporate to hedge its forward carbon price risk on an unmargined basis out to a deferred tenor where there was no futures liquidity.

“This was a significant transaction for us in terms of the notional size as well as the tenor,” says Jackman. “The underlying structure was executed with multiple hedge counterparties and across multiple financing partners, which is testament to its scalability.”

Tramontana also created a book-building process into its note issuance platform last year to deal with any discrepancies arising in the time between notes being issued and the corporate executing its hedge.

“For clients that hedge deals as they become live, the timing of the hedge is key to the commercial feasibility of the transaction,” notes Manium. “During the time between note issuance and hedging, the hedge counterparty may be exposed to a mismatch where prices move, and the same notional may equate to a different tonnage. The challenge is that financing partners look at volume in financial terms and hedge counterparties look at it in terms of tonnage.”

To mitigate this risk, Tramontana developed a mechanism using derivatives for a note to achieve partial fills on orders, improving the risk management process for the hedge counterparty.

“We expect this process to significantly improve the timing and size of transactions and bring more liquidity and efficiency to the market,” says Jackman.

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