Structured Climate Financing: Valuation of CDOs on Inhomogeneous Asset Pools

21 Pages Posted: 4 Mar 2020

See all articles by Natalie Packham

Natalie Packham

Berlin School of Economics and Law; Humboldt University Berlin

Date Written: January 31, 2020


Recently, a number of structured funds have emerged as public-private partnerships with the intent of promoting investment in renewable energy in emerging markets. These funds seek to attract institutional investors by tranching the asset pool and issuing senior notes with a high credit quality. Financing of renewable energy (RE) projects is achieved via two channels: small RE projects are financed indirectly through local banks that draw loans from the fund’s assets, whereas large RE projects are directly financed from the fund. In a bottom-up Gaussian copula framework, we examine the diversification properties and RE exposure of the senior tranche. To this end, we introduce the LH++ model, which combines a homogeneous infinitely granular loan portfolio with a finite number of large loans. Using expected tranche percentage notional (which takes a similar role as the default probability of a loan), tranche prices and tranche sensitivities in RE loans, we analyse the risk profile of the senior tranche. We show how the mix of indirect and direct RE investments in the asset pool affects the sensitivity of the senior tranche to RE investments and how to balance a desired sensitivity with a target credit quality and target tranche size.

Keywords: Renewable energy financing, structured finance, CDO pricing, LH++ model

JEL Classification: C61, G13, G32

Suggested Citation

Packham, Natalie, Structured Climate Financing: Valuation of CDOs on Inhomogeneous Asset Pools (January 31, 2020). Available at SSRN: or

Natalie Packham (Contact Author)

Berlin School of Economics and Law ( email )

Badensche Strasse 50-51
Berlin, D-10825


Humboldt University Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099

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