Investment yield

The CEFC’s current $1.2 billion portfolio of commitments is projected to generate an annual yield of 6.1 per cent once fully deployed.

The CEFC calculates projected yield on a lifetime basis, including both fees and interest charged. Yield is an indicator of the return the CEFC’s portfolio is expected to return over time, once funds are fully drawn down and deployed.

The projected yield of 6.1 per cent is lower than the figure of 7 per cent from the corresponding period last financial year. The projected yield is attributable to the following three factors:

  1. An overall compression in interest rates due to declining credit margins and market base rates which has tracked decreases in the underlying cash rate, bank bill swap rates and Australian Government bond rates, which are used as base or reference rates for most debt instruments in Australia. The Reserve Bank of Australia cash target fell 50 basis points between July 2014 and June 2015, from 2.5 per cent to 2 per cent.
  2. A decrease in the volume of high yielding project finance loans written by the CEFC, due to reduced levels of investment in the face of policy uncertainty around the RET and electricity market conditions of oversupply.
  3. An increase in the volume of corporate loans written which achieve a lower projected yield, reflecting their lower risk profile. 

Yields vary across finance types and for individual projects and programs, reflecting a different risk-return expectation for each particular investment. Generally, less risky investments will be expected to attract a lower expected yield. Equity and project finance investments are typically expected to earn the highest yields. Co-financing and corporate loans generate a lower projected yield because they are either less risky (a corporate loan to an investment grade company, for example, as opposed to a project financing) or tend to be offered at concessional rates to stimulate take up of energy efficient equipment, in line with the CEFC’s public policy purpose. 

Figure 8: CEFC projected yield of investments by finance type 

At 30 June 2015

Investment leverage

As anticipated in the CEFC’s 2013–14 Annual Report, private sector leverage was lower in 2014–15. The following factors influence private sector leverage:

  1. The relative share of investments across finance types. Project finance typically attracts a higher rate of leverage as the
    CEFC generally invests as part of a consortium of lenders.
  2. The rate of leverage for an individual project. Rates of leverage can vary by project or program. A higher rate of leverage for an individual project will increase the average for that finance type and vice versa.

Over time, the amount of private sector leverage has fallen as the portfolio has grown and the nature of the CEFC’s investment activity has changed. As the CEFC’s portfolio continues to grow, changes in the portfolio from new investments from year to year will have a smaller impact on average private sector leverage. Private sector leverage may increase in the future if the CEFC is able to help finance more large-scale renewable energy projects alongside the private sector.

In the 2012–13 and 2013–14 financial years, renewable energy accounted for 63-66 per cent of new CEFC contracted investments by value. In 2014–15, renewable energy accounted for only 38 per cent of new contracted investments. Leverage was also lower for renewable energy deals in 2014–15, compared with earlier years, reflecting subdued private sector interest and smaller deal sizes.

Across the CEFC portfolio, for each dollar of CEFC investment, the private sector has invested an average of $1.80. If other government funding is included, such as grants from ARENA, a total of $1.92 in additional funds have been mobilised for every $1 of CEFC investment.

Figure 9:
CEFC investment leverage by finance type

At 30 June 2015 ($ of private sector investment for each $1 of CEFC investment)

Figure 10:
Trend in private sector leverage for CEFC portfolio over time

($ of private sector investment for each $1 of CEFC investment annually at 30 June 2015)

Figure 11: CEFC portfolio shadow credit rating (SCR) by amount 

Total 1,206 100%
Shadow Credit Rating Total CEFC investment ($m) % of total portfolio
AA 195 16%
A 58 5%
BBB 309 26%
BB 391 32%
B 48 4%
Equity (unrated) 206 17%

At 30 June 2015
SCR figures rounded to nearest $m


Figure 12: CEFC portfolio shadow credit rating (SCR) by finance type

Finance type* CEFC PD weighted average shadow credit rating % of total portfolio
Project finance BB 27%
Corporate loans BBB 34%
Co-financing programs BBB 23%
Total (average) BB 83%
Equity (equity is unrated) 17%

At 30 June 2015
Percentages rounded and may not equal 100%

Portfolio Shadow Credit Rating

As a key part of the CEFC's investment risk evaluation process, shadow credit ratings (SCRs) that align with the Standard & Poor's credit rating scale are assigned to each individual investment to determine the appropriate market pricing and estimate the likely probability of default. 

On a weight average basis, by dollars invested, the CEFC's contracted investment portfolio of $999 million (excluding equity and at 30 June 2015) has an overall composite SCR of BB, unchanged from the prior year.