The Quant Foundry Climate Change Corporate Credit model (4CM) produced some results based on collaboration from Imperial Centre for Climate Finance and Investment. We showed
4CM simulates the progression of the company’s balance sheet out for thirty years where at each anniversary, the model adjusts the investment mix to comply with a transition path – can their revenue stream and lending capacity support different investments in renewables?
The simulation works across a large selection of indicators that we are happy to share in this blog. They all talk to the credit officer or asset manager who is interested in seeing how the credit spread, probability of default evolves based on the forward revenue stream and maturity profile of the debt outstanding.
The credit officer can also view Credit rating (y-axis is credit notches above default) as a function of time.
The initial dip in credit spread reflects the ability of the revenue stream to keep their financial liabilities in check before embarking on a material debt-driven transition to renewables. The dip implies that the company must seek soem way to shrink its balance sheet. Our model will provide indications of which companies are likley yo benefit from transitions versus those that may suffer.
The revenue mix and debt-driven strategy from year 10 till year 25 give a positive boost to the book equity distribution of potential values.
This is driven by solid EBITDA and EBIT growth during this period.
Finally, we take into account the plant depreciation profile.
Asset Value progression.
Tax Payments.
Interest costs.
Dividend Payments.
Revenue and cost progression for each month within each year. Resets to zero at the start of each year, hence the zig-zag nature of the graphs.
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