Merricks Capital provides innovative investment solutions that deliver consistent performance for its investors while operating with financial discipline and prudent risk.
Our investment strategies include private credit across commercial real estate, agriculture and infrastructure and specialised industrial.
Established in 2007, Merricks Capital delivers a truly differentiated multi-strategy offering, with extensive investment capability and global experience spanning multiple asset classes.
Carbon Credits: Credibility Still Capping Potential
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As carbon opportunities increasingly intersect with agricultural lending, the evolving state of carbon credits presents both potential and challenges for lenders. Below, we outline the key considerations from a private credit perspective:
Australian Carbon Credit Units (ACCUs) have faced significant scrutiny recently due to concerns over their issuance standards, with research suggesting that up to 80% of issued units may lack credibility (Communications Earth & Environment). Our discussions with corporates and institutional funds that are participating in the asset class echo these concerns.
We anticipate that the recent independent ACCU framework review (Chubb, 2023) and amended standards under the Australian Government’s ‘Safeguard Mechanism’, will address some of these issues and drive a new wave of demand.
The Safeguard Mechanism, which targets emissions reductions at the country’s largest industrial facilities, appears to be having a noticeable impact on the ACCU market. As of Q1 2024, 51% of total ACCU holdings were linked to Safeguard-related accounts (see chart), with a clear link between carbon credit offsetting and corporate sustainability strategies (Clean Energy Regulator).
Lending against carbon credits presents unique risks and complexities. Our investment hurdle is clear: senior secured loans must be backed by hard assets (farmland and water) that can be transacted if necessary to repay the debt at maturity. We treat carbon credit creation as an income-generating activity of the assets and review the viability of the business model similar to any traditional farming operations.
Over the past year, we have reviewed over $250 million in senior loans involving land with carbon credit schemes or borrowers seeking to unlock potential in this area. To date, our funds have only financed two loans, totalling $35m, where the business models had a carbon generating element. Both have been repaid in full. The more recent pipeline opportunities have lacked sufficient land security and, in our view, the potential borrowers are seeking excessive leverage against carbon values that can shift quickly based on policy changes.
In our experience, biodiversity credits currently offer more credibility than carbon credits. The income schemes for biodiversity credits are better defined, especially where the borrower has done the requisite work to have a counterparty ready to transact the future income streams. In 2021/22, our funds financed a mixed grazing and cropping farm to acquire an additional property with biodiversity credit potential, resulting in an income stream that covered approximately 50% of the property acquisition cost by converting <10% of the land to biodiversity projects.
As carbon credits continue to evolve as an asset class, we expect further price and policy volatility to emerge before the market and framework fully matures. For asset-backed private credit lenders, carbon credits alone are not yet suitable as standalone security for loans. However, when combined with land where the land value exceeds the debt balance, this structure provides an attractive opportunity for borrowers to engage in the carbon market potential while ensuring stable investor returns with limited risk of capital loss.
Australian Carbon Credit Unit (ACCU) Offsets by Source
