Rhino bond markets in everything

Conservationists have started marketing a five-year rhino bond, which bankers say will be the world’s first financial instrument dedicated to protecting a species.

Investors in the $50m bond will be paid back their capital and a coupon if African black rhino populations in five sites across Kenya and South Africa increase over five years. The yield will vary depending on changes in the rhino population, which has fallen rapidly since the 1970s.

The bond is likely to have different categories of investment, with some investors taking a “first loss” position. If rhino numbers drop, those investors will lose their money depending on the scale of the decline and the terms of their investment, while investors in other categories will be repaid.

That is from John Aglionby at the FT.

Comments

What is this funding, and what is it hedging against?
Is it intended as a performance bond, to ensure that the work gets done if the agent fails in some way? In that case, I'd think it would be opposite: pays out if populations fall.
If it's a performance incentive (to give conservationists more if they're successful), it would also be opposite: pay investors/donors less if populations rise.
As it is, it feels like just a leverage instrument - if populations rise, you get more money in addition to more rhinos, but if they fall, you lose out two ways. And it's not clear how the leverage helps with anything.

Exactly what? Are they leveraging rhinos? Is one side of the trade betting on rhino extinction?

Sounds more like a derivative (futures contract or a forwards contract) than a debt instrument. Who is the counter-party? Rhinos would be unique reference assets. How would one monetize a rhino?

What is the source of repayment? Is it future charitable contributions?

Not subscribing to read the article.

> What is the source of repayment?

It's a Ponzi scheme. They'll spend all the money on conservation measures and armed guards. Then they'll sell more bonds to save even more rhinos, and use the proceeds to pay the initial investors.

Instead, they should announce an anti-rhino campaign and offer a bounty for each rhino hide. Then the poachers will actually start raising rhinos at home in order to turn in the hides for profit. Then they cancel the campaign, and the poachers will release the farmed rhinos into the wild. It's bound to work, I read about it once.

They should surgically remove the horns from rhinos. Then they would be of no value to poachers.

Can't they just have Sally Struthers implore us to adopt a rhino?

Sally was pretty fond of cake and cheeseburgers.

Rino bond?

Are Mitt Romney or Kasich soon going to be extinct?

If you buy a Trump bond, will you ever get your money back?

Romney is a rino. Kasich is a ET.

Trumps is priceless. Than God for Trump.

Extraterrestrial?

That explains everything.

By the way, does all powerful God grab p..ssy? I mean, He (or She) can get away with anything.

Yes. Next question.

He does it immaculately.

I can't imagine a worse investment than a highly endangered African megafauna that is also highly valued in traditional Chinese medicine.

What would be the trade you would do? Short the bond and buy Rhino bone futures?

Shouldn't the "highly valued in traditional Chinese medicine" make this a potentially good investment? Just cut like 80% of the rhino's horn off; he'll get by without it.

I thought the idea of putting a mild poison into the rhino horn and selling it to China was a good one.

I've never understood why they could enjoy pirated DVDs and copycat merchandise but not fake aphrodisiac powder.

Of course if people had their heads screwed on straight they'd be selling not bonds but tickets to a shooting war over the Chinese predilection for endangered animal parts.

I assume that peasants buy the knockoffs and the elite or mid elite can afford the rhino horn aphrodisiac?

Then shorting it would make the best investment using your logic, wouldn't it.?

I really hope there's not a way for poachers to short this...

Won't whoever's paying the bond have an incentive to kill Rhinos? Am I misunderstanding the market?

Really start to worry when the market starts trading CDS on the bonds

Ecologist here (but not one who works on rhinos, or any other conservation-related topics). Judging from the diagram here: https://www.cnbc.com/2019/07/18/what-is-a-rhino-bond-here-is-all-you-need-to-know.html?__source=twitter%7Cmain

it looks like these aren't bonds at all? Rather, they're a sort of zero-sum bet between bondholders and "outcome payers". Bondholders pay money to conservation groups (maybe some of which goes to the outcome payers? I'm unclear on that). The conservation groups try to boost rhino numbers. If rhino numbers increase, the outcome payers pay back the bondholders, with interest. If rhino numbers drop, the bondholders don't get paid back.

I have questions about this. Like, why wouldn't the outcome payers just pay the rhino conservation groups themselves? What interest rate are the outcome payers going to have to offer to induce bondholders to front the money, given that rhino numbers have been declining for decades? I have many more questions, but that'll do for now.

I was thinking along the same lines.

Structurally this feels similar to recidivism outcome payments for services to ex-cons: if you keep more of them out of jail for longer, you get paid more. In that case it's effectively a government finding a way to outsource a service and align a payment with an outcome that it wants, rather than paying for a service to a provider who has no incentive to perform at all.

So fine: how does this work here? I'm guessing the government (or charitable trust) pays a set of protection service providers who buy Rhino Bonds, whose payment is variable depending on how well they perform. But if that's the case, why require up front capital from the service providers (which those protection providers almost certainly don't have)? And if they trade the bonds out to someone else, then their whole incentive system is turned upside down and you're probably in a much worse position than you were before with potentially expensive and semi-motivated service providers.

So why bother with a bond in the first place? Why not just say "I'll pay you more if you keep more of the Rhino's alive in five years time?", and then just like that the government has outsourced its park rangers to a private outfit who will climb over Rhino corpses to stop poachers using the most cost effective means necessary.

Presumably the answer is to farm rhinos.

I don't quite get it. The bit about payer/donors in essence borrowing in order to fund current conservation efforts, letting them spend their own current cash at the same time, makes sense. It's just transferring their consumption forwards in time, no different in essence than taking a mortgage so that you can buy the house and continue eating at the same time, or a local government borrowing to fund a playground or something. The investors of course take a risk that the cash to pay them will not be available later, but that's part of what investors get paid for.

But the declining payoff if the projects funded via the bonds fail is perplexing. Why would I loan you money for a project where you're off the hook if you (or the people you, as the "payer", can influence) if you screw it up? What's the incentive? Are they expecting the investors to monitor the situation and cry bloody murder if they see ineffective conservation efforts? It almost feels like a donation by the investors, insofar as the return is tied to a success that in no way enhances the original payers' ability to pay and might actually lessen it. (Successful rhino populations = less success in raising money for rhino conservation?) If it's a donation, via the investors just taking on extra risk, why not just donate?

It's more incentive than simply donating. When you donate, that money is gone and maybe there's more rhinos and maybe there's not. If you invest in these bonds, you fund conservation efforts and possibly get a return for your trouble. Pretty simple to me.

But what return?

Think of it this way: If the "payers" just borrowed at market rates to fund the projects, whatever that might mean based on their resources, security, collateral, etc, it would perforce have to be cheaper than the market rate they'd get for the same setup plus the additional risk that the investors don't get paid if payers (or conservationists) fail.

If the latter isn't more expensive, then the investors are subsidizing conservation efforts, which is swell, but why go through the rigmarole when all you're doing is giving the payers/conservationists a small incentive to screw up? Why not just lend at a subsidized "I'm doing good here!" rate, or lend at the market rate and then cut them a check for a donation? It feels like that nonsense where you get conned into buying X because the vendor offers to send a nickle to the orphans for every pair you buy.

"It feels like that nonsense where you get conned into buying X because the vendor offers to send a nickle to the orphans for every pair you buy."

Yep, or those friends who want you to pay them for each mile that they bicycle or each thousand feet that they climb up Mt. Everest. They donate the funds to charity, but it's mixing two different activities, pointlessly.

As others have observed, the incentives here are at best obscure, at worst perverse, with financial incentives to reduce the rhino population. Even in the best case scenario -- the conservation groups work hard and increase the black rhino population -- we now have the question: they owe principal and interest now, where do they get the money to pay back the investors?

How out of touch people on the spectrum are. A neurotypical understands the mechanism here implicitly.

You say "neurotypical", I say "sucker". Po-tay-toe, po-tah-toe...

Yes but less incentive to save rhinos on the margin.

Most people in these posts are missing the point, that Impact investing funds, that can sit anywhere between a large concessionary return to a full market related financial return, value "return" not just in the monetary sense. It varies but "impact" dependent on how it is defined to the fund is a return just as important as money based on the investors preferences. A charitable donation, could be seen as 1005 impact return. This mechanism allows you to stack different risk/ return profiles in a bond, with fist being the first loss capital that would coming with the highest risk and the highest return "the return" being dependent on the investor and could be in the form of a higher fin. return or as they see it a higher "impact" because they are effectively allowing money to be stacked on top of their "leveraging" the impact.

the other benefactors of more rhinos are governments as people go to National Parks to see them. Governments also pay to protect these species through National park systems. I am sure governments are using some the money they pay to guarantee parts of the bond as a way to raise more money to save this species and part of the tourist industry.

Sounds like a way to fleece morons.

It is time to bring the rhinos and elephants to the USA great plains. They are otherwise doomed to die under the incompenent and corrupt African governments.

The climate and topography and flora in the North American plains is so different from where those animals live I can't even begin to describe it.

"... the USA great plains. They are otherwise doomed to die under the incompetent and corrupt African governments": hold on; the Somali squads don't yet govern the Great Plains.

Obviously, lots of confusion on here about how these impact bonds actually work, probably because the article doesn't explain who the "Investors" are and who actually does the conservation work. Article mentions that British government might be one of donors, which I assume is an "Outcome payer". Rather than just fund some conservation work, they pay only for results. It's like offering a prize.

Then, I would hope that the impact bond is a way for entities actually doing the conservation work to attract funding from profit-seeking investors. That's the part that's unclear in the article. So, for example, the investors fund an entity that builds fences and implements other anti-poaching initiatives, call it RhinoShield Systems.

So, in a traditional arrangement, the British government might award a grant or contract to RhinoShield, which uses the award to fund conservation operations. But, there's no profit incentive for Rhino Shield to achieve measurable results. In the impact bond model, perhaps the British government instead offers to pay RhinoShield an amount based on outcome. Investors buy impact bonds, the proceeds of which are used to finance RhinoShield's work. If RhinoShield is successful, then it uses the outcome payments to return profits to Investors. Article is unclear as to whether this is how things actually work, but this would align incentives properly. The Investors have to be tied somehow to the entities actually responsible for producing outcomes, in this case RhinoShield.

So indirectly it is a derivative for those who pro or against Chinese economic booms. It is the perfact vehicle for people like Gordon Chang who more than 10 years has been forecasting the Chinese economy collapse. So he can put money where his mouth is, invest in the rhino bonds. If the Chinese economy tanks, the demand for rhino horns will collapse and the rhino number might rise and he can collect the gains. Strangely the Chinese billionaires will be in the same boat as Gordon Chang, if the Chinese economy drops, they will be compensated.

On the other hand those African poachers/countries can double dips, sell the rhino bonds for top money, then poach the rhinos to their heart's content and sell the horns, reducing the value of rhino bonds to zero.

It is the second scenario that the rhino bonds are stupid ideas for the first group of suckers. The outcomes can be manipulated with gains for the second group of people without penalty.

The issuers of the rhino bonds can more than double dips. They can also massively short the rhino bonds. They can triple dips. The parties involve might not be formally allied. The nature of the system will pull them together for mutual benefits.

The main flaw of the brain dead rhino bonds is that the issuers are rewarded for incompetence when they do not have to pay dividends, and financially penalized for achieving stated targets.

Comments for this post are closed