Coal bonds are going out of fashion

IFR Asia 1005 - August 19, 2017
6 min read
Asia

It’s quite easy to think of Asian electric utilities as somewhat stolid state-owned enterprises that don’t have to sing too hard for their supper and are able to tap capital markets for their often huge capex needs as if falling off a log.

Recent history backs up that narrative. You only have to look at the jaw-dropping capex bandied around by Asia’s – and the world’s – largest utility, China’s State Grid, which expects to spend an average of US$65bn per annum over the next three years as it embarks on a foreign acquisition binge in places such as Brazil and Hong Kong.

Such is the perceived solidity of State Grid’s earnings that the company had little problem raising US$5bn in April, in one of the biggest Asian bond issues of the year.

Meanwhile, Laos’s Nam Ngum 2 hydroelectric power project is able to draw in the punters in Thailand’s domestic bond market thanks to the fact that all the power it produces is sold via long-term offtake contracts to EGAT, Thailand’s largest electricity-producing utility.

It’s all so terribly comfortable, and the bankers rather love it these days, because it seems the once terror-inducing project finance loan can now find a takeout in the international bond markets rather than searching for a loan market rollover.

IN THIS REGARD the example of Indonesia’s once-fraught Paiton Energy project is barnstorming. Coal-fired energy producer Paiton, which just about managed to escape the ravages of the Asian financial crisis intact in the late 1990s, was able a few weeks back to raise US$2bn via long-term debt, to take out a project finance loan.

It looked like a classic piece of disintermediation away from balance sheet-constrained banks to tap long-dated capital from the deep global liquidity pool harboured by institutional investors.

Still, if bonds were to be paraded like couture collections in Paris or Milan, Paiton should get wolf whistles for its naffness.

Coal-fired energy? That’s so outre, darling. Anything with the merest whiff of the fossil fuel about it is so terribly last century as to be an utter embarrassment.

This may sound frivolous, but investing certainly has its fashion trends, much like the rag trade. And some styles get consigned to the trash, never to return again, even in an era where nostalgia reigns supreme. To my mind Paiton Energy’s deal was the bond market equivalent of Donald Trump’s combover, jumpsuits for men and leg-warmers all rolled into one.

I reckon that, as the 20-year piece of the two-tranche offering (the first tranche was for 13 years) comes close to maturity, it will be viewed as something of a quaint anachronism on the books of those investors who bought it to hold.

OVER THE NEXT 20 years, a divestment programme out of fossil fuel of gigantic proportions is going to kick in alongside the mega-switch to renewable energy which is currently under way in large swathes of the developed world – with the developing world not too far behind in the race for clean energy. It will be these two currents which consign fossil fuel to the dustbin of investment fashion history.

One only has to look at Germany as a pristine developed country example in the energy stakes. The country’s “Energiewende” (energy turnaround) programme, which seeks to mothball nuclear energy and ramp up renewable energy production is in full swing.

One in three German households now uses electricity which derives from renewable sources; in most cases wind or solar power. And independent sources of power outside the national grid are giving the country’s big utilities pause for thought. Power production generated from the rooftops of private residences is catching on, with small start-up companies enabling households to generate sufficient electricity for their needs, with the surplus sold on, either to the grid or directly to consumers, bypassing the big utility companies in the process.

Here in Singapore, a company called Sun Electric rents rooftop space from (among others) the big government landlord Jurong Town Council for the purpose of solar-power generation.

And in the deregulated Singapore power market, the authorities are more than happy to break the existing model via what they see as competition-inducing innovation from such start-ups.

Meanwhile the voice of these innovators sings as one on the subject of blockchain and the settlement of peer-to-peer power production using cryptocurrency. And there’s something of a massive irony about all that.

Because I’m told that the mining of cryptocurrency places massive demands on the power grid, which means that if blockchain catches on with the ferocity it promises, the attendant electricity demand will be mind-blowing.

I reckon the world could cope with that. Big metropolitan power consumers such as Tokyo and Shanghai have such demand that Japan and China are talking about constructing “supergrids” wherein power will be supplied from sparsely populated countries such as Mongolia or Laos direct for use by the citizens of these metropolises.

It seems more than likely this will involve fields of endless wind turbines and solar panels. That’s the current fashion and I see no return to the smokestacks of yesteryear. Investors just won’t have time for such washed-up fashion statements.

Jonathan Rogers_ifraweb