With investor scrutiny growing of the environmental, social and governance credentials of several CEEMEA bond issuers, some in the market hope that COP 26 will help some of them retain their access to capital markets funding.
“There could be capital markets activity off the back of COP,” said one DCM banker in London. “There’s hope that the World Bank guarantee schemes and Next Gen [EU] programme could be a route to funding for some CEEMEA issuers."
The Next Generation EU (NGEU) fund — with over €800bn planned to be deployed — aims to provide funds for the economic recovery from the Covid-19 pandemic with a focus on green investments.
The World Bank guarantees convey the supranational's triple-A rated credit to encourage private sector investment in developing countries. They extend for up to 35 years in tenor.
Over the last one to two years it has become more difficult for some issuers to access the capital markets if their businesses do not meet the higher ESG standards investors now hold them to. "There have been a whole host of sectors shut out as a result and in EM this is a big issue," said the DCM banker. "The main problem [South African electricity company] Eskom has at the moment, for example, is no longer its financial performance but that they are enormous producers of electricity using coal.
"They want and need to pivot to greener electricity generation — and it’s critical for their continued access to capital markets — but they need funding in the first place to do so, which is hopefully what some of these new initiatives will provide. There’s huge change happening but it needs to be financed.”
A fund manager in London agreed. “The hope in EM is that COP 26 pledges could be tied to money the Europeans have already committed,” he said.
That is certainly the case for Eskom. European Commission president Ursula von der Leyden said last week that the European Union will initiate a project at COP26 to help fund the company’s transition away from coal. Eskom wants to borrow more than $30bn for this purpose.
Emerging market borrowers and fund managers have taken some time to understand the importance of this pivot to green. Two years ago, they aired concerns, but these were largely batted away as it was thought that the neither issuers nor investors had the appetite to force the necessary changes through in politically volatile countries. But that has all changed.
“Of late there’s been much more of an understanding that the big asset management firms have one set of rules that govern all their investments, no matter what the asset class,” said the DCM banker. “There’s little care about whether a specific fund is EM focused or not.”
He said the only leeway given seems to be around sovereign issuance. “There’s an acceptance that investors shouldn’t cut sovereigns off the capital markets,” he said. “So for example the conversation about ESG concerns has all been about Eskom, not South Africa. There’s much more of a feeling that countries need to get on and, provided that they are broadly trying to do the right things, which in South Africa’s case is trying to promote new construction in the renewable space, it is OK to lend them money.”
There is some doubt though as to whether COP 26 will itself bring any firm announcements about financing issuers from the CEEMEA region into turning greener.
“A lot of it comes down to the willing transfer of capital,” said the DCM banker. “It’s all so driven by money. I’m interested to see what COP brings but the underlying question is how much G8 countries are willing to pay for advancements in the rest of the world. Most EM countries and companies are happy to sign up to things if other people will pay for them.”
Right direction, but how fast?
While EM, like the rest of the world looks set for a greener direction, the fund manager in London said he was dubious about how quickly it will happen and whether the COP 26 event this month will bring any real change.
“I just don’t see any specific, legally binding commitments coming out of this that will have a big impact on EM,” he said. “In CEEMEA, Russia and Turkey are the countries that matter. Russia isn’t involved in COP 26 and Turkey wanted to be classified as a developing country because it doesn’t have the money to do much on its own. They have bigger economic problems at the moment than going green.”
He said that the event may be a good loudspeaker for raising awareness but he couldn’t see a lot changing for the capital markets specifically linked to it.
“There’s a lot of hype around it but realistically can I see the head of an EM state coming in and announcing that it’s making a commitment to replace a coal burner with a wind farm?” he said. “Of course not.”
But the DCM banker said that on a more positive note, green financing innovations are happening all the time. “As well as the guarantees and subsidies, one of the newer ideas is whether EM countries can be rewarded for simply doing nothing,” he said.
“EM countries aren’t necessarily forced into spending money, but what about if a bond can be issued in return for preserving a rainforest? That’s been something floated by the Gabonese. Because in West Africa they are faced with a choice of deforestation, which is done for money, selling the natural resources that they contain, or preserving a forest and losing out on that opportunity. So you could get a bond in the future that help deflect the effect of that lost opportunity. It’s a further evolution of the concept of green bonds.”
Ukrenergo talks debut green
State owned National Power Company Ukrenergo of Ukraine released initial price talk for its debut dollar sustainability linked green bond on Wednesday morning in London.
The initial guidance for the government guaranteed benchmark bond was put out at “low 7%” area for the five year Reg S/144A issue.
The bond carries an expected rating of B3/—/B. BNP Paribas, Deutsche Bank and Goldman Sachs are bookrunners on the deal.
The coupon on the bond is linked to two sustainability performance targets. The first is for the installed capacity of wind and solar power plants connected to the power systems of Ukraine to achieve 8,900MW by the end of 2024 from the 2020 baseline of 6,474MW. The second is for the share of connected wind and solar energy production capacity and total connected energy production capacity to reach 16.1% by the end of 2024 from the 2020 baseline of 11.8%.
The coupon steps up by 35bp per annum if either of the targets are not met.
