Ask any CFO of a renewable energy company about ‘green bonds’, you will get an answer which may not vary even in language: “We are looking at it carefully.”With every company worth the name “looking at” green bonds, it might give you an impression that Indian entities are about to dash abroad and come back with pockets stuffed with cash.
The reality, however, is the opposite. While globally green bonds are going great guns, Indian companies find no particular advantage in this mode of raising funds.Because global climate funds have been assumed to be a big source for developing green projects in India, organisations such as the Council on Energy, Environment and Water, a Delhi-based think-tank, have called for some government intervention.
Green bonds (or climate bonds) are debt instruments like any other, except that there is a condition that the funds raised shall be used only for ‘green projects’, such as renewable energy, energy-saving and fuel-efficiency.Ten years ago, when the concept began taking root abroad, there was no formal definition of ‘green projects’, but standards have since evolved. The main body of standards are those developed by the ‘Climate Bond Standards Board’, an organisation of funds that have among them around $35 trillion.
The basic principle behind ‘green bonds’ is ‘greenium’, or the premium an investor is willing to pay for green projects.
This means that investors settle for lower returns, resulting in cheaper financing for green projects, such as wind and solar.
Greenium, or the yield sacrifice the investors make is clearly not good enough for Indian companies, primarily because of the cost of hedging
According to Green Bonds Initiative, a not-for-profit organisation that intends to develop green bonds market, the outstanding climate-aligned bonds (whether labelled green or not) is about $ 694 billion, till the end of May. Labelled bond issues have been going up fast—from $ 11 billion in 2013; $36 b in 2014; $42 billion in 2015 and $45 billion till May 2016. The average coupon rate for ‘investment grade’ bonds works out to 3.7 per cent; for low grade bonds 6.9 per cent.
These rates are attractive as long as one does not add the cost of hedging for currency depreciation.
Hedging adds costs
Indian benchmark 10-year government of India bond today yields 7.5 per cent. “For any foreign currency bond issue, fully hedged, the total cost works out the same as borrowing in India,” says T B Kapali, a Chennai-based financial analyst.
He says that there are price advantages only if a company is daring enough to leave at least a portion of the borrowing unhedged.
“Price benefits are very modest, so it is more the big and blue-chip companies that can take advantage of green bonds,” says Sean Kidney, CEO of Green Bonds Initiative.
The big and blue-chip companies anyway find it better to borrow within India. So far, only three Indian companies have come out with green bond issuance (CLP India Rs. 600 crore, Hero Future Energies ₹300 crore and ReNew Power Rs. 451 crore) and all of them were domestic issues. (The other five issuers have been financial institutions —Yes Bank, Exim Bank, IREDA, IDBI Bank and Axis Bank.)
In all, Indian companies have raised a mere ₹1,451 crore through green bonds. (The public sector, Energy Efficiency Services Ltd, has said it would raise $ 100 million by an overseas green bond issue, but then the company intends to use it for expanding its operations abroad, so hedging may not be required.)
Also, all the Indian companies that issued green bonds are big ones, each with a GW of assets, including those under construction.
These companies get good rates by virtue of their size, not because they are green. Samir Ashta, CFO of the wind power company, CLP India, says that his company got a good rate of 9.15 per cent because of its size and ratings, not necessarily because of the ‘green-ness’ of its operations.
A big need
Indian green projects do need funding from abroad. Sunil Jain, Executive Director and CEO of Hero Future Energies, notes that green bond funding is crucial for India to achieve its green goals, including 175 MW of clean energy projects.
How do smaller Indian companies get funding? Banks are not able to lend enough. As ADB officials, Dan Lambert and Siddharta Shah, note in their blog, the need for funds for India’s infrastructure far exceeds banks’ credit limits.
Against this backdrop, a recent study of the Council on Environment, Energy and Water and the US-based National Resources Defense Council, a US-based not-for-profit environmental advocacy group, has (among other suggestions) called for government intervention – mainly in the form of a fund that could offer ‘credit enhancement’ (or loan guarantees).
Its other suggestions, such as more tax-free bonds, relate to raising debt from within the country, a credit enhancement mechanism is what the hour needs, say industry experts.
There is a precedent. Twenty-eight per cent of ReNew Power’s ₹451-crore green bond issue was partly guaranteed by the public sector India Infrastructure Finance Company, and half of it was counter-guaranteed by ADB.
“Together, the partial guarantees boost the credit rating of a typical infrastructure project from ratings as low as BBB to at least AA, making the bonds attractive to institutional investors,” say Lambert and Shah in their blog.
Though the ReNew Power bond was issued in India, the mechanism would work well for overseas issues as well. Government-owned infrastructure-focused, non banking finance companies, such as IIFCL and IREDA, could offer credit enhancements that will make the cost of a green bond issue abroad cheaper, says Kapali.