More than $6 bn green bond issues still stuck

Green bonds of huge amounts from India are stuck because of rising interest rates and global uncertainties, even as the country’s largest lender, SBI, is in the process of going through its maiden issue of green bonds of at least $500 million. According to analysts tracking such bonds, the renewable energy sector alone can offer bonds of

$3-4 billion. SBI’s plan is to raise another $3 billion through such bonds.

To date, Indian companies have raised about $5.4 billion through green bonds in the overseas markets, and about ~66.55 billion through domestic issuances.

No green bond was issued this year. Green bonds are normal bonds, but the proceeds are used for renewable energy projects, or for services that are ecologically sustainable. There are dedicated investors for these instruments and they do not invest anywhere else.

In the secondary market, some of these bonds have seen a rise in yields, or their prices have fallen. Asia as a whole issued $65 billion in green bonds over 2015-17, according to Bank of America Merrill Lynch (BofaML). By 2020, BofaML forecasts, China’s annual green bond issue will be $55 billion, that of Japan and India $15 billion each, and that of Australia and Korea $10 billion each.

Banking sources say SBI has received a huge amount of interest for its bonds, and the issuance will be concluded this week. But SBI, being one of the best-rated issuers from the country, could be an exception. Other companies that don’t have as good a rating as SBI are holding back their plans even as they need to refinance their bank loans. Most of these companies are from the renewable energy sector.

The issues creating hurdles for green bonds hold for any dollar bond issuance, but green bonds have takers in overseas markets, whereas other kinds of bonds face hitches because India’s international ratings continue to remain at just above the speculative grade.

“The global uncertainty is so acute that niche players have to pay 50-100 basis points higher than established names. When you add the hedging cost, the all-in cost of overseas bonds comes to around 12 per cent for most issuers from India, whereas they can raise the same money at 10 per cent from the local markets,” said Sunil Jain, chief executive officer, Hero Future Energies, a renewable energy venture of Hero Group.

Hero Futures was the first Indian company to secure a certified climate bond in 2016 for its wind projects. It had raised ~3 billion from the domestic market.

The company is not looking at raising any fund right now owing to global uncertainties and rising interest rates.

Even as US yields have remained largely stable in the past few months, investors are adding a risk premium of at least 25 basis points. The risk premium can climb up to even 75 basis points for some firms, say bankers who help Indian companies tap the overseas markets for their funding need.

“Indian issuers, in particular, are very price-sensitive. They scale back their plans if prices move up even by a small amount,” said a senior investment banker.

None of the investment bankers Business Standard spoke to wanted to get quoted before SBI came up with the issue. These bankers are in some measure involved in the SBI green bond issuance or expect to get business from the bank.

China is the dominant issuer of green bonds internationally. Although India lags far behind than China, green bond issuance is expected to zoom from India.

Much of this would happen because the government is awarding big projects in the renewable energy space to private companies, especially in the solar power sector.

According to Bridge to India, a consultancy service provider in the renewable energy market, India added a record 10.4gigawatt solar capacity in 2017-18. The solar sector in India received investments of over $10 billion in calendar 2017.

BofaML expects India to need at least $100 billion to meet its renewable energy project needs.