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November 10, 2022updated 11 Nov 2022 10:18am

Market unphased by Sembcorp’s green debt payments step up dodge

Singapore’s Sembcorp evades step up on $1.6bn sustainability-linked debt with sale of Indian assets while maintaining operational control.

By Adrian Murdoch

Sembcorp, coal, green bonds, green loans, sustainability-linked debt
Offloading coal. Sembcorp is officially waving goodbye to its Indian coal assets, but not really… (Photo by Wang Jianmin / Costfoto/Barcroft Media via Getty Images)
  • Shareholders in Singapore’s Sembcorp have signed off on plans to sell the company’s coal power business in India to the Tanweer Consortium for $1.4bn.
  • Sembcorp is funding the consortium’s purchase, has guaranteed the company’s loans, will continue to provide technical advisory services and will keep the current operations team in place.
  • The deal avoids a step up on its S$2.3bn ($1.6bn) sustainability-linked bonds and loans.

Shareholders of Singapore-based energy and urban development company Sembcorp Industries (Sembcorp) have shrugged off any green conscience and given the nod to the company’s INR117bn ($1.4bn) sale of Sembcorp Energy India, its coal power plants in India.

This is despite the publication last week of a damning report from Stockholm-based non-profit think tank Anthropocene Fixed Income Institute (AFII), which described the deal as the “carbon footprint arbitrage of a lifetime”.

Managed by HSBC, it is hard to see the deal as anything but cynically underhanded.

Sembcorp, 49.5% owned by Singapore state investment company Temasek, is to sell two coal-fired power plants in Andhra Pradesh, totalling 2,640 MW to Tanweer Consortium. The Oman-led consortium is made up of private equity investment company Oman Investment Corporation, the [Oman] Ministry of Defence Pension Fund, and Kuwait-based investment company Dar Investment.

The Oman Investment Corporation is a long-standing ally of Sembcorp. The two groups jointly developed and have managed the $1bn Salalah Independent Power and Water Plant in Oman since 2009.

The terms of the deal appear to be an exercise in sleight of hand with Sembcorp to all intents and purposes retaining control while pushing coal assets off its books.

Sembcorp will provide the consortium with what is called a “deferred payment note”. This gives the buyers 15 years – extendable to 24 years – to pay the full amount. It was put in place, the company said, “given the limited availability of funding for coal-related projects due to ESG considerations of financial institutions globally”.

The interest rate on the payment note appears to be less than market rate too. It comes in at 1.8% plus a benchmark rate equal to the Indian government 10-year bond yield, at the time of writing around 7.4% which gives a rate of 9.2%. Commercial interest rates are typically above 11%.

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In the meantime, Sembcorp will continue to provide technical advisory services to the company, the existing operations team will continue to be employed under the new ownership, and Sembcorp has guaranteed the company’s loans out to 2036.

From brown to green

The cynicism is real. Sembcorp is fully aware of what it is doing and why it is doing it, but there’s little resistance – beyond some bad press coverage – to its passing.

In a circular to shareholders, Sembcorp admitted that the sale was being conducted purely to stop an increase in the interest rates of its capital market borrowings and to make sure that institutional investors weren’t scared off. “This would likely result in lower liquidity and thereby an increase in the cost of capital for Sembcorp,” it said.

After the sale completes, Sembcorp will be able to claim that its energy capacity made up of renewable energy has jumped from 43% to 51%. On paper, it will also reduce the company’s greenhouse gas emissions intensity from 0.51 tonnes of carbon dioxide equivalent per megawatt hour (tCO2e/MWh) in 2020 to 0.32.

This is crucial because Sembcorp has used the green capital markets enthusiastically over the past couple of years since announcing plans to transform its portfolio “from brown to green” in May last year.

After dipping its feet into the markets with an inaugural green bond in June last year – a S$400m ($285m) 2.45% 10-year deal – all of Sembcorp’s green capital market transactions since then have been sustainability-linked.

A core key performance indicator (KPI) in all of these deals is a reduction of greenhouse gas emissions intensity to 0.40 tCO2e/MWh.

It is a target of Sembcorp’s first sustainability-linked bond signed in September last year. The largest from South-East Asia at the time, the $S675m 2.66% 10.5-year deal was anchored by the International Finance Corporation, the private sector arm of the World Bank.

It was also part of its follow-up sustainability-linked bond. The company sold a S$300m 3.735% seven-year bond in April this year.

The interest rates on both bonds increase by 25 basis points (bp) if Sembcorp doesn’t hit that 0.40 tCO2e/MWh target by the end of December 2025.

Although the interest rate has not been disclosed, it was even a KPI of a private deal that the group signed – a €70m ($69.6m) five-year sustainability-linked Schuldschein (a promissory note similar to a bond) with Landesbank Baden-Württemberg in mid-August.

It is also part of Sembcorp’s loans. At the beginning of May this year, the group signed a S$1.2bn five-year syndicated sustainability-linked revolving credit facility with ANZ, DBS Bank and OCBC Bank as mandated lead arrangers. The interest rate has not been disclosed, but it also has a 25bp step up if the same target is not reached.

With at least S$2.3bn borrowings subject to an interest rate hike, Sembcorp’s move makes a great deal of financial sense.

Fiduciary duty trumps all

Market reaction has been muted and Sembcorp has shrugged off any debate about the sale.

In a statement to the SGX on 9 November, the company assured investors that its emissions would be reported and assured by a third-party auditor and said that the sale was “in the best interests of multiple stakeholders”.

Although there has been a share price dip since the Indian sale was announced in September, with a return this year of 49.2%, investors aren’t complaining. Indeed, Sembcorp is one of the best-performing shares on the SGX this year, only knocked into second place by auto distributor Jardine Cycle & Carriage which has seen its shares soar 52.8%.

At the beginning of August, Sembcorp reported a 94% jump in second-half profits to S$490m and a 45% jump in revenues to S$4.8bn

More to the point, it doesn’t seem to have troubled analysts. Of the ten who cover Sembcorp, six rate the stock as a “buy”.

After news of the sale emerged, Kevin Tan, analyst at Maybank, Malaysia’s largest bank, hailed the company as “greener than ever” and in his note said that news of the sale had “eased ESG concerns”.

“We think that this sale is positive on a pro-forma basis given it is strategically imperative for Sembcorp to progress towards being a greener company,” he continued.

It was a similar story at brokerage PhillipCapital where Singapore-based senior research analyst Terence Chua deemed the sale as “strategically important” and that it would lift the company’s environmental scores.

Ulf Erlandsson, AFII’s founder and chief executive, called the deal "very unfortunate" on LinkedIn.

“It provides a template for how investors decarbonise portfolios by shifting emitting assets from operational assets to financing assets, to allow them to arbitrage carbon footprinting accounting,” he said.

But as far as markets are concerned, fiduciary duty trumps everything.

Sembcorp declined to comment on the story.

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