By Saurabh Trivedi, Research Analyst at IEEFA
Green bonds have become a key financial instrument for raising profitable foreign debt capital in the Indian renewable energy market.
Since 2016, Indian companies and financial institutions have raised around $ 14.43 billion through green bonds according to data from Bloomberg New Energy Finance (BNEF).
So far this year, Indian companies have attracted $ 4 billion in green bonds, already breaking the previous record of $ 3.43 billion in cumulative green bond issuance in 2017.
The importance and popularity of India’s green bonds is likely to increase: they provide an opportunity for clean energy companies to mobilize global funding for projects that will help India meet its renewable energy targets ( ER) and relatively higher and less volatile returns for global investors.
In August 2021, India reached 100 GW of installed capacity of renewable energies (excluding large hydropower). While this is indeed a milestone, the country is still far from reaching its renewable energy target of 175 GW by 2022.
India would need to install 75 GW over the next 19 months to meet the target by FY 2022-2023. A quadrupling of current installation rates is needed to meet India’s even more ambitious goal of installing 450 GW of renewable energy capacity by 2030.
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Global capital is ready, willing and authorized to invest $ 500 billion India’s renewable energy sector must meet the 2030 target. In addition, Prime Minister Modi announcement an ambitious national infrastructure plan of 100,000 billion rupees ($ 1.35 trillion) in his Independence Day speech on August 15.
The plan aims to make India energy independent by 2047 by reducing dependence on imported fossil fuels and expanding the use of cleaner fuels, which would also help the country meet its climate goals.
Given this enormous investment potential, the stable economy with a democratically elected government, and the mature but still growing government-backed clean energy production sector, India offers a tremendous investment opportunity for global investors.
In November 2020, BlackRock CEO and co-founder Larry Fink planned a “seismic reallocation of capital”. This is now happening with more than 40 trillion dollars ready to invest in climate-friendly assets. India is a large emerging economy that already offers significant investment opportunities in the clean energy sector and can provide a “home” for large amounts of foreign capital to meet its very ambitious climate goals.
Green bonds play a growing role in financing these climate goals. 2021 saw new records set both in terms of the amount of capital raised through green bonds and their low coupon rate (interest rate paid by bond issuers).
Azure Power Global Limited (Azure) recently raised $ 414 million via a green bond issued by Azure Power Solar Energy Private Limited, a wholly owned subsidiary of Azure.
The bond was issued at a nominal interest rate of 3.575%, which is the lowest coupon ever recorded for an Indian borrower in the high yield bond category. Azure will use the proceeds of the bond to refinance its $ 500 million 5.50% green bond issued in 2017, which is due in 2022. Refinancing is estimated to reduce Azure’s cost of debt by 200 points. base (bp) in terms of rupees covered.
Azure Green Bond breaks record set by Greenko’s green bond for the lowest 3.85% pa coupon issued in March for $ 940 million. These obligations are closely comparable. Both have six-year maturities and issuers backed by strong global financial institutions (Azure Power is 51% owned by CDPQ of Canada, while Greenko’s lead investor is GIC of Singapore).
Average interest rates on green bonds fell more than 120 basis points in dollars in 2021 compared to 2020 without major changes in the long-term credit ratings of bond issuers.
For example, ReNew Power issued a green bond in January 2020 at a rate of 5.875% and its last green bond, issued in March 2021, reached a rate of 4.50% (reduction of 138 basis points) without any changes. of its long-term credit rating. . All emissions in 2021 were below a rate of 5%.
Bonds issued in 2020 and 2021 are currently trading at an average yield to maturity (YTM) of 3.90%, with the exception of the Cliffton India Green Bond which trades at a very high YTM of 6, 52%. According to Nomura’s estimates, Azure’s latest green bond could trade at a yield slightly above the current YTM of 3.35% for Greenko’s green bond which trades at the lowest YTM.
The current average yields of these bonds are significantly lower than the actual yields at the time of listing, reflecting the tightening of interest rate spreads.
The demand for Indian Green Bonds in primary markets has been considerably high, as evidenced by the 2-9 times oversubscription of these bonds despite being in the high yield category. In addition, the current commercial yields of Indian green bonds also reflect strong demand for these bonds in the secondary market.
The current downtrend in yield to maturity, a forward-looking measure, indicates that Indian clean energy borrowers would be able to issue subsequent green bonds as well as bank loans at even lower rates.
In addition, it also gives equity investors confidence in the financial viability of the company as well as the company’s commitment to the deployment of clean energy projects. These benefits should ultimately help India’s clean energy borrowers narrow their effective interest rate spreads and lower their overall cost of capital.
Indian green bond yields are falling mainly due to three factors: significant demand for green bonds and ESG bonds in general; the quality of Indian issuers with significant experience in clean energy projects; and the low interest rate environment globally.
The German Green Bund is trading at a virtually zero interest rate, which is also an indication of the low interest rate environment in the green bond markets.
If the yield curve of the Green Bund vis-à-vis its vanilla twin is an indicator of lower yields existing in green bond markets, then a similar “greenium” in green bond prices can also be expected on other markets.
In fact, there are several academic research papers who have provided empirical evidence that green bonds around the world trade at a higher price (lower yields) than their corresponding non-green bonds, in both primary and secondary markets.
Unless the current global macroeconomic environment changes significantly, green bond yields will continue to decline like all other conventional bonds, but with even tighter spreads.
However, in the current era of low interest rates in OECD countries global investors are looking for higher returns as well as greener pastures for investment. Indian green bonds offer the double benefit of investing in climate-friendly projects and relatively higher and less volatile returns.
Yields are relatively stable as most of the underlying renewable energy projects in India are linked by long-term power purchase agreements backed by government guarantees. This ensures less volatile cash flow and therefore prompt debt service payments by the bond issuer.
Flight of capital from fossil fuels
The growth of green bond markets is also an indicator that capital is shunning fossil fuels. It is becoming increasingly difficult for fossil fuel companies to obtain profitable debt without serious and achievable plans for the transition to a low carbon future. Investors in the green bond market are very wary of fossil fuel companies, or even of any company directly or indirectly associated with fossil fuel related activities.
This is mainly due to the integration environmental, social and governance (ESG) issues in investment decisions.
For example, large foreign investors like Amundi, AXA IM and NNIP have sold their assets in the Green Bond of the State Bank of India (SBI) in response to the proposed SBI loan of nearly A $ 1 billion ($ 650 million) to the Adani Group’s Carmichael coal project.
This indicates that fossil fuel companies, including Indian companies, will find it increasingly difficult to access global capital, especially green bonds, meaning they will miss out on a profitable financial instrument of ‘enormous global depth.
The lack of competition from large fossil fuel companies, with their historically huge track record, further strengthens the case for Indian renewable energy developers to access foreign capital through green bonds.