Investors in property trusts might feel quite at home with yield companies. They’re investment vehicles that provide a predictable income, except through renewable energy. It’s just one of the exploding trends that in combination with green bonds – and divestment – will change the game in energy.
According to former Citibank and Deutschbank managing director Tim Buckley divestment from the heavily subsidised coal sector is not ultimately about the politics of climate change, it is about managing growing investment risk.
And in the investment game what really counts is returns, in particular two exciting new trends in financial instruments for renewable energy , “yield cos” or yield companies, that mirror the predictable earnings of property trusts, and green bonds.
Currently the director of Energy Finance Studies, Australasia for the Institute of Energy Economics and Financial Analysis, Buckley says it’s true that policy stability is a key ingredient for certainty around the 40-year capital investment represented by a wind farm or utility-scale solar.
However, the exploding international financial trends are making the risk more attractive by offering cheap debt financing and cheap equity, he says.
“The Green Bond market has grown into a $40 billion annualised sector. That market has doubled in the last six months, and I am expecting to see $100 billion in new issues next year,” told The Fifth Estate in a recent interview.
Recent issues have included EUR 1 billion by France’s bilateral development bank, Agence Française de Développement in September this year which is a 10 year bond with a coupon of 1.37 per cent and a rating of AA/AA+ (Standard & Poors and Fitch).
AFD said the proceeds will be used for projects that “have a significant impact and quantifiable in terms of greenhouse gas emissions”, including renewable energy, energy efficiency, urban transport, forestry and agriculture projects which meet set criteria on the carbon footprint.
Just last week, Development Bank of Japan issued the first green bond from a Japanese issuer; EUR 250 m with a 0.25 per cent coupon and three year tenor. Moody’s and S&P have rated the bond Aa3 and A+ and the bond was over-subscribed to EUR 750 m. Underwriters were Bank of America Merrill Lynch, Morgan Stanley, Citi and Daiwa. Proceeds of the bond are being allocated to a pool of five green buildings.
Also last week, Germany’s development bank, KFW, issued the largest single bond to date in $US, at $1.5 billion. It is the bank’s second bond issuance this financial year and has a five year maturity and coupon of 1.75 per cent. KFW has 40 per cent of its entire EUR 27.8 billion 2013 commitments invested in climate and environmental protection.
Yield cos – from zero to $20 billion in 18 months
The yield co trend is also exploding. These he said are similar to listed property trusts – they provide a predictable income stream, but in renewable energy assets. The first to launch was NRG Yield, and within three months of launching, its share price had doubled. Up to five more Yieldcos have also already launched, and there are five more proposing to launch in the next three months.
“That sector has gone from nothing to $20 b in 18 months,” Buckley says, explaining that yield cos halve the cost of equity to between six and eight per cent, compared to regular equity at 10 to12 per cent.
NRG Yield recently undertook the world’s largest ever wind farm transaction, purchasing the asset for US$2.47 billion. This is an example of how a Yieldco can free up capital for renewable energy, as project developers are then able to obtain further financing via green bonds and build more projects, a trend Buckley tips will gather momentum world-wide extremely quickly.
“The cost of renewable energy is capital. If you put the Green Bonds and YieldCos together, it’s an absolute game changer. That’s where I’d put my money.”