Critics pan Sembcorp's coal sale
Sembcorp Industries' decision to sell its Indian coal power plants in order to avoid paying coupon step-ups on sustainability-linked bonds has ignited a debate over the value of the targets in SLBs, and highlights the danger of public companies off-loading high-emitting assets to privately owned entities.
The Singapore-listed energy provider’s shareholders approved the US$1.5bn spin-off of Sembcorp Energy India Ltd on November 8, in a deferred sale that allows Sembcorp to slash its emissions and dodge paying looming coupon step-ups on its SLBs while retaining an interest in the coal company.
SEIL is one of the largest independent power producers in India and operates two major coal-fired power plants in Andhra Pradesh. Sembcorp argues that the sale allows it to deconsolidate SEIL's carbon footprint and reduce its own carbon intensity. But the switch from operational to financial exposure attracted considerable criticism.
In a circular to shareholders, Sembcorp was explicit that the aim of the divestiture was to avoid paying the step-up coupons on its SLBs. The move renders the step-ups worthless as they will never now be triggered. Sembcorp also gave details of a controversial deferred payment-in-kind note that gives cheap funding to SEIL.
“The option of retaining SEIL was considered, however, this could lead to a step-up in interest costs for [Sembcorp's] sustainability-linked financing instruments,” Sembcorp said in the circular.
Sembcorp issued a S$400m (US$289m) green bond in June 2021 and then two sustainability-linked bonds – a S$675m 10.5-year deal in September 2021 and a S$300m seven-year in April 2022. Both SLBs are subject to a 25bp step-up on April 1 2026 if Sembcorp does not meet a sustainability performance target.
The SPT was linked to the company’s undertaking to reduce its greenhouse gas emissions intensity to 0.40 tonnes of CO2-equivalent per megawatt hour by 2025 from 0.54 in 2020. However, the sale of SEIL immediately cuts Sembcorp’s emissions intensity to 0.31 and will more than halve its absolute emissions.
"When we look at the proposal for the sale in the letter to shareholders Sembcorp is saying that they are doing this because they don't want their SLB coupons to step up," said Ulf Erlandsson, chief executive of the Anthropocene Fixed Income Institute, an advocacy group pushing to decarbonise financing.
Slashing emissions in one fell swoop via a sale highlights fears that more listed public companies will divest assets into less tightly regulated and transparent private companies rather than work to reduce emissions. The move also underlines worries that weak SLB structures with poorly calibrated targets could drive more divestment as targets are tested.
“Which reputational risk is worse: missing the performance target or selling a brown asset and financially supporting it to continue operating?” one banker in Asia asked.
Brown to green?
Sembcorp in May 2021 announced its strategic plan to transform its portfolio from brown to green, which included managing its coal-fired power generation assets for value and exploring strategic options.
It has now opted to sell SEIL to Oman’s Tanweer Consortium, which is led by private equity investment company Oman Investment Corp.
The sale, which also reduces Sembcorp's debt to S$7.1bn from S$8.7bn, has financing attached to get around the soaring cost of capital for coal companies.
“Given the limited availability of funding for coal-related projects due to ESG considerations of financial instruments globally, bidders were given the option of vendor financing,” Sembcorp said.
The deferred payment note that resulted gives Tanweer cheap funding until payments are made in 2038 and 2047, which AFII said makes Sembcorp a lender of last resort for the coal assets with recourse and its role as a "shadow bank" should be considered by its lenders. The financing was structured by HSBC, which said that it did not comment on client relationships, but was committed to supporting its customers in their transition to a low-carbon future.
Sembcorp said that the sale’s structure was developed in the best interests of multiple stakeholders and in accordance with strategic commitments made to shareholders. The deal “is in its opinion, a responsible way to progress its brown to green transition", the company said.
Singapore state investment company Temasek Holdings is a 49% shareholder in Sembcorp and has ambitious decarbonisation targets of its own. Temasek declined to comment.
The deal is also relevant for the International Finance Corporation, the financing arm of the World Bank. The IFC was an anchor investor in Sembcorp’s 2021 SLB. An IFC spokesman said that it had agreed a defined use-of-proceeds provision, which means that its investment in Sembcorp's SLB will be used to finance or refinance the company's renewable energy and other sustainable projects in countries such as India and Vietnam that meet ESG standards applicable to IFC’s investments.
(Additional reporting by Morgan Davis)