Suek's bond market debut is attracting controversy as Russia's biggest coal producer attempts to find traction with an investor base that is increasingly refusing to finance the industry.
Many international accounts are expected to shun the US dollar five-year benchmark 144A/Reg S senior unsecured guaranteed note issue that will refinance a loan, as the coal sector finds itself the target of asset managers' exclusion lists.
"The big red flag is the coal footprint, which will no doubt mean we will not be looking at this and even if [the coal footprint] is below our threshold, the direction of ESG investing suggests that one probably doesn’t want to be investing in coal right now," said one London-based portfolio manager.
"I believe Suek has been looking to come to market for a number of years and with ESG investing being what it is today, their timing couldn’t be worse."
While several other international investors told IFR they would not even consider the bond issue because of the company's profile, another London-based investor said he would listen to Suek's calls, albeit with reservations.
"I was very surprised to see coal front and centre of the business operations," he said. "I would imagine it will make it difficult to get the deal off the ground given many, and increasing, client restrictions in this space, including our own."
Demand is likely to come mostly from local investors. The nine leads are Alfa Bank, Bank of America, Bank of China, Citigroup, Commerzbank, Gazprombank, Renaissance Capital, Sberbank and VTB Capital.
The banks involved have drawn heavy criticism from some quarters. "We opine that a bank running this bond deal is not aligned with any principles around climate transition, climate change mitigation, or 'net-zero' commitments," wrote Ulf Erlandsson, executive chair of Anthropocene Fixed Income Institute, a Sweden-based think tank focused on climate impact in capital markets.
Spokespeople for all the banks and Suek declined to comment or failed to provide one before IFR went to press.
Many banks are willing to refinance debt for coal miners through a so-called transition phase, and as long as proceeds are not used by the company for expansion of coal operations.
Citigroup, for example, has a public environmental and social policy framework in which it states that it intends by the end of 2025 to reduce by half, from a 2020 baseline, its credit exposure to companies that derive more than 25% of their revenue from thermal coal mining. After that, it will no longer facilitate capital markets transactions. Bank of America also has a similar commitment.
Suek (Ba2/–/BB) is Russia's top thermal coal producer, operating 28 mines in several regions, and is one of the largest exporters of seaborne thermal coal globally, according to Fitch.
The company has an investment programme to reduce its carbon footprint through the modernisation of its assets, and directed 8% of its total capex to health, safety and environment initiatives in 2020.
Another element is the crucial role of coal for heating the population of Siberia, where temperatures can fall below -40 degrees celsius.
"The ESG aspect of the business is not one-dimensional and is not limited to the environmental impact and carbon footprint," said a sellside analyst. "For example, the company is the sole producer of heat in some of its areas of operations – Siberia is a bad place for alternative energy; it is also very cold and the locals should have the right to warm themselves."
The deal could be priced this week.