“It is never too late to be wise”.
The famous quote made by Daniel Defoe in the enduring novel ‘Robinson Crusoe’ three centuries ago is still relevant today, as worsening climate change has propelled a dynamic energy transition amid a broader acceptance that “it is never too late to be wise”.
Government policies, technological developments, and international cooperation have advanced renewable infrastructure from niche to mainstream, as seen in India and Southeast Asia.
One noticeable area of the energy transition is the adoption of renewables, which are cheaper than fossil fuels for three-quarters of the world by GDP (coal was the cheapest for most of the world as recently as 2014).
More renewable power was added to the grid over the last seven years than fossil fuels and nuclear power combined. Given its crucial role in driving positive environmental change, PGIM Fixed Income has been maintaining an overweight for the renewables sector since its emergence in the Asian public debt markets in 2017.
“The climate change imperative is clearer than ever, and we continue to favour the renewables sector given its core role in the energy transition,” said Umar Manzoor, Asia corporate bond analyst of emerging markets corporate bond research team at PGIM Fixed Income.
“We see value in Indian renewables, which have had the lion’s share of issuance out of South and Southeast Asia, and expect steady returns backed by resilient operational performance, growing importance of the sector, policy support, and a solid shareholder base,” Manzoor said.
INDIA: RAPID TRANSITIONS
The bullish case for energy transitions is growing in India. A target of 450 gigawatts (GW) in renewable capacity by 2030 requires the country to increase capacity by 35 to 40 GW/year, which translates to capital investments of around $25 billion annually. This represents a substantial increase from the $6 billion in financing that closed in the first half of 2021.
India's renewable energy targets by 2030
Importantly, the government has supported regional distribution companies—to whom renewable energy companies sell most of their power—under a liquidity infusion scheme to be deployed over the next three to four years. This indirect support to renewable companies improves past attempts to resolve deeply-entrenched issues in the financially-challenged distribution sector, although a lasting solution will require structural improvements on collection efficiency and transmission loss.
In fact, debt valuations and credit fundamentals were resilient for renewable companies through the worst time of last year’s slowdown, notwithstanding some variabilities in wind asset performance. The increased equity cushion in these issuers is underscored by ReNew Power’s special purpose acquisition company (Spac) listing this year at an $8 billion valuation against $620 million in earnings before interest, taxes, depreciation and amortisation (Ebitda).
Renewable companies have attracted high-quality shareholders—including sovereign wealth funds and global financial firms—to invest in multiple tranches in recent years, providing a robust source of capital amid expectations for more initial public offerings (IPOs) to follow.
Meanwhile, bond structures in the renewable sector have ever-tighter cashflow waterfalls, built-in partial amortisation, collateralisation by onshore assets and generally increasing cashflows derived from entities under central government (rather than regional) control.
The bonds are trading in the 250-350 basis points spread range, reflecting broader sector pricing among mid-tier and strong BB-rated companies, with the market comfortably absorbing the $2.6 billion in net issuance in 2021 year-to-date ($4.8 billion gross), as compared with $3 billion in 2019.
SOUTHEAST ASIA: SCALING UP
India is leading the pack in energy transition among emerging markets in Asia, as Southeast Asian countries are on a slower track given that coal-fired generation is still largely the cheapest form of energy in the region.
As of 2019, Southeast Asia’s capacity mix was 29% renewables (around one-fifth of which consisted of hydro), while coal and gas represented around one-third of the market. Of the region’s 77 GW in installed renewables capacity, Thailand and Vietnam have the highest penetration of wind and solar at 11% and 10%, respectively. As such, relatively few deals are seen coming from the region, except for Singapore-based Vena Energy, which has a diversified portfolio of assets in Asia.
But while issuance has a long way to go, officials have made pledges to scale up the renewables sector. Vietnam has been the most aggressive country with large renewable energy targets, and it was responsible for over 70% of the $22 billion in asset finance for renewable capacity builds between 2018 and 2020.
In other parts of the region, the Philippines targeted 30 GW in renewable energy by 2040 and announced a moratorium on coal-fired projects. Malaysia and Indonesia targeted 31% and 23% in renewable energy contribution by 2025, respectively, while Thailand targeted 18.7 GW in renewable capacity additions by 2037.
Helen Chang, CFA
Managing Director, Head of Asia Pacific ex Japan, Client Advisory Group
PGIM (Hong Kong) Limited
T: + 852 3769 8283 M: + 852 6898 0982
E: [email protected]
This material reflects the views of the author as of October 14, 2021 and is provided for informational or educational purposes only. Source(s) of data (unless otherwise noted): PGIM Fixed Income.
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