Australian debt capital markets – catching the solar wave

The first half of 2017 has been particularly positive in the development of green bonds in Australia. Green bonds are debt instruments where the proceeds are ring-fenced and used exclusively to finance or re-finance projects promoting environmentally sustainable activities. 

Australian issuers, like those in many other countries, have acted relatively quickly in bringing green bonds to their investor base. All four of the largest Australian domestic banks have now issued green bonds, something which the Climate Bonds Initiative reports is unmatched in any other advanced economy in the world. Financial year 2016–17 saw Monash University became the first tertiary institution in the world to issue certified green bonds, with issuance also by the Victorian and Queensland Governments through their respective treasury corporations (the recent QTC seven-year green bonds, sized at AU$750 million, was the largest single green bond issuance and the longest tenor green bond from an Australian issuer to date).

Looking further abroad, there are also positive signs that green bonds will be an important source of financing in infrastructure projects going forward. According to an OECD report published in April 2017, green bonds have the potential to scale up to US$4.7–5.6 trillion in outstanding securities and US$620–720 billion in debt instrument issuance in the four largest markets (China, the European Union, Japan and the USA). The OECD confirmed that there are significant benefits to issuers and investors going forward. The financing provides a natural fit for low-carbon investments which are characterised by their substantial capital costs upfront combined with their long-term income streams.

But where to from here? Could FY 2017–18 be Asia Pacific's year of the solar bond?

It just could be. This year is likely to see significant deployment of large scale renewable energy projects in Australia. Current statistics show that we have more than 3500MW of large renewable energy projects under construction starting in 2017 (Clean Energy Council). In particular, following the ARENA large-scale solar auction we have seen a wave of solar projects reach financial close and more are under development. Examples include:

• the 12 solar projects funded by ARENA grants as part of the ARENA LSS program (Kidston, Longreach, Collinsville, Emu Downs, Whitsunday, Griffith, Oaky, Darling Downs, White Rock, Dubbo, Parkes and Manildra);
• Hamilton and Gunnawarra developed by Edify Energy and Wirsol – together with the Whitsunday solar farm above, these three projects formed the largest solar farm portfolio financing to date in Australia; and
• Bungala being developed by Reach and sold to ENEL and DIF – the three-stage project marks the largest solar project to date to be developed in Australia.

Each of these projects has had their own financing and legal challenges and the wave of solar projects currently in early stage development faces increasingly harder financial challenges, in part due to variability an availability of off-take agreements to secure project financing but also regulatory and electricity market price uncertainty. 

However, given that each project is likely to have a lengthy term over which finance is required, long-dated bonds issued off the back of a wholesale Australian debt issuance programme would, depending on pricing, seem to provide a real alternative funding source that is well matched to solar bond projects. In particular, some of the more obvious benefits for sponsors, if a bond solution becomes viable for these types of projects are as follows:

• matching long-term revenue generating assets with long-term funding (with longer-dated bonds able to be priced through new longer-dated benchmark lines as a result of recent extensions to the Commonwealth Government securities yield curve);
• the removal of shorter-term refinancing risk associated with bank debt funding;
• if structured to pay a fixed rate of interest, locking in that interest rate over the life of the bond, reducing interest rate risk; and
• providing competitive pricing tension with other sources in the overall funding mix.

With a growing body of green bond issuers and green bond investors (including offshore investors, arguably attracted by the availability of longer-dated debt and positive yields in a low growth and low-interest rate global environment), there are significant prospects for green bonds to provide an important source of funding in the low-carbon future of Australia.