Debt funding linked to sustainability factors will increasingly be the norm for Europe’s utilities in 2020 after accounting for more than 30% of the roughly EUR 65bn capital market debt raised by the sector last year, says Scope Ratings.
Such wide and growing access to sustainability-linked funding at relatively low borrowing rates will underpin the stable credit outlook for the sector this year, helping energy-infrastructure companies offset the drain on cashflow from higher capital expenditure incurred by for the integration of growing volumes of renewable electricity into Europe’s grid.
For integrated utilities and power suppliers, robust commodity prices (spot and hedged) will provide protection on credit quality though the whole sector faces lingering political and regulatory risks related to government concerns about environmental protection, foreign ownership of strategic assets, and security of supply.
“Utilities remain one of the driving forces behind the further growth in green finance,” says Sebastian Zank, analyst at Scope.
Companies across all sub-segments from generation, transportation and distribution to supply are continuously widening the options for investors looking for ‘sustainable’ investment. Examples include Italy’s grid operator Terna (rated A-/Stable) which is using green bonds and green credit facilities; Germany’s independent power producer Encavis (rated BBB-/Stable) issued a green Schuldschein; Norway’s municipal utilities BKK (rated BBB+/Stable) and Eidsiva Energi (rated BBB+/Stable) issued green bonds. Last year alone around EUR 20bn of the roughly EUR 65bn capital market debt issued by European utilities has carried the green or sustainability label.
“The share of ‘green-labelled’ capital-market funding will significantly increase in 2020, bolstered by the wide investor acceptance of such financing instruments and the increasing establishment of ‘green bond frameworks’ for most utilities,” says Zank.
“Green-labelled financing is open to any industry, but experience from last year shows how well-placed utilities are in terms of attracting investors with sustainability-linked bonds, hybrids, Schuldschein loans or bank facilities,” Zank says.
Utilities are earmarking these funds for investment in sustainable projects such in renewable energy, energy storage, energy-efficiency, e-mobility (green debt) or issuing securities whose features, primarily interest rates, are linked to key performance indicators (KPI) such as carbon-emission reductions or water conservation metrics (sustainability-linked debt).
Sustainability-linked facilities may provide more flexibility than the green loans since the use of the facilities is not limited to a specific green investment. On the contrary, they can be used for general corporate purposes which address all aspects of sustainable development, says Zank.
“Such funding may become the preferred financing tool over green debt as sustainability-linked facilities may be more rewarding for the issuers in terms of pricing, in line with sustainability metrics,” he says.
The question remains whether utilities which rely increasingly on green finance can do so without sacrificing their financial performance. Meeting ESG-linked KPIs that serve as covenants in loan/bond agreements in return for a reduced coupon requires utilities to incur up-front costs – new investment or setting up new efficiency programs – which might exceed potential interest savings and reputational gains.
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