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Industry roundup: 8 February

Asia’s rigid financing models hamper transition from coal

Continuing to rely on coal as a power source is bad news for climate action and also makes little economic sense as global energy demand slows and renewable energy prices fall. However, hampering efforts by countries across Southeast Asia to phase out coal sooner is a rigid financing model that guarantees coal plants stay active for decades at a time.

The problem centres around power purchase agreements (PPAs), which are reviewed in detail by Nyshka Chandran, a regular contributor to the BBC and Al Jazeera, in a recent article published by Aljazeera.com.

Chandran notes that PPAs continue to be in widespread use across Southeast Asia and typically involve utility companies paying coal plants to generate power for a 20-to-30-year period irrespective of external factors – a scenario known as a “coal lock-in”.

She cites the example of GNPower Dinginin, one of the Philippines’s newest and biggest coal-fired power plants located in Bataan province on the island of Luzon. The US$1.7bn facility began construction in 2016 before launching commercial operations late last year.

Plans are underway to add a second 668-megawatt unit to expand total capacity to 1,336 megawatts. Like other coal plants in the Philippines, GNPower Dinginin materialised years before President Rodrigo Duterte’s administration banned new coal projects in 2020. However, as the ban doesn’t apply to existing ventures, young facilities such as GNPower Dinginin ensure that coal will remain the Philippines’s primary energy source for years to come.

Chandran reports that GNPower Dinginin has PPAs with 30 utilities and two retail electricity suppliers. As the long-term nature of these contracts insulates coal plants against market pressures, owners have little incentive to shut down plants that produce guaranteed returns. PPAs are in many cases unprofitable for utilities as these companies pay more for coal than they would for increasingly affordable renewables.

“Asian emerging markets are risky investments, which is why investors and project developers require financial incentives and higher returns on equity while investing in these markets,” Haneea Isaad, an energy finance expert at the US-based Institute for Energy Economics and Financial Analysis (IEEFA), told Al Jazeera.

More than 60% of renewable power generation added in 2020 cost less than the cheapest new fossil fuel option, according to a 2021 report released by the International Renewable Energy Agency (IRENA). Separately, a 2020 report by the Rocky Mountain Institute, Carbon Tracker Initiative and Sierra Club suggests that building new renewable energy capacity would be cheaper than continuing to operate 39% of the world’s existing coal capacity.

Global electricity demand is also set to slow between 2022 to 2024, growing at an annual average rate of 2.7% versus 6% in 2021, according to the International Energy Association (IEA), with more than 90% of that demand servable by renewables such as solar and wind.

Chandran reports that terminating a PPA early can be a costly process, leaving the utility to pick up outstanding taxes, bank debts, equity capital investment and compensation to the coal plant developer for lost profits. In the case of a US$1 billion coal plant with a 20-year PPA, early termination could cost a utility between US$555 million and US$845 million, according to an IEEFA analysis.

Those costs are likely to be passed down to consumers in the form of higher electricity prices, according to David Elzinga, a senior energy specialist at the Asian Development Bank (ADB).

“There’s the climate angle but there’s also the cost of power production to keep in mind. The risk of doing nothing is thus significant from both a climate and financial perspective,” Elzinga told Al Jazeera.

Early PPA termination on the buyer’s end, which is usually a state-owned company in emerging Asia, “could hurt investor confidence and lead to less deals reaching financial closure,” the IEEFA’s Isaad said. In Indonesia – the world’s biggest thermal coal exporter – and Vietnam, about 60% of coal-fired assets are owned by state-owned entities, Isaad said.

PLN, Indonesia’s state-owned power company and the world’s 15th biggest owner of coal power plants, has pledged to retire three of its plants by 2030 and shut the rest by 2055 but cannot cancel its PPAs, Rida Mulyana, director general of electricity at the Ministry of Energy and Mineral Resources, told local media last year. At best, PLN can negotiate with investors and power producers, Mulyana said.

While rich countries such as Canada have government agencies that buy out PPAs, many cash-strapped economies can’t afford that option.

The Philippines’s government agency that privatises and manages the debt of state power assets is unable to buy out coal plants without “long-term and low-cost funds,” the Manila Bulletin quoted the agency’s board chairman, Carlos G Dominguez III, who is also the Philippines’s finance secretary, as saying last year.

“Refinancing coal power plants will be a challenge for lenders and owners alike as environmental constraints put pressure on future financing pathways,” Ken Lee, senior analyst at Wood Mackenzie in Singapore, told Al Jazeera.

Blended finance programs that tie a refinancing mechanism, such as green bonds or ratepayer-backed bonds, to reinvestment in clean energy have been touted as a possible solution. The ADB’s Energy Transition Mechanism, announced last year, aims to retire 50% of coal-fired power plants in Indonesia, Vietnam, and the Philippines over the next 10 to 15 years – a goal that requires US$30 billion-US$60 billion in financing based on calculations of US$1 million-US$1.8 million per megawatt, Elzinga said.

Plants in Indonesia, Vietnam, and the Philippines are younger so have more life and more financial value, he said. The ADB seeks to use concessional loans from governments and the donor community as well as market-based financing for its pilot phase.

So far, private players seem interested with Prudential, Citi, HSBC and BlackRock Real Assets all reportedly in talks with the ADB. The emergence of international carbon markets, as outlined in the Paris Agreement, could sweeten the deal for investors.

Placing a financial value on carbon emissions avoided by the early closure of coal plants could reduce debt levels and lower overall risk – a factor underpinning the InterAmerican Development Bank’s US$125 million package to Chilean utility ENGIE Energía last year that has been billed as the world’s first pilot project to monetize the cost of decarbonization.

With more than 40 countries pledging to phase out coal power at last November’s Cop26 conference, energy transition schemes such as the ADB’s are likely to be closely monitored by governments, utilities and consumers alike.

“Companies, over the last few years, have had shareholder pressure to exit coal so getting them to invest in coal plants might attract criticism but we’re asking companies to invest for the sole purpose of retiring these facilities,” Elzinga said. “It would be much easier if we asked them to invest in renewables but that wouldn’t resolve coal’s lock-in issue.”

The full article can be accessed here.
 

Customers rank New Zealand’s business banks

New Zealand’s business banks are ranked for performance across 16 key business banking brand attributes, including sustainability, responsiveness, innovation, connectivity, insights and digital solutions in a customer survey conducted by research and analysis firm East & Partners.

Based on its direct interviews with more than 600 business leaders of varying company sizes, segments and sectors across New Zealand, the firm comments that “business banks are increasingly differentiating their solutions and services in a very competitive marketplace, as they digitalise offerings and respond to the need for more sustainable propositions.”

East & Partners’ research, conducted jointly with Red Matter Consulting research found that treasurers, business owners and CFOs ranked Westpac NZ as the “Leading Business Banking Brand” in New Zealand, leading the micro, SME and commercial banking segments, whilst ANZ was ranked first in the Corporate segment. HSBC also performed particularly well in the Corporate space with a higher brand recall than one of the country’s “Big Four” banks (ANZ, ASB, BNZ, and Westpac).

Westpac performed strongly as a business bank that encourages sustainability and is responsive in challenging times, most notably through the Covid-19 pandemic. ANZ was noted for its innovative products and trans-Tasman connectivity. BNZ scored highly in providing strong insights to support growth, whilst ASB was seen as the leading bank for digital solutions. Kiwibank’s highest rating was in its support and promotion of social enterprises.
 
The survey also found that all New Zealand banks struggled in ease of onboarding with 70% of business customers responding that no bank stood out in this area. Only 5% of businesses failed to identify a leading business banking brand. Nore than one in five business customers responded that they would consider switching on a clear differentiator within the next six months.
 
Martin Smith, global head of markets analysis at East & Partners, commented: “The inaugural best of breed Business Banking Attribute ratings provide a fascinating insight into the competitive positioning success of NZ banks in terms of relationship share, wallet share and mind share tempered by genuine capability.

“Are NZ business banks “walking the walk” or simply “talking the talk”? No single business bank is outperforming across all 16 attributes captured at a critical time when one in five CFOs are planning to switch business bank in the next six months. Customer expectations are rising rapidly, where must NZ banks invest now to prevent significant customer churn?”

Red Matter Consulting’s founder and managing director, Iain Taylor, added: “Although it is often said that the business banking sector is highly commoditised, our research is clear that business customers are able to differentiate the business banking brands in New Zealand based on clear criteria. What is particularly interesting is when you map the business bank brand awareness across various attributes, with respective market shares. Some business banks are clearly in ascendence, whilst others are sitting quite precariously and open to attrition.”

 

Monneo joins Kantox on cross-border payments automation

UK-based fintech Monneo a virtual IBAN and corporate account provider has announced a partnership with currency management automation software provider Kantox, which aims to give Monneo’s customers additional flexibility when managing outgoing payments.

A release stated that Kantox’s innovative currency management automation technology can help businesses to fully automate and streamline their end-to-end FX workflow, allowing firms to be better protected from risk and helping to increase their competitiveness.

With Kantox’s assistance, Monneo’s customers can perform immediate foreign exchange transfers across different forms of currency, while removing FX risk. Businesses can also use Monneo’s service to make payments in over 130 different currencies and are able to choose and connect to 11 banks in its banking network, enabling them to engage in global financial transactions without incurring prohibitive exchange fees, charges, or administrative costs or risk.

The new partners say that they “share a collective goal of accelerating digital growth and transformation within the financial sector. By working together, the two businesses are beginning to make strides towards achieving this lofty ambition and offering customers a modern, intuitive solution for financial transactions. Additionally, the partnership is helping to give businesses the power to bank beyond borders in a frictionless manner.”

Monneo offers an end-to-end solution for the e-commerce industry, allowing online merchants to accept card payments, receive settlements from acquirers into dedicated IBAN accounts and pay out, whilst maintaining control of multiple IBAN and merchant accounts at several different banks via a single platform. Kantox provides currency management automation software for businesses to automate their end-to-end corporate FX workflow, eliminate risk and leverage foreign currencies to increase competitiveness. 

Commenting on the partnership, Michael Schimmel, Chief Commercial Officer at Kantox said: “It’s great to see Kantox’s solution incorporated into Monneo’s exciting service. Despite specialising in different areas, our two companies share a number of important goals, which helps to make us naturally aligned.”
 

Lendingkart partners with Amazon India on working capital loans

Indian fintech start-up Lendingkart, which was set up in 2014 to provide unsecured business loans, has entered into a strategic partnership with e-commerce major Amazon India, under which Ahmedabad-based Lendingkart will provide collateral-free loans to eligible sellers registered on Amazon.in based on lender qualifiers. The partnership aims to provide access to quick, easy and low interest loans for sellers based on their performance. 

The deal was reported by The Hindu Businessline, which quoted Lendingkart’s President, Manish Bhatia, who said: “We recognise the potential of the segment of micro, small and medium enterprises (MSMEs) that is focussed on online business. There has been a tremendous increase in the business done by this segment. Therefore, a partnership with Amazon opens doors to a high-growth segment for Lendingkart. We are hopeful to create more digital entrepreneurs with this partnership.”

Lendingkart says that the new facility will offer users minimal documentation and flexible repayment options. Sellers will only have to provide basic details including their contact information to complete the loan application and authorisation should be completed within minutes. 

To date, LendingKart has provided business loans to over 1.5 million MSMEs in more than 4,000 Indian cities and towns across all states and union territories. The new partnership gives the company access to 800,000 MSME sellers and over five million MSME merchants on the Amazon ecosystem. 

“Both Amazon and Lendingkart’s goal to help MSMEs is similar,” said Bhatia. “It was a natural and obvious fit for us to partner to provide fast and easy access to capital to all sellers and merchants on Amazon India’s platform.

“We believe that lendingkart xlr8 and 2gthr platform will seamlessly merge Amazon’s seller ops and make it easier for the sellers and merchants to access working capital not only with Lendingkart but with other banks and non-banking financial companies (NBFCs) as well.”

Vikas Bansal, Director, Amazon Pay India, added: “The mission of Amazon.in’s seller lending programme is to enable seamless access to credit for our sellers with transparent policies and low costs. This program enables marketplace sellers across India to avail affordable credit seamlessly to meet their working capital requirements. Our partnership with Lendingkart aims to serve capital needs with digital journey and at affordable rates to our sellers across India.”

 

January was ‘record month for new corporate debt’

For the second successive year, January saw a record total of more than half a trillion dollars of debt raised by corporates as issuers raced to leverage attractive borrowing rates in response to more hawkish global central bank policies, led by the Federal Reserve and the Bank of England.

According to financial market data provider Refinitiv, Investment grade enterprises raised US$532 billion in January worldwide, the highest value on record for the first month of the year according to its data spanning more than two decades, and just surpassing the previous 2021 record of US$530 billion.

"The main driver is borrowing costs, which are very, very low. With the Fed talking about tightening, rates markets moving higher I think issuers are very much trying to get ahead of whatever the next leg higher in yields is going to be,” said Winnie Cisar, Global Head of Strategy at research firm CreditSights.

In the US, the most significant source of issuance, companies and financial institutions issued US$153.5 billion in bonds, the data showed, the highest since 2017. US banks and financial institutions were a key driver, raising $104 billion. By contrast sub investment-grade companies, where enjoyed a record run in 2021, saw bond issuance more than halve from January 2021 to US$32 billion.

“We had expected to see a deceleration from financials not needing to raise as much as capital as last year but a lot of these issues are among the most savvy in the market in terms of navigating borrowing conditions,” Cisar added.

The issuance signals confidence in the credit markets, which delivered their worst monthly losses since March 2020 in January. 

The Federal Reserve has indicated since the start of this year that it may tighten US monetary policy earlier than expected, which may also include shrinking its US$8 trillion balance sheet. That has triggered a global sell-off in bond markets and risk assets with bond yields rising sharply as traders price in up to five rate hikes from the Fed before the end of 2022.

 

Ebury adds to trade finance range

Global non-bank foreign exchange (FX) and fintech trade finance provider, Ebury, is now offering Hong Kong’s SMEs unsecured trade finance.

Ebury says that it anticipates bullish demand for its trade finance product given its pertinence to the working capital needs of Hong Kong small businesses, positioned as a complementary product for their payables with facility sizes up to US$5 million. The UK- headquartered fintech is emulating its successful Australian competitive positioning strategy to enter the non-bank trade finance lending market in Hong Kong.

Ebury is valued at over US$1 billion offering FX and trade finance capabilities across 130 countries with offices in 20 markets. The firm first began offering FX and risk management solutions to Hong Kong SMEs in 2019.

“Our experience in other similar markets is that growth in our book accelerates over time. In Australia, the book has grown more than 300 percent in 2021 with the majority of our clients using it to finance supply chains into north Asia,” said Ebury Asia Pacific Managing Director, Rick Roache.

“This Hong Kong trade finance launch is an important part of our regional growth strategy. Once this business is established it will serve as a launch pad for Ebury into mainland China,” Roache added.

The company recently announced plans to accelerate its expansion in Latin America, with the broadening of its offering in Brazil, and is eyeing new markets in the region.

Ebury opened an office in São Paulo last May, its first in the Latin America region, as part of a planned expansion following the buy-out of a majority stake in the company in 2019 by Santander.
 

Neuberger Berman adds new UCITS fund

Employee-owned investment manager Neuberger Berman has announced the launch of its long-running US Large Cap Value strategy in Europe as a UCITS fund.

The Neuberger Berman US Large Cap Value Fund is run by New York-based portfolio managers Eli Salzmann and David Levine, supported by 38 senior research analysts.

According to its release, with US value stocks remaining at “historically cheap levels compared with growth counterparts,” the team utilises a fundamental, bottom-up, research-driven approach to identify undervalued US businesses with a catalyst for price appreciation. While seeking to avoid ‘value traps’, the portfolio managers search for attractively valued stocks in sectors that have been deprived of capital, and in turn deprived of capacity.

“As some of last year’s unknowns become knowns, it is likely that the changing market environment will spur volatility thus creating opportunities within the value investing space,” says Salzmann. “We believe that equities remain the most attractive asset class over the long term given their potential to generate capital appreciation.

“The fund benefitted from being positioned in more cyclical areas of the market, but despite volatility we remained disciplined value investors. We continue to monitor valuations and opportunities in the equities space given the recent changes to the Fed’s inflation outlook and the impact that will have on the different stocks and sectors in our portfolio.”

Levine adds: “We believe inflationary expansion will continue; however, it will be volatile, the extent of which will ultimately depend on how aggressive the Fed will be in tackling rising inflation. While longer-duration growth stocks have been recovering since Treasury yields hit their peak in March 2021, as yields start to edge up again, we believe value is likely to reassert itself and should outperform growth on a medium-term outlook.”

Jose Cosio, head of global intermediary (ex US) at Neuberger Berman, says: “After being largely ignored over the last number of years, value sectors have begun to turn the corner on the recent acceleration in economic growth – setting the scene for what we believe will be a multi-year recovery for this style of investment. For example, year-to-date returns for the most expensive stocks in the Russell 1000 index have sharply underperformed the least expensive deciles for stocks. Despite this recent outperformance, there is still plenty of ground to make up, with ample opportunity to invest in the space.”

“We are pleased UCITS investors now have the ability to access this proven and disciplined strategy, which is run by two highly experienced value managers, especially as many clients are not currently showing value characteristics in their portfolios.”

The release cautions that investing in the fund is subject to risk, including currency, derivatives, liquidity, market, operational and counterparty risk; additionally there is no assurance or guarantee that the fund’s objectives will be achieved or that investors will receive any return on their investments in the fund.

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