As Indian Prime Minister Narendra Modi was winning headlines garnering U.S. support for a $160 billion solar-power push, the bond market was putting together more concrete funding plans.
Export-Import Bank of India, which has lent to solar and wind programs, sold the country’s first green dollar bonds in a $500 million issue of 2.75 percent notes March 24. India’s issuance of overseas securities meeting environmental criteria overseen by the Zurich-based International Capital Market Association could surge to as much as $1.5 billion annually in the next two to five years, according to Commerzbank AG.
Modi got a pledge from U.S. President Barack Obama for unspecified funding to raise solar production to 100 gigawatts by 2022 from about 3 gigawatts, and is fishing for more aid ahead of a climate summit in Paris in December. The former leader of the state of Gujarat pioneered India’s first solar incentives and restored wind-farm tax benefits in July after a two-year hiatus. That’s driven a rally in convertible notes of Suzlon Energy Ltd., the turbine maker that caused India’s biggest default of such debt in 2012.
“The government’s thrust is on building green renewable sources of energy, and that should prompt more local issuance,” said Jaideep Iyer, Mumbai-based group president for financial management at Yes Bank Ltd. “We’ll continue to seek the development of the market for green bonds.”
Expanding Appeal
Exim Bank priced its five-year securities to yield 147.5 basis points over similar Treasuries, Bloomberg-compiled data show. That compares with an average 263 basis points on international bonds from Indian issuers, according to Bank of America Merrill Lynch indexes.
The sale from Exim Bank was the third U.S. currency green note in Asia outside Japan. The first were 1.75 percent notes sold by Export-Import Bank of Korea in 2013 and 2.125 percent securities from Taiwan’s Advanced Semiconductor Engineering Inc. in July, data compiled by Bloomberg show.
Yes Bank sold the nation’s first local-currency notes tied to climate projects last month in a 10 billion rupee ($160 million) offering of 10-year securities. The lender is in talks with International Finance Corp. to offer the equivalent of $50 million more in such securities, Iyer said.
Global investors are seeking to expand profits in climate finance amid negotiations among more than 190 nations on a new agreement to fight climate change effective in 2020.
‘Mega Trend’
Deutsche Bank AG said last month it wants to boost green bond investment to 1 billion euros ($1.1 billion), joining Citigroup Inc. and Barclays Plc in expanding in the market.
“Green bonds will be a mega trend which we have already seen in Europe,” said Xuanlai He, Singapore-based Asia credit research analyst at Commerzbank.
While interest in green bonds is mounting globally, Indian issuers must vie with overseas peers investors may be more familiar with, according to Yes Bank’s Iyer.
“The pocket of investors who have the mandate to invest in such issuance may not take India risk due to lack of history of investing in India and low awareness about the country,” Iyer said. “However, given the expected resurgence in the Indian economy, this should change over the next few years.”
Debut Offering
More explicit government support for green bonds would help differentiate them from other securities, according to Arun Srinivasan, a Mumbai-based senior vice president for investments at ICICI Prudential Life Insurance Co., which manages assets equivalent to $15 billion.
“It’s a great initiative from the government to promote the use of renewable energy,” Srinivasan said. “But unless there is some tax benefit for investing in these bonds, it wouldn’t make much difference for the investor.”
Modi must balance efforts to add more environmentally sustainable power with promises to bring universal access to electricity to India’s 1.24 billion people. While he’s stressed coal will continue to dominate for now, environmental problems including smog in New Delhi worse than Beijing’s by some measures is adding to pressure to develop cleaner alternatives.
The world’s third-biggest emitter of greenhouse gases will raise the duty on coal to 200 rupees a ton, Finance Minister Arun Jaitley said in his budget for the year starting April 1. The money will be used to promote clean energy, he said.
India’s solar ambitions would require $160 billion, according to Arunabha Ghosh, chief executive officer at the New Delhi-based Council on Energy, Environment & Water. It would spread solar panels across an area the equivalent of three times the size of India’s most populous city, Mumbai.
While green bonds carry risks to issuers including the costs of additional reporting and breaches of use-of-proceeds clauses, expanding demand will “drive increasingly favorable terms,” according to a March 19 report by KPMG International.
