Diversification Drives Green Bond Demand

How do you convince investors and lenders to pour money into costly, long-term projects involving a new kind of technology in an also new and untested market? That particular question was on the mind of every renewable energy generation developer and CENACE auction winner over 2016 and, despite lingering doubts about the contract lengths and the rules that govern the wholesale electricity market, commercial banks and institutional investors are starting to notice a sector that until recently seemed the almost exclusive domain of national development banks and multilateral lenders.

A global push toward country-sponsored and corporate sustainability strategies, which is also reaching Mexican industrial players, is stimulating interest in financing instruments like green bonds. “World leaders have made clear that they expect the society of the future to be low- carbon. This means changing the way we do business, manage natural resources and use energy,” says Estanislao de la Torre, HSBC Mexico’s Chief Operations Officer. The bank’s Mexican unit signed a 10-year off-taker agreement in 2016 with Enel Green Power Mexico to supply half its local energy needs from wind power.

What are the worries? In Mexico, the liberalization of the electricity market following the Energy Reform launched a slew of energy-generation developments, mostly promoted by CENACE’s power auctions. But the companies that won those auctions signed 15-year contracts to supply electricity to CFE, at very low prices, while the length of financing deals for large infrastructure projects is usually longer than that. Also, the 2016 auctions set a low bar for project requirements in terms of permits and rights of way, a complex subject in the country. “At Citibanamex, we are being cautious of two things, with the first being the quality of the sponsor. Because of the way these auctions are awarded there is little consideration for permits. Companies can win the auction without much permitting in place so a good sponsor with a track record and proven development skills is critical. The second is the merchant risk the PPA carries beyond 15 years, as well as the risk of underproduction for any given year before that,” says Salomon Amkie, Vice President of Power & Alternative Energy at CitiBanamex.

Some instruments have already taken hold. In 2015, state- owned Mexican development bank NAFINSA issued the first green bond in Latin America. The US$500 billion bond was five times oversubscribed, leaving national and international investors anticipating further prospects for diversifying their business portfolios. The opportunity finally arrived in September 2016, when NAFINSA placed the first green bond in the Mexican Stock Exchange (BMV) issued in Mexican pesos. This green bond was almost three times oversubscribed, showing investor commitment and trust in this new sustainable financing mechanism. The future of these new financing tools looks promising as demand continues to rise. Eduardo Piquero, director of MÉXICO2 says, “the main factor driving green bond’s demand is diversification. There is a greater risk associated with having oil and gas-based portfolios, so diversification through green assets has become a priority for global investors.”

NEW OPPORTUNITIES

Despite the several challenges arising in the energy industry, financing institutions are stepping up their game and developing new solutions to support the sector. Several banks, both commercial and development, have created new schemes to ensure companies can comply with the financial requirements needed for successful projects. New guarantee procedures that address risks identified in the market have been developed to provide income security for developers and banks, as a result of opportunities identified by financial institutions to participate in the new power market. Several key players have pointed to transmission, distribution and power generation as the sectors with the most growth potential in the coming years. When choosing projects to finance, banks are no longer staying in the dark regarding the functioning of the technologies they intend to fund. Instead, lenders are arming themselves with teams of experts in different areas to get specific technical assessments that will allow them to optimize their processes.