India’s bond solution

The recent bond issue by Greenko may be a sign of things to come for investors keen to access emerging market renewables infrastructure. By Ian Dixon of Investec.

Combining predictable income streams with a rapidly expanding market, emerging market energy infrastructure projects can be very attractive prospects for international investors. However there is, almost inevitably, substantial political risk and regulatory cost involved in investing in a developing economy. With its heavily regulated and often subsidised business model, infrastructure investment is vulnerable.

The challenge for investors is how to access a sector and investment opportunity with significant potential while also ensuring that there is sufficient reassurance on security and an acceptable level of risk.

The simplest and most effective way for investors to minimise their exposure to political risk is to focus investment on the more stable emerging markets such as India or Indonesia. In India, for example, a longstanding, functioning democracy with an established legal system and a newly elected business-friendly government, make the subcontinent attractive relative to many comparable economies.

Nonetheless, even in such comparatively benign business environments, there are challenges to overcome. There are often strict rules governing inward investment, designed to maintain national control over strategic national assets or support domestic investors, while bureaucratic hoops need to be jumped through.

The recent bond issue by UK-listed Greenko plc, of which Investec are brokers, might provide a roadmap for how to minimise such regulatory costs to investment. The Greenko bond structure not only allows investors to access such markets, with the issue attracting over 70 percent of its investors from the UK and US, but could allow companies looking to service the growing energy deficit in emerging economies to enjoy affordable finance for growth.

The $550 million issue by Greenko, an India-focused wind and hydro energy generator, saw demand sufficiently exceed expectation to allow a tightening of the yield from 8.5 percent to 8 percent. More impressively, the bond was Greenko’s debut in the international debt markets and the largest Indian debut bond to date. Such a successful initial offering was achieved by using an innovative approach to both security and transparency that benefitted both the company and investors, providing reassurance on both financial and regulatory risk factors.

Greenko’s bonds were the first to be secured on an identified group of 20 Indian renewable wind and hydroelectric facilities. This security provided investors with access to income generated by an attractive asset class in a straightforward manner.

While attractive in general, visibility on emerging renewables has often been poor. In order to increase investor confidence in the assets being offered Greenko commissioned a comprehensive, independent projection report by Deloitte. The report included financial projections for both FY2015 and FY2016 for each individual underlying asset and the group as a whole. EBITDA projections for each asset were included in the bond documentation (a first in the sector) with Deloitte issuing a series of observations on the regulatory, financial and operational status of each. These reports helped to provide investors with a handle on the precise underlying assets, their current condition and likely performance over the early years of the bond.

The level of transparency provided by the company helped to attract a significantly broader investor base than had initially been expected, providing a level of visibility not normally seen in emerging market transactions, but also demonstrated the importance of clarity in the infrastructure sector more generally.

As a ‘proof of concept’ we at Investec believe that the Greenko issue has the potential to trigger interest in the high-yield market among renewable companies from around the globe as they seek to build up their portfolio of operating assets to meet growing economic and political demand. This will only become more important as the spectre of tightening monetary policy looms in the US.

However, with the high level of demand for this bond demonstrating the level of investor appetite for exposure to emerging market infrastructure assets and the need for additional power capacity growing rapidly in emerging markets, we would expect emerging market opportunities to lead the way.

It should be no surprise if we see other global renewable companies access the high-yield bond market as an increasingly large number of companies to seek to access the international debt markets over the coming months and years.

*Ian Dixon is head of Debt Capital Markets (DCM) at Investec in London