Bankable Insights – Credit Markets Edition I_August 2021
Bankable Insights – Credit Markets: A collection of the latest insights and perspectives on topics of relevance to the Credit Markets industry
*Bankable Insights* Credit Markets Edition I
Opportunities from disruption
August 2021
Dear clients,
I am pleased to share with you our inaugural Credit Markets edition of Bankable Insights, a selection of articles that take a closer look at how innovative financing can offer a range of funding options for corporates, financial institutions and sovereigns to raise the capital they need, and for investors to turn their capital into ‘a force for good’. The credit markets have remained strong amid global economic uncertainty primarily due to exceptional financial liquidity provided by central banks and historically low interest rates. This bodes well for issuers and borrowers in our footprint markets of Asia, Africa, and the Middle East. But it specially benefitted those in transition industries and economies who embraced sustainability-linked financing instruments. While these deals were a step in the right direction, many borrowers continue to face potential future challenges around attracting financing.
The pandemic has deepened global inequalities – now is the time to step up multi-lateral collaboration. The main questions that are emerging for institutional investors are: how to channel capital to where its impact is greatest, how to align purpose with profit and which types of investment techniques can help. The pieces in this edition provide practical examples of progress to date and where more work is needed.
We hope you will find this an interesting read and I look forward to engaging with you further as you renew and pivot your business and investment strategy for the future.
Henrik Raber
Global Head
Credit Markets
Standard Chartered
The future of financing is rainbow
The future of financing is rainbow
Can financial capital be harnessed as a force for good and tackle inequalities deepened by the pandemic?
While COVID-19 has in some ways been a unifying force, there is no denying the havoc it has wreaked on societies and the global economy, with the gap between ‘haves’ and ‘have nots’ dramatically widening. Even if the world economy is faring better this year than previous projections indicated, a slow roll-out of COVID-19 vaccines in many developing nations in Asia and sub-Saharan Africa is negatively impacting their economic recoveries. The pandemic is deepening global inequalities. Can innovative financing structures born out of multilateral collaboration – and which are directed towards a broad spectrum of sustainability goals – help? We think so.
Channelling capital to where its impact is greatest
Unprecedented financial liquidity provided by central banks and historically low interest rates have been the main drivers of exceptionally buoyant global credit markets over the past 12 to 18 months. But what matters most is where the volume of financing is deployed and the impact it has. In other words: credit market participants have a unique opportunity to step in and harness financial capital as a force for good.
Board member and shareholder focus on marrying commercial decisions with ESG guiding principles is only increasing, even if assessing the economic value of ESG financing structures remains challenging due to the lack of uniform ESG reporting requirements and the fact that many environmental and social impacts can be hard to measure.
Nevertheless, we have seen an exponential growth in demand for sustainability-linked bonds, with YTD 2021 ESG bond issuance already at 75% of 2020 volumes1. Sustainability-linked loan volumes have increased 15 times over the past four years2.
Yet volumes are not everything. Where capital is channelled and the impact it has is key. This is an area recently investigated by Standard Chartered, whose Sustainable Finance Impact Report revealed, for example, that a solar project in India has seven times the impact on CO2 reduction than a similar-sized project in France.
1 Bloomberg/Dealogic, April 2021
2 ‘Green Lending Review’, A Refinitiv LPC Publication, April 2021
India is the new hot spot for renewable energy, and this is not going unnoticed. We have recently structured a landmark USD1.3bn green financing deal, with massive interest and participation from international banks, which in turn has opened doors for new sponsors. We are very pleased to be playing an active role in channelling financing to where it is most impactful.
Henrik Raber
Global Head Credit Markets
Standard Chartered
Innovative financing: turning green into rainbow
Taking the innovation and momentum that has driven green finance and using it to support more of the UN’s Sustainable Development Goals3, more and more issuers are going beyond the pure environmental perspective when issuing sustainability-linked bonds and are channelling financings towards the wider spectrum of ESG goals. Beyond ‘green bonds’, which are devoted to financing projects with a positive environmental impact, we can expect to see an increase in: ‘social bonds’, the proceeds of which must finance positive social outcomes; ‘blue bonds’ to finance marine and ocean-based projects; and ‘orange bonds’ to unlock private capital for women’s empowerment and gender finance.
Looking at credit markets more broadly, we still have a steep road ahead of us to bridge the infrastructure investment gap in many developing nations.
3 ‘The 17 Goals’, United Nations, Department of Economic and Social Affairs, Sustainable Development
When we look at Asia and Africa, the gap in infrastructure investment needed and expected spend is currently around USD193bn. This is anticipated to widen to around USD346bn by 20404
Henrik Raber
Global Head Credit Markets
Standard Chartered
4 ‘Global Infrastructure Outlook’, June 2018
Creating innovative financing structures that have real impact on critical infrastructure in high-barrier markets in Asia, the Middle East and Africa is not an easy task as it requires multilateral collaboration between Export Credit Agencies (ECAs), Multilateral Development Banks (MDBs), Foreign Direct Investments (FDIs) and banks.
FDI flows to developing economies have shown relative resilience to the pandemic and attracted a record 72% of FDI last year. However a recent UNCTAD report also reveals a decline in international project finance deals in Africa, Asia, Latin America and the Caribbean5.
So maybe the rainbow future of financing is not a far-off pipe dream. It’s certainly a journey and it will take resilience to navigate through less favourable and more volatile market conditions, while keeping the commitment to harnessing capital as a force for good front and centre.
5 ‘Investment decline in productive assets spells trouble for poorer nations’, UNCTAD, February 2021
Against this backdrop, it is remarkable that Standard Chartered has brought ECAs, MDBs, FDIs and banks together and is leading the charge in critical infrastructure developments in markets such as Angola, Ivory Coast and Ghana. This is something that sets our bank apart and I know our project finance team is busy working on deals that will continue to positively impact development in our footprint markets in Africa, Asia and the Middle East.
Henrik Raber
Global Head Credit Markets
Standard Chartered
When purpose meets profits:
investing as a force for good
When purpose meets profits: investing as a force for good
Impact investing is booming, with the market expanding by more than 40 percent last year. So why we have not solved the world’s problems yet?
A few years ago, sustainable investments were niche products, but today impact investing is booming: the market expanded1 by more than 40 per cent last year to USD715 billion. And it’s clear that investor appetite for environmental, social and governance (ESG) assets is continuing to strengthen. So why have we not solved the world’s problems yet?
The issue seems to lie in channelling capital to companies and projects that contribute to solving the world’s problems but whose growth is limited by access to external financing. Such investments are not easy to find and can be risky. Standard Chartered believes that innovative financing techniques will play a key role in addressing these issues as they are aligning purpose and profits more effectively, while providing investors’ with more granular visibility into the impact of their projects.
Pooling assets to spread risk and make them more easily marketable is just beginning to take off in ESG investing. Bespoke securitisation structures, where assets are placed into a legal vehicle that issues bonds, require innovative thinking. They are an attractive way to offer different levels of risk and potential return to investors, who can pick and choose depending on their risk appetite and the desired level of credit quality.
As a means to attract institutional capital to projects who have a deep environmental and social impact, asset-backed securities (ABS) and collateralised loan obligations (CLO) – which are backed by pools of loans, are standard financial vehicles which have become important enablers of impact investing.
Pooling assets offers bespoke solutions
These tools offer institutional investors access to investments they would never normally be able to consider, due to their size or absolute risk levels. In the same vein, they are an effective way to channel capital to impact projects and deals in regions that struggle for investor attention.
Even so, the securitised asset market remains small relative to the flood of green funding, while incorporating sustainability principles has become a fundamental requirement for most fund managers. Structured ESG financing has lagged behind, in part because of a lack of availability of collateral that meets the impact requirements and also due to a lack of standardised frameworks and ways to measure effectiveness.
Blended finance, the bringing together of private and public investors and different forms of capital to support development, helps to channel capital to where it’s needed most, as it may, for instance, serve as an effective catalyst to enable transactions, where equity returns would not otherwise be commercially viable. The blended finance2 approach allows investors with different objectives to invest alongside each other, opening up investable opportunities for institutional investors who may have returns as their main motivation, second to social impact, or may be interested in both.
This is a fast-paced, fast-changing world. The wall of money being raised shows the potential of structured finance to deliver returns and move the needle in terms of making a difference where it’s needed most.
Marc Freydefont
Head of Capital Markets Solutions
Standard Chartered
Challenges faced by impact investing
While fundamental shifts are in train, as the financial community reassesses how, why and where it channels capital, applying ESG principles remains challenging3 because of the complexity of the structures, the lack of data for each part of the transaction and the lack of an agreed lexicon for discussing and assessing progress as well as few benchmarks for assessing credit risk.
Securitisations often involve multiple parties and assets bound together in the legal structure. There are many parts in the chain, from the initial originator who structured the assets, to the sponsor, who selected these underlying assets, to the trustee and the entity who maintains the assets, to the ratings agencies.
With high levels of due diligence needed along every part of the chain, there can be differences of opinion with regard to the level at which the ESG lens should be applied. While industry bodies agree that there’s a need for robust ESG guidelines in structured finance, no ESG reporting standards4 have been developed so far and data can be scant or hard to compile.
Improving metrics is of vital importance as this will help convince institutions to back impact investing. Investors want to see deep impact, and when they are assured their money is going to make a difference, they are more likely to fund projects that might not otherwise be funded.
A blended approach can benefit everyone
Bonds that raise funds to support the livelihoods of women are a remarkable showcase of success, representing returns for investors, creating deep impact, and driving real change in people’s lives.
The Impact Investing Exchange (IIX) issued a series of women’s livelihood bonds (the latest one towards the end of 2020, raising approximately USD 30 million5) structured as a CLO of loans made to underlying microfinance institutions and in support of enterprises owned or run by women in emerging markets. These bonds use elements of blended finance to increase their impact, with a focus on transparency from start to finish: measurement at every level, starting from initial assessments and when the loans are made.
While the first issuance was a landmark, what makes these projects easier to sell to institutional investors is repeating the process, gaining traction and growing the market gradually over time. Working hand-in-hand with ratings agencies to develop credit risk assessments and standards will be a key part of driving this forward and will pave the way for larger-scale projects to come.
Impactful securitisation is the future
There is no doubt that ESG and impact investing have captured the imagination of the securitised finance world. More than USD 1 trillion worth of structured finance6 will probably be issued in 2021, according to S&P Global Ratings, and investors will increasingly demand ESG data as a precursor to their involvement.
A recent survey conducted by Fitch Ratings7 shows that 84% of polled CLO managers have a stated ESG policy, with 60% part of an organisation that is a signatory to the United Nations Principles for Responsible Investment (UNPRI). Managers reported generally sparse ESG information for leveraged loan issuers, but highlighted steps taken to improve the information gap. Survey respondents believe that their credit analysts are in the best position to assess ESG impact, with larger institutional firms with substantial resources more likely to have specialised teams to facilitate consistency of their ESG approach across their organisations.
Around eight in 10 securitisation issuers currently incorporate ESG into their overall business practices, according to the Structured Finance Association8 and half of the responders that did not have those practices in place already have plans to do so.
With the momentum harnessed in the right way, structured finance offers the potential to bridge funding gaps9, channel capital to where it is needed most and help developing nations to rebuild their economies. Securitisations composed of different tranches can give funding access to smaller ESG projects that become part of larger asset pool, and they allow investors to choose the level of risk that fits their requirements.
It also offers a chance for institutional investors to align profits with purpose, orientating the aims of developing countries alongside those of financial markets. Structuring creates a broader, deeper pool of opportunities, which ultimately will lead to more development projects getting off the ground. There’s already evidence linking impact investing and profitability, with the two best performing US equity funds in 2020 focused on clean energy.10
Securitisation techniques can really make a difference here. Not only do they have a positive aim, they also offer great returns and access to profitable projects that were previously out of reach.
Mark Freydefont
Head of Capital Markets Solutions, Standard Chartered
EUR 159 million ECA-backed financing to improve critical healthcare infrastructure in Côte d’Ivoire
EUR 159 million ECA-backed financing to improve critical healthcare infrastructure in Côte d’Ivoire
Standard Chartered has provided EUR 159 million financing to the government of Côte d'Ivoire for the refurbishment of maternity wards in 62 hospitals across the country.
Background
The government of Côte d’Ivoire is currently making a concerted effort to improve access to healthcare services in the country. The plan is to refurbish existing facilities and build new ones. This is of particular urgency, given the pandemic situation as well as to align with the United Nations’ Sustainable Development Goal 31 (SDG) concerning good health and well-being.
One of the main areas of focus is the improvement of neonatal health. According to UNICEF, the Côte d'Ivoire’s mortality rate of children from 0 to 28 days remains high and is often associated with the lack of quality care at birth and in the first few days of life.2
Towards this, the Ministry of Economy and Finance of the Republic of Côte d'Ivoire engaged Standard Chartered, the country’s leading foreign bank, to execute a EUR 159 million financing facility for the refurbishment of maternity wards in 62 hospitals in 24 of the Côte d'Ivoire’s regions and the autonomous district of Abidjan. The refurbishment includes electricity power upgrades, improved IT and data connection, potable water and storage, and installing fire safety systems and equipment in the maternity wards, delivered by a leading contractor active in Middle East and Africa.
Enabling long-term capital investment for critical infrastructure development in sub-Saharan Africa
The transaction facilitates long-term capital expenditures in necessary medical infrastructure development in sub-Saharan Africa by using the Export Credit Agency (ECA) structure. The cost of this capital is a fraction of the cost of commercial capital otherwise available to African countries.
Deal structure- ECA – backed financing structure
While Standard Chartered is the sole mandated lead arranger and structuring bank for the deal, the transaction is further supported by the ECAs of Denmark, EKF Danmarks Eksportkredit (EKF) and Poland Korporacja Ubezpieczén Kredytów Eksportowych (KUKE).
Standard Chartered’s role
Standard Chartered structured the deal as a one-window solution for the financing required. This includes managing the entire execution of the transaction to draft a bespoke financing agreement, proposing the most efficient solution to finance the commercial contract. This also includes consulting on the key financing terms with the Government of Côte d’Ivoire. Standard Chartered also liaised with the ECAs on their support for the contract and compliance with their internal processes.
The bank’s advice to the contractor, based in the Middle East, was critical to win the approval of the ECAs and assistance in structuring the deal to make it eligible for support by EKF and KUKE. This also helped in minimising the borrower’s ultimate costs.
Furthermore, Standard Chartered worked closely with the ECAs and the contractor to ensure compliance with environmental and social laws across all sites.
This deal between the Government of Côte d’Ivoire, the contractor and the ECAs of Denmark and Poland highlights Standard Chartered’s commitment in enabling nations in Africa, the Middle East and Asia to reach their Environmental, Social and Governance (ESG) goals.
Powering Asia’s energy
transition with institutional capital
Powering Asia’s energy transition with institutional capital
How can institutional capital accelerate Asia’s shift to sustainable energy?
Asia’s transition to renewable energy is picking up momentum and is expected to characterise the region’s development over the coming years. Diversified and resilient sources of institutional capital can help accelerate the shift, bringing benefits for all.
The pandemic has already put significant pressure on government budgets. And while the renewable energy industry has weathered the COVID-19 pandemic well, financial commitments in the sector have still dropped1, widening the chasm that needs to be filled.
In Asia Pacific, the power generation sector could attract USD1.5 trillion worth of investments2 by 2030, with countries like Vietnam, Philippines and Indonesia already paving the way toward clean sources.
But balancing economic development with sustainability while maintaining reliable and secure energy access is the region’s key challenge. Therefore, a well-balanced mix of mature and new technologies will set the tone for a smooth transition.
Asia Pacific is clearly the undisputed engine of power demand globally and there remains confidence in the long-term trajectory of the sector. By providing funds in markets where it is scarce, institutional capital has a critical role to play in their sustainable development.
Sujay Shah
Managing Director and Global Head of Clean Tech,
Standard Chartered
Ambitious goals set by some countries offer opportunities for investors from around the world, for example solar, wind and biomass are forecast3 to make up more than a third of Vietnam’s total power generation by 2030, up from about 10 per cent in 2019.
While investment is flowing to this region, distribution is uneven. The East Asia and Pacific region attracted around a third of global renewable energy financial commitments in 2017-2018, but this was mainly driven by increased spending on solar photovoltaic panels and onshore and offshore wind in China. Funnelling finance to smaller projects and nations can be tricky.
That’s where debt financing and structured financing can play a key role, helping to mobilise institutional investors to areas and companies in need of investment. Thailand and Malaysia are among the countries that offer strong institutions4 and favourable policy environments, according to an analysis by the Climate Policy Initiative.
Instruments like green bonds can also bring more capital to renewable energy projects. This is already a growth area. Issuance of green bonds earmarked for renewable energy climbed from just USD2 billion in 2013, to USD8 billion by 20195 - and there is yet more growth to come.
Current green bond issuances6 make up less than 1 per cent of the global bond market, which is estimated at about USD 100 trillion, according to the International Renewable Energy Agency. Strong demand is set to continue to drive issuance upward and the large ticket size that green bonds can create is already attracting institutional investors.
Tailored investment funds are another way to make capital available, with institutional investors keen to deploy financing, companies are looking to fill the void. The Climate Finance Partnership7 an investment fund managed by BlackRock, aims to raise as much as USD1 billion to finance green infrastructure, energy efficiency solutions and clean mobility.
Financial institutions can also help push emerging energy technologies to the fore. While solar and wind dominate current investments, structured finance deals could help back less-prominent sources of renewable energy like green hydrogen or ammonia.
Understanding the local environment and specific needs is key to overcoming challenges like scale, the size of deals, the regulatory environment and the risk-return balance of many of the projects that are seeking finance.
Asia is already on the way to making its energy generation climate-compatible and requires the rapid availability of additional capital to help power it forward. Ensuring that investments are directed toward the economies and areas that need them most depends on partnerships between governments, institutional investors, banks and other organisations.
Continuing to build capacity and generate innovative blended finance initiatives will help bring more large institutional investors on board. The appetite to finance Asia’s green energy transition is here – now is the time to put more plans into action.
Investing in the face of
an uneven economic recovery
Investing in the face of an uneven economic recovery
Find out how the global recovery can offer good investment opportunities especially across emerging markets.
The global economy is seeing an uneven recovery from COVID, with emerging markets (EM) lagging their developed-market peers. But as EM countries seek to get their economies onto a sustainable recovery path, there are opportunities to be unearthed by investors.
Governments in both developed and emerging economies are putting plans in place to get their economies back on track. As nations increasingly focus on investing in a sustainable recovery that goes beyond a quick bounce-back, environmental, social and governance (ESG) considerations are gaining importance, and a range of opportunities linked to infrastructure and sustainable assets are opening up to investors.
The global recovery will offer good opportunities especially across emerging markets. Governments across the world are focused on building back more sustainably. This could lift prospects for everyone looking to tie investment to socially linked and sustainable assets, particularly where capital flows can be most effective.
Razia Khan
Head of Research, Africa and Middle East
Standard Chartered
While global economic prospects are generally looking up, heightened near-term uncertainty, the prospect of tighter monetary policy, rising inflation in developed economies and higher levels of public debt are downside risks to recovery. How might investors best navigate this investment landscape?
Building back better
Assets linked to ESG will play an increasing role as investors focus on channelling their capital to make a difference. Market-driven mechanisms where the public and private sectors work together offer one way to supercharge this, in tandem with local government reforms.
There are challenges – the global response to COVID-19 may have inadvertently complicated the investment environment for some lower-income countries, and more needs to be done to ensure that capital flows reach those that have been hardest-hit by the pandemic.
However, the trend is worth focusing on. Increasing interest in green and social investing may help to attract new investors to emerging markets. Capital geared towards supporting sustainable recoveries and money deployed by ESG funds can provide opportunities for infrastructure development in emerging and frontier markets.
For example, sustainability-linked bonds and green bonds could provide channels for international financial institutions to provide support and even out the economic recovery. And sustainability bonds could enable some countries to raise the capital they need while also addressing the UN’s Sustainable Development Goals.
An emerging asset class
Emerging and frontier markets are ripe with opportunities, despite their slower recovery from the COVID-19 pandemic relative to developed nations.
Advances in their legal structures and economic growth in recent decades have made many of these countries less high-risk, allowing them to narrow the gap with developed markets. While their slower pace of vaccine rollout is likely to lead to a more protracted economic recovery, emerging and frontier markets will still benefit from rising external demand. The recovery in developed markets has been a boon to global trade and has helped to create a more favourable price environment, particularly for commodity exporters. This has improved the investment outlook.
Still, the uneven economic recovery appears to be here to stay. Even within EM, there are vast differences. Some, like China and the UAE, were able to contain the virus promptly, and others, like Poland, were able to deploy fiscal support. In contrast, economies that entered the pandemic with macroeconomic imbalances or large debt burdens are facing a steeper path to recovery.
Against this backdrop, rising prices in much of the developed world have sparked concerns that stimulus plans may have to be pared back more quickly, and that interest rates will have to rise.
After the global financial crisis, the Fed’s stimulus withdrawal plans (the so-called ‘taper tantrum’ of 2013) led to market turmoil. This time, with inflation expectations looking more anchored, the effects of the Fed taper are likely to be more muted.
Even so, interest rate normalisation and the tapering of stimulus are likely to remain a key focus over the next year. By the second half of this year, the positive effects of vaccination campaigns in major developed economies should start to filter through, helping to spur momentum in emerging markets. A more concerted global effort to boost vaccine supply in developing countries may also lift sentiment. The return of more sustained growth in emerging markets may help – at least partially – to offset any tapering concerns.
International cooperation
All global players have a role in shoring up the virus response.
While the crisis may offer opportunities for emerging and frontier markets to accelerate reforms and build back stronger, they cannot do it alone. International financing can offer a range of funding options which could be key to ensuring prosperity and closing the gap.
The global economic recovery is expected to be strong but uneven as many developing countries struggle with the lasting effects of the pandemic. Along with addressing vaccine distribution and debt service relief, taking steps to spur green, resilient, and inclusive growth while safeguarding macroeconomic stability is also imperative.
Economic growth will return more forcefully to emerging markets in the months ahead, Investors would do well to position themselves for this eventual firming up of the global growth outlook.
Razia Khan
Head of Research, Africa and Middle East
Standard Chartered
Unlocking shipping’s
transition to a green future
Unlocking shipping’s transition to a green future
How are new ways of financing and demands for environmental stewardship enabling a new era in shipping?
Shipping is transitioning, with new ways of financing and demands for environmental stewardship set to define its future.
The COVID-19 pandemic underscored the importance of shipping for the delivery of critical supplies and, with more than 80 per cent of international goods carried by sea1, it will remain crucial. Even so, the changes brought about by the COVID crisis, coupled with longer-term trends including the shift toward green finance, mean the industry is facing a pivotal moment.
While sources of finance have diversified, the total on offer is less than a decade ago, meaning less to go around2 and stiffer competition for what is available. With many sustainable investment guidelines excluding activities linked to fossil fuels, the risk is that shipping also misses out on flows of green capital.
As shipping changes, we need financial solutions that promote and reward sustainability. Balancing profit, environmental concerns and innovation is a collective imperative.
Abhishek Pandey
Managing Director and Global Head of Shipping Finance
Standard Chartered
Decarbonisation focus
So complex are the challenges in decarbonising shipping, that the sector was left out of the Paris agreement3 on climate change. The shipping industry emits about 940 million tonnes of carbon annually4 and accounts for about 2.5 per cent of global greenhouse gas emissions, yet so far it has been slow to shift toward environmental, social and governance (ESG) factors.
One step in the right direction is the Poseidon Principles5, a global framework for responsible ship finance, of which Standard Chartered is a signatory.
More than half of the top 24 maritime lending banks, which hold loan portfolios totalling more than USD185 billion, are signed up, and the principles are in line with the International Maritime Organization6’s ambition for greenhouse gas emissions to peak as soon as possible and be reduced by at least 50 per cent by 2050.
But more needs to be done. In particular, a collaborative approach is needed to transition the industry, with governments, investors and banks putting their heads together to find solutions.
First-in-class green deals
Standard Chartered is helping to lead the way, by instigating a number of first-of-their-kind loan agreements7 linked to sustainability targets.
These include a sustainable loan arranged for Odfjell SE that linked the credit margin to progress achieved against the client’s sustainability targets. Odfjell uses a metric for carbon intensity – the Annual Efficiency Ratio – as a sustainability indicator, rather than an absolute emission measure.
A similar green loan deal8 was struck for ASYAD Group’s shipping arm, the Oman Shipping Company, which linked eight years of financing to targets that line up with the UN’s sustainable development goals. The ships produced will have ECO notations – a key standard for environmental ship design9, construction and operation that goes beyond statutory requirements.
While these deals represent a step in the right direction, the industry is facing some challenges around attracting financing.
Traditional bank lending to build vessels and onshore facilities plummeted10 in the past decade, with the financial crisis foreshadowing the exit of many European banks. Growing regulatory pressures increased the pressures, encouraging many financial institutions to sell their portfolios or allow their loans to amortise.
While that vacuum has been filled by alternative investors, particularly leasing companies and private equity, there’s a widening chasm between large shipowners that can attract financing on the best terms, and smaller players who lack the heft to lure investors.
This ongoing squeeze on financing may impact decarbonisation of the industry – something that’s estimated to cost as much as USD5 billion. Smaller operators face a vicious circle, where they struggle to fund ESG requirements, which means they are overlooked by investors, meaning they don’t have the income to become more sustainable.
And that’s where alternative and innovative financing can help, embedding sustainability targets into funding deals to help alleviate the demands placed on companies.
Some imaginative funding tools have already been proposed, including carbon taxes, carbon trading schemes and offsets. Initiatives like the Poseidon Principles and the Sea Cargo Charter are helping define the future of financing, but there’s still work to be done, particularly on closer collaboration.
Green shipping can only work when all parties are pulling together.
Standard Chartered is working with its partners and leading the way in innovative international shipping finance that supports decarbonisation.
Abhishek Pandey
Global Head of Shipping
Standard Chartered
Facilitating Asia’s
infrastructure development
Facilitating Asia’s infrastructure development
Here’s how project and ECA financing can help to fill Asia’s strategic infrastructure funding gap.
The region’s infrastructure funding gap is so large and strategic, there is a pressing need to identify and enable new sources of finance. That is where project financing and ECA financing can become important facilitators of international investments.
Developing Asia requires investment in excess of USD1.7 trillion a year in infrastructure spending if it is to maintain green growth and eradicate poverty by 2030.1 When seeking to finance this green infrastructure, businesses and public-sector organisations in the region may not be aware of the support available from export credit agencies such as UK Export Finance (UKEF), a longstanding partner of Standard Chartered. Such agencies can reduce the cost of finance and insurance, without the stringent conditions required by tied-lending.
A long partnership
UKEF is the Export Credit Agency of the British government. Its primary mission is to support UK exports, and ensure no viable export fails for lack of finance from the private section. UKEF also seeks to support UK policy goals, such as promoting transparency in global trade and the global transition to a low carbon economy.
The most important difference is flexibility. In order to apply for its finance, UKEF requires a minimum of 20% of a contract to be sourced from UK suppliers (though it will seek to bolster that percentage if possible). This is more favourable than the requirements of some other export credit agencies (ECAs) including the US equivalent, EXIM, which requires more than 50% of content to be sourced from the United States.2
Moreover, to account for the variety of services sectors that export from the UK, UKEF is relatively flexible about what constitutes “UK content”. Its emphasis is on activity that supports job-creation and value-add in the United Kingdom. This can include companies that are not domiciled in the UK but have facilities there. Finance is available in more than 60 currencies, reducing forex risk, and the agency prides itself on avoiding the bureaucracy that is sometimes associated with governmental bodies.
For large projects, UKEF also offers a Direct Lending Facility, loans of up to GBP200 million for overseas buyers to purchase from UK exporters, at fixed interest rates.3 Competition to access this facility is intense, as the overall pot is limited to GBP8 billion, of which GBP2 billion is reserved for clean growth projects demonstrating the UK government’s commitment to transition to cleaner energy.
Another product, UKEF’s Standard Buyer Loan Guarantee, is perhaps the most relevant product for the majority of organisations in Asia-Pacific. It insures a commercial bank loan to an overseas buyer, whether private, public or in a public-private partnership, to finance the purchase of UK services, capital goods and intangibles, of up to 85% of the contract value, typically within a range between GBP1 million and GBP30 million (USD42 million).
International finance has been likened in the past to borrowing an umbrella that you have to give back once it starts raining. UKEF states explicitly that this is not the case with its lending. The overseas buyer can choose to borrow at fixed or floating rates, and to re-pay the loan over an extended period. The financial institution involved in the transaction receives a guarantee from UKEF for the amounts due under the loan, while the exporter is paid as if they had a cash contract, which helps with their working capital requirements.
UKEF can also structure a facility on a line-of-credit basis, enabling the overseas buyer to make multiple purchases from different suppliers. However, this is more complex than financing an existing contract because it requires UKEF to do much more due diligence on the guarantor, the buyer and the supply chain as a whole.
Standard Chartered and UKEF
How does this work in practice? In 2019, Standard Chartered worked with UKEF to help Serba Dinamik, a Malaysia-based engineering services group, to cover USD64 million-worth of imports from various smaller subcontractors, not all of them UK-based, for a range of small green-energy projects in Indonesia, which individually were not bankable. Under the framework, Standard Chartered extended a commodity-based Islamic finance facility (a commodity murabaha) to the borrower, Serba Dinamik Indonesia. This facility allowed the Indonesian company to strike an engineering, procurement and construction contract with the Serba Group’s UK subsidiary to work with other UK suppliers on energy projects in Indonesia.
UKEF has been the first ECA to engage with Islamic finance, and this was not its first sharia-compliant transaction. In terms of Asia-Pacific markets, its experience in this area may be particularly relevant to countries such as Malaysia and Indonesia, which are leaders in the formalisation and uptake of Islamic financial products.
Financing a greener future
Crucially, UKEF no longer extends support for energy products that undermine efforts to combat climate change. The flipside of this is that UKEF offers extended loan tenors (up to 18 years for renewable energy, nuclear and water projects, nearly double the usual 10-year outlook) and more readily available funding for sustainable energy projects.
In terms of the kind of projects eligible for UKEF's clean-growth financing, these can be anything from sustainable water and wastewater management, to biodiversity conservation, to eco-efficient buildings and transportation. It is not limited to clean-energy projects, although one such provides a good example of how UKEF participates: UKEF is one of six export credit agencies, among a syndicate of some 25 financial institutions including Standard Chartered, that are participating in the USD3 billion financing and insurance of the 589MW Changfang and Xidao offshore wind project off the west coast of Taiwan.
Given the appetite for green transformation in Asia, UKEF’s policy objectives cohere with those of many businesses and state-owned enterprises in the region. A poll conducted at a UKEF-Standard Chartered webinar on 27 April found that attendees saw South Korea as the country with the most potential for renewable energy, followed by Vietnam. Almost two-thirds of attendees had worked with an ECA in the past.
Standard Chartered has long been one of UKEF’s most active partners, and we share many of its goals, for instance by committing to provide USD40 billion in project financing services for infrastructure promoting sustainable development by 2024.4 For organisations considering projects that could include UK suppliers, and particularly those involved in the creation of green infrastructure, partnering with UKEF may in many cases help reduce the cost of financing and insurance, while giving project managers the freedom to source from a mixture of world-class contractors.
About UKEF
UK Export Finance is the UK’s export credit agency. It exists to ensure that no viable UK export lacks for finance or insurance from the private market, providing finance and insurance to help exporters win, fulfil and get paid for export contracts.
Maritime in transition –
balancing profit and purpose
Maritime in transition – balancing profit and purpose
With the maritime industry at a pivotal point in its transformation to a lower carbon future, find out how financial institutions can play a more strategic role in proactively supporting the industry’s transition.
Inside a seismic shift in shipping
Shipping may be the least energy-intensive way to carry goods, consuming one-fifth of the energy required for freight transport, but it is nevertheless being forced to confront the reality of its role in climate change – not least because it is a carbon-emitting activity that still relies heavily on oil-based fuels.
International Shipping is the largest contributor within the sector with 740 million tonnes of CO2 emissions in 2018. The share of international shipping emissions in global GHG emissions has increased from 2.01% in 2012 to 2.02% in 2018, with containers, bulk carriers and tankers accouting for 86.5% of emissions.1
1 IMO, Fourth Greenhouse Gas Study, 2020
This has led to a major shift in approach within the industry, according to Andreas Sohmen-Pao, chairman of BW Group, who recently spoke with Standard Chartered’s Global Head of Shipping, Abhishek Pandey at an industry event. BW Group is a major player in the sector, managing the world’s largest fleet of very large gas carriers and the second-largest fleet of offshore floating production vessels, among many other assets.2
We’re at a major societal turning point, and at a business level there will be a new frame of reference for what’s acceptable, I think some people are saying, what is the point of making a lot of money if we destroy the planet?
Andreas Sohmen-Pao
Chairman - BW Group
With this in mind, what steps has the shipping industry taken? For a start, the IMO has adopted mandatory measures to reduce emissions, to support the UN’s Sustainable Development Goal #13 to take urgent action to combat climate change. All stakeholders in the sector, from financiers to lessors and operators, are committing to take steps to drive long-term decarbonisation.
But getting to this goal is not a straightforward path, particularly when it comes to the regulatory infrastructure. “Should it be carbon levies, or a traded scheme? Do offsets work? What is future fuel going to be?” Mr Sohmen-Pao asked. “There will be plenty of debate, but the industry is acknowledging the problem and talking about solutions in a very different way from what was done historically.”
Inevitably, change is unlikely to depend on one solution. That means investing in a variety of innovative technologies, in the likelihood that they won’t all pan out – a risk that BW Group has been ready to adopt.
We’re investing in many different things. LNG for some ships, LPG for other ships, methanol, batteries, biofuels, solar, wind… As a private company at the holding level, we have the luxury of being able to be a bit more experimental.
Andreas Sohmen-Pao
Chairman - BW Group
It’s not just fuel. BW began investing in environmental technologies of all kinds around 12 years ago, through a subsidiary called BW Ventures.
“We bought into ballast water management systems, carbon nanotubes for better paints, hull cleaning robots, more efficient electrical motors, water treatment…” Mr Sohmen-Pao noted, explaining that as with most venture capital activity, many initiatives didn’t succeed. But there are high hopes for some, including the maritime battery maker Corvus, which is now exploring maritime-certified hydrogen fuel cells,3 and those in the wind energy sector.
3 Renewable Energy Magazine, “Corvus Energy to start development of hydrogen fuel-cell systems with technology supplied by Toyota”, February 2021
Finance incentives
“Given the complexity and scale of global energy infrastructure built up over decades, there will be no overnight transition”, Mr Sohmen-Pao said. “But it’s an equally big mistake to think that it will never happen. “Because when you marry human ingenuity with financial capital – which is happening now – we’ll see big shifts happening.”
Indeed, the power inherent in the provision of finance is a major potential driver of change, Mr Sohmen-Pao said.
“My main hope is that this period of more discerning capital and bank financing continues… it’s right that banks support companies they feel are going to be good stewards of capital and differentiate as they are doing today.”
This is why Standard Chartered has become a signatory to the Poseidon Principles, a global framework that aims to align carbon emissions in the shipping industry with international targets set by the UN, including its ambition for greenhouse gas emissions to peak as soon as possible and to reduce the total annual GHG emissions by at least 50% by 2050 compared to 2008.4 Signatories to the principles represent a bank loan portfolio to global shipping of approximately USD185 billion – nearly 50% of the global ship finance portfolio.
Cutting carbon emissions in the shipping sector is crucial in avoiding the worst effects of climate change. As a bank that specialises in financing world commerce and the enablers of global trade, signing up with the Principles is therefore an important addition to our existing efforts to reduce emissions. We look forward with partnering our peers and clients globally to achieve the goals we all share with the IMO.
Abhishek Pandey
Global Head of Shipping, Standard Chartered
