What we have recently seen as a trend is that investors are taking a stride with regards to funding for green bonds, also known as the climate-aligned bonds. As per the latest report, Bonds and Climate Change: The State of the Market in 2016 by HSBC, about $US2.5-3 trillion of capital is required per annum in investments related to climate change. Out of said amount, 60-70% caters to emerging markets. The report at the same time highlights that Australian issuance of unlabelled climate-aligned bonds is in the order of $2.5 billion, which is still quite low, and mainly has seen Aurizon as the player. During this time, the news that companies like Treasury Corporation Victoria and Flexigroup coming together with the three big banks for the discussion on climate finance is quite an encouraging thing to see.
Going back in time a little, we also took a note of the fact that FlexiGroup (ASX: FXL) emerged as the first Australian company to issue a green asset backed security for the purpose of funding solar panel installation financing, which appears to be a good move in the above direction. The following key features have been put across in terms of FXL’s move:
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First mover advantage in tapping the certified green bond in Australian market:Australia’s ANZ Bank was the first to issue a bond certified using the Climate Bonds LCB Criteria in May 2015 in building and industry segment. A number of others have followed including ABN Amro (Australia), Axis Bank (India), Westpac (Australia) and Obvion (Netherlands). In climate aligned segment, the market size is $2.5 billion and FlexiGroup Limited (ASX: FXL) is said to be the first company from Australia to issue certified green Asset Backed Security (ABS) of AUD 50 million (USD 39 million) of Class A2-G Notes. Class A2-G notes was a part of an AUD 260 million asset-backed securitization (ABS) transaction. The company intends to use these funds from the green ABS issue to refinance residential rooftop solar photovoltaic (PV) systems. The notes are priced at 150 bps over BBSW.
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Penetration of the FlexiGroup’s green ABS: The potential for green ABS is expected to be enormous in Australia because the rooftop solar segment is flourishing.The issue can also be viewed as an instrument of bringing rooftop solar into mainstream bond market in Australia for the first time and a source of cheaper finance for this as well as renewable energy technologies. By gaining Climate Bonds Certification from London Climate Bonds Standard Board, FlexiGroup was said to have assured investors of the green credentials of this bond. This is also said to lay a best practice example for future domestic issuers. National Australian Bank (ASX: NAB) is acting as arranger and green bond structuring agent for FlexiGroup’s Green ABS issue. The Clean Energy Finance Corporation invested AU$20 million in the issue.
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Focusing on core high RoE business units: FlexiGroup is focusing in core high RoE businesses of cards, Certegy and leasing. The management expects low growth in Certegy business in FY17, which would eventually ramp up to 10% in FY18. Currently core business contributes around 90% of volume in addressable market of ~AU$250 billion. The company has also made an equity investment and a funding line into Kikka Capital with option to take ownership in future. FlexiGroup has discontinued low RoE and non-core business units of Blink, Think Office Technology and divested as well as written off associated assets. The company has launched new payment business X-PAY and commenced signing partners ready to use the services when it goes live in current month. It is to be noted that solar panel financing contributes to most of the Certegy’s income while solar volumes continue to be over $15 million every month.
Overview of green bond issue
Market opportunity: Environment challenges affecting economy and society are climate changes, resource scarcity, natural capital loss and degradation. Sourcing funds by issuing green bonds is getting popular in global economy and most of the proceeds will be used for renewable energy, water and wastewater project across the globe. As per the data released by CBI on July 01, 2016,the climate-aligned bonds universe now stands at $694bn - comprised of $576bn of unlabeled climate-aligned bonds and $118bn of labeled green bonds. Based on the report, low carbon transport was the largest single sector, which issued bonds worth $464 billion or 67% of total bond size. The remaining $97bn (14%) is drawn from Building and Industry, Agriculture and Forestry, Waste and Pollution, Water or Multi-Sector bonds.
According to the International Energy Agency (IEA), cumulative investment of $53tn is required by 2035 in the energy sector alone. New Climate Economy estimates that $93tn of investment is required across the whole economy by 2030.
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Source: HSBC dated July 2016
Stock performance: FlexiGroup stock has fallen over 38.14% during this year to date (as of July 04, 2016). But the group has taken several initiatives to drive future growth. The company has guided that FY16 cash NPAT would be ~ AU$97 million (statutory - AU$ 54.2 million) and dividend payout would be 50%-60% of cash NPAT.
Going forward, the management expects FY17 volume growth to be lower than 10% while for FY18 it would be higher than 10% driven by its Cards- NZ, Cards- AU, Certegy and Leasing – NZ businesses.
Overall, this move by FXL has brought rooftop solar into the Australian mainstream bond market and laid avenues for financing of renewable energy technologies.
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