Short Position - Green bond, O&G funding, Going the EV way


Green bond

ISSUANCES of green bonds are on a rise. Governments, banks and corporations are issuing them and there seems to be sufficient investor-interest for the debt papers.

Some green bonds are issued to fund specific projects such as waste treatment plants or to build solar farms. Others are being issued with a general focus in mind such as to help organisations reach their sustainability goals.

This week, Hap Seng Consolidated Bhd issued the first tranche of its green bonds. It is looking at areas such as safeguarding the well-being of employees and their workplace, limiting the impact of its business operations on the environment, and alleviating the economic and social disparities in Malaysia.

Recently, CIMB Bank Bhd became the first Malaysian bank to issue a sustainable development goals bond in the international capital markets. Proceeds from the US$500mil (RM2.1bil) will be channelled to projects such as affordable housing, startups and small and medium enterprises, public schools and hospitals, green mass transit, climate resilient buildings and infrastructure, forestry and wildlife conservation projects, as well as Covid-19 and other global pandemic financing, the bank said.

In Thailand, major seafood processor Thai Union Group PCL has also been issuing green bonds. The company said the issuance was towards “blue finance” – financing for projects benefiting oceans and the seafood industry as a whole. Expect more green bonds to be issued as the world moves towards its sustainability goals.

While there is a growing number of investors seeking exposure into green bonds, they ought to ensure that the green bonds they are investing in do not fall short of the highest sustainability standards.

This is especially so in the general purpose green bonds. Investors ought to ensure that the issuers of such papers do not indulge in “green washing” which can come about when parties take advantage of a lack of clear and credible definitions and targets, lack of verification and poor disclosure requirements.

Hence what is needed is credible and common definitions and targets which are science-based and meaningful. There also needs to be independent verification, ongoing monitoring and accurate reporting.

O&G funding

MANY oil majors have been shifting their capital spending from traditional oil and gas (O&G) exploration activities and going into low-carbon emitting ventures.

Coastal Contracts Bhd seems to be bucking the trend. It is taking a big bet on an O&G project in Mexico, committing almost RM1bil to it.

This week, Coastal Contracts said it was proposing to provide financial assistance of up to US$220mil (RM924mil) to its joint venture company in Mexico, Coastoil Dynamic SA de CV.

The financial assistance is to fund the construction of an onshore gas conditioning plant dubbed the EMC Papan Project and to provide working capital for its initial operations.

Last month Coastal Contracts said it inked a deal with a unit of Petroleos Mexicanos, a Mexican state-owned petroleum company, for this project, noting that there was a contract value of about RM4.5bil.

The EMC Papan Plant is part of the Mexican government’s plan to make gas accessible to every person in the country.

Coastal Contract is in a net cash position of some RM105mil but that isn’t enough, hence the company will have to raise funds.

In fact, Coastal Contracts is likely going to have to assume a debt amount that is higher than the company’s present market capitalisation of RM840mil, driving up its gearing level to 0.62 times.

Coastal Contracts has said that the money will be raised via internally generated funds, bank borrowings, the issuance of bonds or though project financing.

One wonders why Coastal Contracts needs to bear the burden of that RM1bil financing.

Why isn’t it able to secure financing from other sources such as banks? And could that in turn be due to the reluctance of financial institutions there to fund traditional O&G companies, in light of the movement towards sustainability?

If that is the case, one wonders how successful Coastal Contracts will be in securing bank borrowings here for the Mexican project.

Going the EV way

THE Malaysian Automotive Association is projecting car sales to hit the 600,000 mark this year.

After a 2021 that was wrestling with the pandemic and lockdowns, it managed to sell 508,911 vehicles – just 4% lower than in 2020.

This year, the projection is an 18% improvement from the number of vehicles sold in 2021. That is no doubt a tough ask as 2021 was helped by the waiver on the sales and service tax.

There will be the similar waiver in the first half of this year, but helped by a full exemption of excise and import duties for electric vehicles (EVs).

There is no doubt the industry will be able to top the sales of the 274 EVs sold last year. Demand will be there but there is a lot that needs to be done to ensure that the infrastructure is in place.

Without proper charging stations, the industry will still be able to sell cars as many Malaysians can easily rely on EVs for their daily city commute.

It is the interstate travel that is going to be challenging but there is at least one petrol station operator that is starting to offer charging bays for people who want to use EVs to travel.

Next will be the supply of EVs. Such cars are in high demand and with the chip shortage acutely hitting the production of vehicles, it is worth watching how the delivery commitments can be met for this year.

The key thing is the government’s long-term commitment towards EVs.

By basically saying you can bring in such car tax-free, EVs will have a price advantage in Malaysia. There is reason why this is being done.

Firstly, lost collection on the tax waiver has to be seen in context with the petrol subsidy the government pays. It is almost ringgit for ringgit but in the long-run, it is more beneficial if cars are EVs as they will help lower Malaysia’s carbon footprint and accelerate the country’s environmental, social, and governance-adoption.

A ringgit lost today will be a ringgit earned tomorrow and there is a benefit if there is an economically-friendly transportation industry. That will help to lower the penality paid by the large oil palm and petrochemical industry in the country.

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