Cautious view: Woods (right) speaks during the CERAWeek oil summit in Houston, Texas. He is of the view that the world is not on the path to meet net-zero in 2050 because nobody wants to pay for it. - AFP
LONDON: The credit market’s appetite for high-carbon companies will soon be put to the test, with around US$3.2 trillion of debt from commodities and utilities issuers due to be refinanced over the coming years.
The figure represents more than half of all outstanding debt from carbon-intensive sectors and equates to a refinancing need of about US$600bil each year through 2030, according to findings provided by London Stock Exchange Group Plc (LSEG).
The issuers analysed “may struggle to refinance maturing carbon-intensive debt,” LSEG said.
And if they do, they might “have to accept that investors may look for higher risk premia to compensate for taking on growing transition risk.”
The fear of being saddled with so-called stranded assets is increasingly giving investors pause as they try to estimate how much longer carbon-intensive sectors will remain profitable in light of ever stricter regulations curtailing greenhouse gas emissions.
Jaakko Kooroshy, global head of sustainable investment research at LSEG, said the energy transition is already “in full swing” and has “completely remade the competitive landscape.” The question is how fast it will proceed, he said in an interview.
For investors, timing the transition is key, with a newly emboldened oil and gas industry doubling down on its core business.
This week, Saudi Aramco chief executive officer Amin Nasser told participants at the CERAWeek by S&P Global conference in Houston that the transition away from fossil fuels to cleaner energy sources is “visibly failing.”
At the same event, Exxon Mobil Corp CEO Darren Woods said the world is “not on the path to meet net-zero in 2050” primarily because “nobody wants to pay for it.” And earlier this month, Shell Plc weakened its targets for CO2 cuts in the coming decade.
There’s a “huge amount of uncertainty around this transition and how it will unfold,” said Kooroshy.
However, he added that “if anybody tells you that the transition has stalled, I think you will need to take that comment with a grain of salt.”
LSEG is not making predictions about how the energy transition will unfold, Kooroshy said. Instead, it has calculated the size of what it calls carbon-intensive debt, a label that covers bonds issued by electric utilities, oil and gas producers and distributors, auto manufacturers, chemical companies, miners and airlines.
In an analysis that covered 9.3 million corporate debt securities issued since 1900, LSEG found that as of June last year high-carbon companies had US$5.5 trillion outstanding, accounting for 29.5% of total non-financial corporate debt.
Korea Electric Power Corp, Electricite de France SA, Petroleos Mexicanos, Toyota Motor Corp and BP Plc were among issuers in the group with the biggest estimated refinancing need, according to the report.
LSEG found that bonds from carbon-intensive issuers tend on average to be larger, have longer maturities and attract higher ratings.
If companies wish to take out new debt on similar terms, they will have to reckon with transition risk, said Kooroshy.
“If you issued a 20-year bond in the early 2000s in the auto industry or utility sector, the low-carbon transition wouldn’t have factored into the financing costs, but if you come in 2027 and try for a similar deal I would expect transition risk to be a prominent part of the discussion,” said Kooroshy.
“Investors will need to ask, do they understand the potential implications for the revenue streams and ability to service debt going forward in a lower carbon world.”
Refinancing risk will also become a challenge for banks, said Samu Slotte, global head of sustainable finance at Danske Bank A/S.
Oil and gas companies pose minimal credit risk in the short term; but in the longer term – if the pool of lenders willing to finance a high-carbon company starts to shrink – the remaining banks will have little choice but to roll over the company’s debt or potentially be saddled with losses, he said.
“It’s unclear how long banks will continue to finance oil and gas,” said Slotte. “There’s no imminent credit risk, but what if you can’t get out?”
LSEG also found that almost two-thirds of the US$5.5 trillion total that exists in high-carbon debt is owed by privately held companies or state-owned enterprises, both of which are often subject to much less scrutiny when it comes to reducing emissions and aligning with the Paris climate goals.
Meanwhile, the share of issuers from emerging markets – where carbon emissions are growing at the fastest rate – saw annual issuance of carbon-intensive debt increase from 4% in 2000 to 41% in 2022.
What’s more, only 20% of debt issued in 2022 was denominated in US dollars, down from 54% in 2000, while debt issued in China’s yuan accounted for one-third of the total new issuance in the same year, the LSEG analysis showed. — Bloomberg
