7 November 2022

Investors urged to vote against Sembcorp coal plant deal

The financial engineering behind Sembcorp's proposed sale of two coal-fired plants means the transaction is a "quick and dirty solution" to decarbonisation, and highlights the weaknesses of some sustainability-linked bond (SLB) structures, a think-tank has argued.

Sembcorp is a Singapore-based holding company that owns and operates an infrastructure development and energy generation business, and is also an issuer of green and sustainability-linked bonds.

In September, the company announced plans to sell its subsidiary – Sembcorp Energy India Limited (SEIL), the operator of two ‘supercritical’ coal-fired plants in India generating 2.6GW of power – to an Omani-led private consortium, Tanweer Infrastructure, for S$2.1 billion ($1.5 billion).

Sembcorp said the sale will help meet its decarbonisation targets. However, the deal is effectively funded by Sembcorp, which is to loan the money to the consortium via deferred payment notes, with payments due in 15 to 24 years, pointed out environmental think-tank, the Anthropocene Fixed Income Institution (AFII). It is urging shareholders to vote against the plans at an extraordinary general meeting tomorrow.

AFII says the nature of the sale merely shifts the ownership of thermal coal assets into private hands, with “minimal real emissions reductions”. It points out that Sembcorp will retain substantial liabilities of SEIL as well as operational influence.

AFII argues that the way in which the deal has been engineered makes Sembcorp a “shadow bank”: “Effectively, the company is acting as a lender-of-last-resort … to provide cheaper-than-otherwise-available funding to the consortium.”

AFII also disagrees that the transaction should allow Sembcorp to meet the decarbonisation targets that form the key performance indicators of its SLBs. Sembcorp has issued two SLBs with coupon step-ups of 25 basis points from April 2026, unless its greenhouse gas emissions intensity is reduced to 0.40 tCO2e/MWh by December 2025, from 0.54 in 2020.

Ulf Erlandsson, founder and CEO at AFII, told Environmental Finance: “I think this deal is a big deal. Core [to this] is that a public company lends money to a private consortium, in a very convoluted way, for the consortium to ‘buy’ the coal assets of the public company.

“Moreover, the deal seems to have been engineered to get out of paying SLB step-ups.”

AFII argued that the emissions from the coal plants should still form part of Sembcorp’s emissions until the loans have been fully repaid.

It urged bondholders to “challenge Sembcorp on how Sustainability Performance Targets should be calculated”.

“The SEIL transaction illustrates a potential weak point with current SLB structures: less well-calibrated targets can drive incentives to divest rather than decommission: a company could opt for a quick-and-dirty solution rather than a longer-term, credible option, in order to reach targets and not experience detrimental changes in bond interest rates.

“We are of the opinion that more work needs to be done in terms of SLB conditionalities linked to changes in the corporate structure.”

“Any lender to Sembcorp will have to consider that their lending will provide liquidity to a coal financing entity,” it added.

Temasek is reportedly the largest Sembcorp shareholder, with a 49% stake, and the next largest shareholders are Vanguard Group, Norges Bank, BlackRock and PineBridge Investments.

“It would be unfortunate if shareholders make a decision on the upcoming extra general meeting that would put them at risk of being in breach of internal coal financing exclusion guidelines or sustainability targets,” added Erlandsson.

A Sembcorp spokesperson told Environmental Finance that the results of its' EGM will be posted on the Singapore Exchange and on Sembcorp’s website by this evening. Sembcorp commented: "The sale of SEIL underpins Sembcorp’s brown to green transformation strategy and also progresses us towards one of our 2025 targets – the reduction of our greenhouse gas emissions intensity to 0.40 tonnes of carbon dioxide equivalent per megawatt hour (tCO2e/MWh) from 0.54tCO2e/MWh in 2020. Our commitments to our stakeholders, including our bondholders, are very clear and are not subject to interpretation. Every step we take advances us towards the transition of our portfolio, underscoring our conviction to meeting our commitments."