Developments in the Solar Corporate Bond Market

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by Corporate Bonder

The global bond market is huge. Data from the Bank for International Settlements shows that the total size of the global debt securities market (domestic and international securities) was $99.5 trillion as at June 2011, of which $89.9 trillion were notes and bonds. Governments accounted for $43.7 trillion of outstanding debt securities, financial organizations $43.8 trillion, corporations $11.0 trillion and international organizations $1.0 trillion.

Against that, Bloomberg has estimated that there are $230bn outstanding of fixed-interest securities that meet their “green bonds” definition. And of course the IEA talks of $1 trillion of investment a year needed for the global shift to a low-carbon economy.

The Solar Corporate Bond Market

There’s been a lot commentary on the collapse in the solar market and the accompanying share prices of solar companies. In this first of what we plan will be a quarterly market update we’ll have a look at the bond market for the solar industry and how it has been affected by market developments.

To illustrate the state of the market we found three solar companies that have issued corporate bonds and another five with convertible bonds outstanding. The bonds are listed below; they show that the market is clearly distressed, with yields on a number of bonds greater than 20%, despite a significant rally in solar convertible bonds during January. Credit spreads of greater than 1000 are typically thought of as being at distressed levels. The pricing data is as at February 7th 2012 (Bloomberg).

Table: List of bonds (convertible and conventional) issued by solar companies. Market prices trading at distressed levels.
Bond Price Yield Credit Spread
WFR (MEMC) 7.75 19 USD 84.3 11.0 950
SOLARW 6.375 16 EUR 61.5 22.4 1884
SOLARW 6.125 17 EUR 58.5 20.6 1855
REC 11% 14 NOK 97.9 12.9 912
REC 0% 16 (FRN) NOK 77 14.3 1162
REC 9.75% 18 NOK 71.8 18.2 1428
REC 6.5% 14 EUR CONVERT 60.9 38.2 2949
SPWR 4.75 14 USD CONVERT 91.8 9.0 842
SPWR 4.5 15 USD CONVERT 87 9.4 876
TSL 4 13 USD CONVERT 87.7 13.7 1289
STP 3 13 USD CONVERT 73 34.6 3356
JASO 4.5 13 USD CONVERT 84.8 18.6 1761
SOL 4.125 18 USD CONVERT 67.8 12.0 1405

REC Case Study

REC (RNWEF.PK) is a useful case study as it has publicly listed senior debt, subordinated convertible debt and listed equity which we can use to compare the performance of different parts of the capital structure. The chart illustrates the total return (rebased to 100 at 15 April 2011 when the longer bonds were issued) for all listed instruments in the capital structure.

The senior bonds have exhibited less volatility and a smaller fall in market price due to their lower risk profile than the convertible bond and the equity. Nevertheless, having lost less will be of little comfort to investors that bought the longer dated senior bonds at or around the issue price of 100, as they are now priced in the 70s. The fall in the price of the bonds reflects a substantial increase in the market’s perception of the risk in the sector and uncertainty regarding the value of solar assets. This does not bode well for solar companies looking to raise finance in the debt markets at present as the required yields are simply too high to make the businesses viable. The lowest risk solar companies in the market may be able to access markets but most companies will have to wait until yields come down and investor appetite improves before they can issue bonds.

Implications for Other Renewable Energy Companies

Corporations with solar activities amongst a much larger set of businesses (eg. integrated utilities or industrial conglomerates) are better placed to raise corporate finance for solar activities as the interest rates the market requires on these more diversified businesses are currently significantly lower.

While the solar market’s woes are unhelpful to the broader renewable energy market, many of the issues are specific to the industry and therefore should not inhibit the borrowing ability of corporations operating in other renewable energy activities. The current sovereign and financial sector malaise is a much more serious issue for broader renewable energy financing at the present time.

REC bond spreads
REC bo
nd spreads

Bryn Jones, manager of the Rathbone Ethical Bond Fund commented: “the solar market continues to suffer from a number of headwinds, however senior bonds with higher coupons or structured debt can outperform equity in more stressed conditions. As a result this could support the view for more Structured Bonds issuance within the renewable energy space.”

Corporate Bonder is a corporate bond fund manager in the London. This article first appeared on the Climate Bonds Initiative blog.


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