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The investor base for loans to Australia's coal sector is changing rapidly as more banks step back from carbon-intensive industries to meet their sustainability goals.

Recent refinancings for Port of Newcastle, the world's largest thermal coal export port, and the Loy Yang B coal-fired power plant in Victoria show that the sector is becoming increasingly reliant on a narrower group of lenders as the focus on environmental, social and governance factors upends long-standing relationships. Both deals took several months to close, underlining the challenges facing Australian borrowers in a sector with about US$13bn of loans due to mature by the end of 2023.

“The ESG movement is strong and it’s very challenging to fight against it,” said a Sydney-based banker at an Asian bank. “Banks are competing for green credentials and keen to promote how ‘green and clean’ they are. It’s difficult to book new assets, particularly in thermal coal.”

Four existing lenders to PON – ANZ, DBS Bank, MUFG and Mizuho Bank – declined to participate in its new deal, a A$666m (US$514m) refinancing that included A$515m of sustainability-linked debt.

New lenders joining PON’s refinancing were Agricultural Bank of China, China Everbright Bank, China Merchants Bank, Citigroup and First Commercial Bank, accounting for A$365m combined, or nearly 55% of the overall deal.

Meanwhile, three of Loy Yang B’s existing lenders – Intesa Sanpaolo, Sumitomo Mitsui Banking Corp and United Overseas Bank – dropped out from the A$440.5m refinancing for the 1,100-megawatt power plant, even at richer pricing than the original loan from December 2017.

Loy Yang B, which is owned by Alinta Energy, a unit of Hong Kong-based Chow Tai Fook Enterprises, closed the refinancing last month with a syndicate of seven banks, including three Chinese banks that were first-time lenders to the project.

"Banks’ standards on what’s bankable and what’s not are constantly evolving," said another Sydney-based banker at an Asian bank. "What may have seemed possible a couple of months ago, may no longer be today."

Inconsistent approach

The two loans also reveal a lack of common standards in lending to coal-related businesses.

While some banks welcomed the structure of PON's refinancing – with targets linked to emissions reductions and a green tranche aimed at energy-efficient building projects and diversifying the port's revenue base – others shied away because of its exposure to the coal sector, which represented nearly 90% of shipments last year. Some bankers away from the transaction also raised concerns that a SLL for a coal port could risk hurting the credibility of the product, which is still in its infancy.

The sustainable portion was more popular: of the 11 lenders participating in the financing package, only three took exposure to the non-SLL tranches.

Others were wary that the deteriorating ties between Australia and its biggest trading partner, China, would hurt the business. China has refused to grant customs clearance for Australian coal imports since October amid an intensifying diplomatic row.

Chinese banks, however, now make up six of the 11 banks in the new syndicate for PON, versus three of 10 for the 2018 financing.

Loy Yang B's refinancing told a similar story. Some banks were unable to participate because of their internal policies around coal financing, but ANZ and DBS – both of which declined the PON deal – were happy to participate in Loy Yang B's refinancing despite its high emissions profile.

BOC, China Everbright Bank and China Minsheng Bank were the mandated lead arrangers and bookrunners, with China Merchants Bank and Standard Chartered Bank joining ANZ and DBS at the lower levels.

Chinese support

The heavy presence of Chinese banks in both loans is not surprising given the parentage of the borrowers. PON counts China Merchants Port Holdings as a 50% shareholder, while Hong Kong-based Chow Tai Fook Enterprises owns Alinta Energy, which acquired Loy Yang B in 2017.

Two more loans in the market are expected to attract Chinese banks – a US$400m refinancing launched in early April for Yancoal Australia, the country’s largest pure-play coal miner, and a new borrowing to replace Millmerran coal-fired plant's project financing from 2018.

Chinese state-owned coal miner Yankuang Group is the ultimate parent of Yancoal Australia, while another state-owned power producer, China Huaneng Group, is one of the shareholders in Millmerran.

BOC and Citigroup are leading Yancoal Australia’s refinancing.

“The risks of doing coal-related financings will get higher in the coming years as fewer banks will be able to do such deals,” said a Hong Kong-based banker at an Asian bank. “These borrowers, especially for those in developed countries, will have more difficulties raising funds.”

Meanwhile, Japanese banks – historically among the biggest lenders to the coal sector – have also been paring back as they come under increasing scrutiny. Mizuho, MUFG and SMBC have all announced plans to phase out coal financing, joining other global peers such as HSBC and Singapore’s DBS Bank. ANZ announced in November that it will no longer bank any new business customers with more than 10% of thermal coal exposures, down from the previous 50% threshold.

“Lending to the coal sector is subject to criticism and this is not something we want to proactively pursue,” said a Tokyo-based banker at a Japanese bank. “Large Japanese investors are negative towards the sector and if we cannot sell down to investors, we would not take risks even if it’s a refinancing.”

“When banks are looking to reduce their coal exposures, they are naturally going to cut back from the offshore markets before their home markets,” said a Sydney-based banker at a European bank.

Some banks are not only avoiding the obvious areas such as coal-fired power plants and thermal coal mines, but also exiting related infrastructure or services including mining services and rail with coal haulage operations, the banker said.

Coal-terminal operator, North Queensland Export Terminal, formerly known as Adani Abbott Point Terminal, has been facing funding challenges. In March, Standard & Poor’s downgraded the company to BB− from BB+, citing refinancing risks.

Its Indian conglomerate parent Adani Group was in talks with State Bank of India last year for a loan to finance its controversial A$16.5bn Carmichael coal mine and rail project in Queensland. SBI was set to offer a Rs50bn (US$679m) loan to Adani’s Aussie mining business, renamed as Bravus Mining & Resources, according to Indian media reports. As at the end of last year, at least 90 organisations – including finance, transportation and insurance firms – had declared they would not continue their ties with the project.

((Mariko Ishikawa: +612 9321 8179, mariko.ishikawa@refinitiv.com, Twitter: @LPCLoans; Additional reporting by Apple Li and Wakako Sato))

(Editing by Prakash Chakravarti, Chris Mangham and Steve Garton)