REC Limited, India's state-owned power lender, has issued its first green bond in Japanese yen. Leap records it as an $18.55 million deal, which looks small for a company of REC's size and a market of Japan's depth. It is small, because it is only one tranche. The full yen issue is worth about $420 million, and the way it is split says a lot about what investors wanted.
Key takeaways
- REC Limited issued its inaugural Japanese yen-denominated green bond, announced on 12 January 2024, including a 10-year tranche with a face value of $18.55 million.
- REC Limited's first yen green bond issue totals about $420 million across three tranches: $212.97 million over five years, $188.24 million over 5.25 years and $18.55 million over ten years.
- The five-year tranche of REC Limited's yen green bond carries a coupon of 1.76 percent, and the 5.25-year tranche a coupon of 1.79 percent.
- REC Limited issued the yen green bonds under its $10 billion Global Medium Term Notes Programme, with DBS Bank, Mizuho, MUFG and SMBC Nikko as joint lead managers.
- Proceeds from REC Limited's yen green bonds will finance eligible projects under its Green Finance Framework, in line with the Reserve Bank of India's External Commercial Borrowings guidelines.
Why does Leap record this bond at $18.55 million?
Because Leap records each tranche separately, and this record is the 10-year one. A tranche is a slice of a single bond issue with its own maturity and coupon. Splitting an issue lets the borrower meet investors who want different holding periods without running separate deals.
REC's yen issue has three slices. The five-year tranche is $212.97 million and the 5.25-year tranche $188.24 million. The 10-year tranche, the one in this record, is $18.55 million. Added together they come to about $420 million. A headline figure of $18 million describes one part of the issue, not the whole. The full figure is about 23 times larger.
All three tranches were issued under REC's $10 billion Global Medium Term Notes Programme. A medium term note programme is a standing framework, documented once, under which a borrower can issue bonds in different currencies and maturities as market windows open. It lets a borrower move quickly when demand appears, without drafting a new prospectus for each deal. This was the first time REC used it for yen-denominated green debt.
The bonds are denominated in yen. Investors pay in yen and receive interest and principal in yen. Unless REC hedges it, the yen exposure on the debt sits with REC. The issue was expected to settle on 19 January 2024.
What does the tranche split say about investor demand?
It says investors wanted short and medium paper, not long. The two tranches of five and 5.25 years make up about 95.6 percent of the issue. The 10-year tranche is about 4.4 percent.
The coupons tell a similar story. The five-year paper pays 1.76 percent and the 5.25-year paper 1.79 percent, three basis points more for three extra months. Leap does not record a coupon for the 10-year tranche. What the sizes show is that REC placed only a small amount at ten years. Whether that reflects limited appetite, a higher cost REC chose not to pay in size, or a deliberate test of the long end is not stated.
For REC, coupons below 2 percent are part of the attraction. For Japanese investors, a green bond from a state-owned Indian lender offers a yield on yen paper with a defined environmental use of proceeds.
Where will the money go?
It goes to projects that qualify under REC's Green Finance Framework, within limits set by the Reserve Bank of India. A green finance framework is the rulebook a borrower publishes to define what its green bond proceeds may fund.
REC's framework is broad. It covers solar, wind, bioenergy, hydropower including pumped storage, geothermal and green hydrogen. It also covers transmission dedicated to renewable energy, energy storage, energy efficiency, waste-to-energy and clean transport such as electric vehicles and charging. It even includes financial assistance to power utilities to meet their Renewable Purchase Obligations, the targets that require them to buy a share of their power from renewable sources.
That breadth fits REC's role. Formerly the Rural Electrification Corporation, it is owned by India's Ministry of Power and registered with the Reserve Bank of India as a non-banking finance company and infrastructure finance company. It lends to central and state utilities, state electricity boards, rural electric cooperatives and private developers. Proceeds from a green bond issued by REC flow through its loan book rather than into a named project.
Enerdatics' data shows that Leap records six bond financings in India across 2023 and 2024, and four of them belong to REC. Three are the tranches of this yen issue. The fourth is a $750 million REC bond from May 2023 recorded without a structured amount. The two non-REC bonds, from NABARD at about $125 million and SAEL at about $161 million, total about $286 million together, well short of the roughly $420 million REC raised in yen alone.
What does the deal signal for Indian green finance?
It signals that Indian state lenders are widening the pool of currencies they borrow in to fund the energy transition. A first yen green issue opens a market REC can return to, and the near 96 percent weighting towards five years shows where that market's appetite sits for now.
Multi-tranche green issuance is now a standard tool for large energy borrowers, as shown by E.ON's six bond tranches in seven months. Debut green bonds from state-linked issuers draw particular attention to how the money is used, as in where Masdar's first green bond is going. And as India's operating renewable assets change hands, as in IndiGrid's purchase of a ReNew solar plant, the debt side of the market is drawing in new currencies as well.
The open question is how much of REC's next yen issue it can place at ten years. This one put less than 5 percent there.
Frequently asked questions
How large was REC Limited's yen green bond? About $420 million across three tranches. Leap's record for the 10-year tranche shows $18.55 million, which is one part of the issue.
What coupons did REC Limited pay on its yen green bond? The five-year tranche pays 1.76 percent and the 5.25-year tranche 1.79 percent. No coupon is recorded for the 10-year tranche.
Who managed REC Limited's yen green bond? DBS Bank, Mizuho, MUFG and SMBC Nikko were joint lead managers.
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