Large scale solar sector a key area in OCBC Malaysia’s sustainable financing

This article first appeared in The Edge Malaysia Weekly, on November 23, 2020 - November 29, 2020.
OCBC Malaysia was the sole principal advisor and lead arranger for the first Asean Sustainability SRI sukuk to finance a 50mw brownfield solar project in Kedah

OCBC Malaysia was the sole principal advisor and lead arranger for the first Asean Sustainability SRI sukuk to finance a 50mw brownfield solar project in Kedah

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UNDOUBTEDLY, sustainable financing, particularly in the area of renewable energy, has been gaining ground in Malaysia of late as the country looks to increase its renewable energy mix to 20% by 2025 from 2% last year.

OCBC Bank (Malaysia) Bhd (OCBC Malaysia) is one of a growing number of lenders placing emphasis on such financing.

The bank, a subsidiary of Singapore’s second largest banking group by assets, Oversea-Chinese Banking Corp Ltd (OCBC Group), first started financing renewable energy generation projects in 2012.

“While financing solar photovoltaic (solar PV) plants remains one of the cornerstones of our initiative, other forms of renewable energy ventures such as waste-to-energy and biogas projects also feature prominently in our portfolio,” Jeffrey Teoh, managing director and head of corporate and commercial banking, tells The Edge.

“Further down the value chain, we have also positioned ourselves to lend support for our customers in realising their respective sustainable journeys as more corporates and individuals participate in generating clean energy under the government’s Net Energy Metering (NEM) scheme,” he adds.

NEM is a mechanism that allows eligible consumers to install a solar PV system that produces energy for their own consumption. The excess energy generated is exported to the Tenaga Nasional Bhd grid and will be turned to credit that may be used to offset part of their electricity bill.

According to Teoh, financing the large scale solar (LSS) sector is a core component of OCBC Malaysia’s domestic sustainability initiative.

“Our involvement in financing the LSS sector cuts across the industry’s value chain, ranging from contract financing facilities for engineering, procurement and construction (EPC) works to long-term project financing for LSS developers. We have deployed an assortment of solutions from our product spectrum, from small-scale bilateral loans right up to capital market issuances in the past, and are bullish on sustaining this momentum for upcoming LSS programmes in the future,” he says.

His colleague Tan Ai Chin, managing director and senior banker of client coverage and head of investment banking, shares that the bank has pioneered several award-winning green and sustainable financing transactions in support of the development of the renewable energy sector in Malaysia.

Watershed year

Last year was a watershed year for OCBC Malaysia’s foray into LSS financing, says Tan.

That year, OCBC Malaysia led a consortium of lenders in financing an LSS plant in Perlis. It arranged a RM150 million facility to part-finance the development of a 30mw solar plant, which, coincidentally, was the first green loan syndication in Malaysia.

“Subsequently, we were the sole principal adviser and lead arranger for the first Asean Sustainability SRI (sustainable and responsible investment) sukuk to finance a 50mw brownfield solar project in Kedah,” she says.

And then in October, OCBC Malaysia concluded yet another LSS financing deal, also via the capital markets. It was the sole principal adviser, lead arranger and lead manager for a RM260 million Asean Green SRI sukuk issuance to refinance an existing 50mw plant in Negeri Sembilan.

“Our continuous efforts in promoting sustainable financing in partnership with our clients to support their ESG (environmental, social and governance) agenda and best practices has put OCBC Group among the key leaders in sustainable financing within Asia-Pacific,” notes Tan.

OCBC Group, whose key markets are Singapore, Malaysia, Indonesia and Greater China, aspires to expand its sustainable financing portfolio to US$25 billion by 2025.

“OCBC Malaysia is expanding its sustainable finance portfolio based on the strategic direction set by the group. We intend to make the most of the opportunities available to us in Malaysia in order to contribute to being a leading proponent within the group for all of us to achieve this vision,” Teoh says.

LSS financing is one of the areas that the group has chosen to focus on to reach that goal.

“Our familiarity with the industry has equipped us with the capability to structure customised financing solutions that meet the specific requirements of our customers in order for them to achieve their financing goals,” Tan says.

“Our understanding of project risk mitigation enables us to execute end-to-end packages such as providing bridging facilities as an interim funding measure for an awarded project, while simultaneously establishing a sukuk programme as a long-term solution,” she adds.

This is not to say there are no challenges or issues in financing LSS projects.

“[With LSS] being a matter which is largely governed by state and/or local governments, compliance with the differing land laws and ensuring that the necessary approvals are obtained from the state authorities for the development of the project is one of the issues — which we have seen to be a consistent complication for many LSS projects,” Teoh shares.

“And on the technical front, we must assess the completion risk of the project by the reviewing the track record and capability of the appointed engineering contractor. This also extends to studying the proposed equipment specifications and technical knowledge of the project consultant to ensure that the project is economically viable,” he adds.

Indeed, across the region, increasing awareness of sustainable financing, as well as a strong regulatory push in the same direction, have been key drivers in helping banks achieve their sustainability agendas.

“In Malaysia, the development of LSS power projects via the Energy Commission’s LSS scheme is part of the government’s efforts to increase the country’s renewable energy mix from 2% to 20% by 2025, and we have seen tremendous interest from banks and institutional investors to finance these projects in order to spearhead a movement towards responsible investing,” Tan observes.

In the OCBC Malaysia context, sustainable financing involves renewable energy project financing, green/ social/ sustainable loans and bonds, as well as sustainability-linked financing.

“By virtue of the projects’ nature, LSS is a prime candidate for us to pursue that can meet the criteria for these categories, but having said that, there are also other sectors that we do actively pursue. For example, this year, we had also arranged the world’s first Islamic syndicated sustainability-linked facility, which evidences our focus towards not just renewable energy-driven financing but also bringing value to our corporate clients that wish to further their own sustainability agenda,” Tan says.

Untapped ESG opportunities

PwC Malaysia, in a report released this month, highlights that there are untapped ESG opportunities in Malaysia, given how penetration of renewable energy is still far from target.

“Malaysia is behind other countries when it comes to the penetration of renewable energy, electric vehicle sales and construction of green buildings. This is worrying as electricity, transport and construction are among the top greenhouse gas (GHG)-emitting sectors in the country,” it says in the report, “Rethinking ESG in a post-Covid-19 World”.

Investment in these areas is crucial to offset Malaysia’s growing GHG emissions, which have doubled in the 20 years from 1997 to 2017, it adds.

Banks play a crucial role in making a difference through their financing.

According to Tan, OCBC Malaysia is committed towards not financing any new coal-fired projects moving forward, a testament to its sustainability goals.

Asked if he expects Malaysia to meet the 20% renewable energy target by 2025 considering that it is not too far off, Teoh says: “The introduction of self-consumption guidelines by the Energy Commission for solar PV installation is expected to be a key driver in increasing adoption rates for renewable energy consumption, as consumers can hedge against the rising cost of electricity by having a higher degree of control on the generation aspect.

“In future, energy consumers have the freedom of choice to invest in generating sufficient energy for their own consumption. We view the mass adoption of rooftop solar PV technology to be a potentially considerable contributor towards Malaysia’s quest to achieve the target of 20% renewable energy mix by 2025,” he adds.

For the financial year ended Dec 31, 2019 (FY2019), OCBC Malaysia reported a record-high net profit of RM954 million, which represented a 17% year-on-year increase. The increase was underpinned by a 9% growth in total income, which was derived mainly from higher gains on disposal of financial investments and stable net interest income.

Based on the unaudited interim financial statements posted on its website, 1HFY2020 net profit stood at RM306 million, a y-o-y decline of 26%. It said this was mainly due to the higher impairment allowances of RM163 million stemming from higher expected credit losses under worsened market conditions brought about by the Covid-19 pandemic. Total income for the period grew by a marginal 1% (or RM18 million), which came mainly from a 36% (RM26 million) increase in trading income and higher gains on disposal of financial instruments.

As at June 30, its total assets stood at RM97.07 billion while its gross lending portfolio book stood at RM69.74 billion, the biggest component of which was housing loans (RM23.82 billion).

OCBC Malaysia currently has 42 branches, of which 9 are that of OCBC Al-Amin Bank Bhd, its Islamic banking subsidiary.



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