Ten dodgy fossil fuel deals hurting the banks

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The demise of the fossil fuel industry just got real for Australia’s big banks. Having provided the debt that fueled the last big fossil fuel boom, the likes of ANZ, CommBank, NAB and Westpac now find themselves exposed to projects that are both environmentally and financially toxic, as markets for fossil fuels tumble and the world looks to implement the Paris climate change agreement.

#1 Wiggins Island Coal Export Terminal

The Wiggins Island Coal Export Terminal (WICET) was originally planned by Glencore and its seven project partners way back in 2008, when the project was approved as an 84 million tonne per year export facility. But only one of the three stages of the project ultimately went ahead – albeit at twice the initial cost. Since then, three of the project’s proponents – Caledon Coal, Bandanna Energy and Cockatoo Coal – have all gone into administration.

Caledon went into liquidation on 31 July 2017, leaving the five remaining owners to repay the debt. In April 2018, Nomura bought $81 million of Caledon’s preferred shares in WICET at a price of less than 60 cents in the dollar, demonstrating just how little the market thinks of the asset.

Export charges at WICET are up to five times more expensive than other ports and the five remaining partners have to pay for the unused capacity. So while the port is operating well below capacity, these tough contract terms are keeping it afloat for now. But with mounting pressures on the remaining counterparties, the project looks shaky at best.

In October 2016, Lloyds Bank sold its $148 million worth of WICET debt at a reported loss of 21%, in a move the AFR called “the first crack in WICET’s lending group, who are sitting on steep paper losses about five years after committing to the project.” 

Negotiations for several refinancing proposals fell over, with banks unwilling to accept worse terms than the original deal. In March 2018, the 20 lenders – owed a combined $3.5 billion on WICET – reportedly agreed to provide a ‘financial lifeline’ to the project. The deal essentially extends the debt deadline, but this doesn’t deal with the problem: the port’s high costs and low export volumes.

In July 2018, news reports revealed that WICET was facing possible legal action from the some of the junior lenders who provided around A$550m of the Wiggins Island Preferential Shares (WIPS) in the original financing of the project. They claim they are owed around A$40m in unpaid dividends.

ANZ is the most heavily exposed Australian bank to WICET, having provided $417m worth of project finance in 2011. That deal also saw CommBank, Westpac and NAB each chip in $164m, meaning that all of our big banks are tied to the misfortunes of this dodgy coal port.

#2 Peabody Energy

Coal mining in Queensland’s Bowen Basin, where Peabody operates six mines.
Credit: Greenpeace/Tom Jefferson

On 13 April 2015, Peabody Energy filed for Chapter 11 bankruptcy protection under US law, unable to service its $8b of debt. Peabody was the world’s biggest privately-owned coal producer, but these days that’s not a great claim to fame, with the industry experiencing rapid structural decline.

Throughout 2015, Peabody suffered an annual loss of over $2.5b and saw its share price plummet some 97%. Before its bankruptcy announcement, the company’s corporate debt was trading in some instances of less than 1% of what it was issued at.

Australia’s big banks may be caught up Peabody’s demise, with CommBank, NAB and Westpac each having contributed to $49m to facilitate Peabody’s purchase of Macarthur coal in October 2011. Since then, the debt has been downgraded by both major ratings agencies – Moody’s and Standard & Poor’s – to ‘very high’ and ‘substantial’ risk ratings respectively. Although Peabody’s Australian operations are supposedly continuing unchanged, their opaque corporate structure means it’s difficult to tell what effect a restructure brought on by Chapter 11 proceedings will have.

Westpac, ANZ and NAB are also reported to have loaned $25m each to Peabody’s head operations in North America, and major question marks now hang over just how much of that debt will be recoverable. According to the AFR, “ANZ is believed to have written off its exposure to Peabody’s North American headstock, while Westpac has on-sold its debt.”

Reports ahead of an expected record profit from Commonwealth Bank in August 2016 also highlighted a $72 million loss that the bank was expected to suffer as a result of its Peabody exposure. For an industry driven by massive profit motives, even skimming this loss from the bank’s margin will have hurt.

Despite being exposed to losses from debt to Peabody, NAB has continued to support the coal miner with its plans to expand the Wambo coal mine in New South Wales. In February 2015, NAB facilitated an intercompany loan between Peabody and its Australian subsidiary, which it is being claimed puts Peabody in a strong enough fiscal position to proceed with the expansion of the mine. This support is at odds with NAB’s commitment to help hold global warming to below two degrees.

See how the big banks are shaping up against their commitments on global warming here.

#3 Adani Abbot Point Coal Port

Adani’s Abbot Point terminal was hit with a credit rating downgrade in March 2016,  leaving it just one notch above ‘junk’ status. Despite destructive plans to expand the port to accommodate coal from the Galilee Basin, the economic outlook for Abbot Point port is a gloomy one, with the amount of coal contracted to be shipped via take-or-pay contracts predicted to fall rapidly from 2020.

Analysis from IEEFA suggests the coal terminal ‘runs the risk of becoming a stranded asset’ if Adani’s Carmichael project doesn’t go ahead. The port needs to refinance $1.5 billion of debt in 2018, and over $2 billion by 2020. Without the promise of extra capacity being taken up by Carmichael coal, and considering the big four Australian banks’ aversion to the project, securing this refinancing has proven difficult.

Reports from 2014 and 2016 also show that Adani has been unsuccessfully trying to sell a stake in the port for years. In 2018 they appointed investment bank Rothschild to advise on the sale. 

While Adani hasn’t yet found anyone foolish enough to buy a stake in Abbot Point, it has been successful in refinancing part of the debt linked to its purchase.

After a desperate almost year-long search Korean asset manager Mirae Asset Daewoo bought $330 million worth of Adani’s $2billion debt, with the aim of on-selling it to Korean insurance companies and other investors.

Find out which companies could make or break Adani’s Carmichael plans.

Abbot Point coal terminal in the Great Barrier Reef World Heritage Area
Credit: Greenpeace/Tom Jefferson

#4 Whitehaven Coal

Maules Creek project blockade 2013
Leard State Forest, NSW

As a pure-play coal company, Whitehaven’s fortunes have no insulation against the structural decline of the industry, which saw the company’s market value drop more than 90% from its April 2011 peak to 2016.

Whitehaven owns and operates one underground and four open-cut coal mines, including Maules Creek. Having destroyed part of NSW’s Leard Forest, the Maules Creek project has faced strong and sustained community opposition because of its horrific environmental impacts. All four  coal mines  breached their licence conditions most years between 2010 and 2016 by exceeding coal dust pollution levels and polluting waterways. In 2017 the EPA upgraded Maules Creek to its highest risk category.

Despite Whitehaven’s obvious struggles and lack of social license to carry on its operations, the company attracted a $1.4b refinancing loan announced in March 2015, with ANZ, NAB and WBC each contributing $100m. Just a few months later, it was reported that nervous lenders were already looking to exit the deal, with the huge risks associated with exposure to the coal industry finally beginning to sink in for at least one bank.

Whitehaven’s appalling environmental record has been highlighted in the media, and the company wants to expand its coal mining operations at the expense of the local environment and global efforts to halt climate change. Yet ANZ, NAB and Westpac all decided to arrange a $1 billion, two year extension to a corporate financing deal for Whitehaven in August 2017.

#5 Newcastle Coal Export Port

As the world’s biggest coal export port, Newcastle’s fortunes are dangerously linked to the fortunes of the coal sector.

The Newcastle Coal Export Terminal (NCET) is one of three terminals at Newcastle, and is owned and operated by the Newcastle Coal Infrastructure Group (NCIG), which is in turn owned by a group of coal producers including BHP, Yancoal, Whitehaven and Peabody.

NCIG was placed on review for downgrade in December 2015, with Moody’s analyst Mary Anne Low stating that “the sustained weakness in coal prices and the uncertain duration of the downturn is increasing the likelihood of counterparty failure and consequent volatility in NCIG’s cash flows”. That rating downgrade took place in June 2016, with the group’s debt downgraded to “junk”. The downgrade followed a failed attempt by NCIG to refinance $500 million of its debt. BHP Billiton also failed to refinance $500 million of its debt, with banks apparently less willing to lend to the sector in the face of its poor outlook.

In 2016 the terminal project (NCET) was reportedly seeking a refinancing deal for its $3.5b worth of loans.

In August 2018 it was announced that the port’s debt had been refinanced by a syndicate of ten lenders which included ANZ and Commbank. A newcomer to the syndicate included NAB.

NCIG has attracted over $2 billion of finance from Australia’s big four banks over the years. Back in January 2008, ANZ provided $388 million to enable the initial construction of the NCIG terminal, along with a further $138 million loan for the post-construction phase.

Through 2010 and 2011 the terminal was expanded over two stages, attracting a total of $569m from ANZ, $461m from CommBank and $241m from NAB. Some of the debt for the terminal’s expansion was refinanced in March 2014, with ANZ chipping in $294m and NAB providing $102m.

Coal reclaimer at Port of Newcastle
Credit: Max Phillips (Jeremy Buckingham MLC)

#6 Dalrymple Bay Coal Terminal

Dalrymple Bay Coal Terminal
Hay Point, Qld
Credit: Greenpeace/Tom Jefferson

Dalrymple Bay is yet another example of an Australian coal port under extreme pressure from the industry’s downturn. Moody’s in March 2016 downgraded Dalrymple’s credit rating to non-investment grade. That was before Peabody’s bankruptcy announcement, which would have sent further shivers through Dalrymple – Peabody produces a quarter of all coal shipped from the port!

With the future of Peabody’s Australian operations uncertain, and fellow Dalrymple user Anglo American selling its Australian coal mines, you’d think the coal port’s creditors would be getting worried, right? Apparently not.

After each loaning $50m to Dalrymple Bay in September 2014, ANZ and Westpac had an opportunity to cut ties in July 2016. But instead of seeing the warning signs provided by the ratings downgrade and Peabody’s bankruptcy, the two banks became lead arrangers for a $350m refinancing deal, with reports they will underwrite the debt themselves.

#7 Origin – APLNG

Origin’s APLNG project is one of three massive, high-cost LNG facilities built on Queensland’s Curtis Island. With a whopping price tag of $24.7b, APLNG was a bullish bet on huge future LNG demand from the likes of Japan, Korea and China. This hasn’t eventuated, with China’s demand remaining steady and Japan and Korea’s actually declining in 2015-16.

With an extra 100 million tonnes of LNG due to flow from new projects into the global market, prices were pushed to less than a quarter of what they were in early 2014. The spot price of around US$4.50 per unit was so low that APLNG exports couldn’t cover its operational and financing costs.

In further bad news for the LNG sector, Japan investigated the legality of purchase contracts that block the on-sale of LNG to other countries. Worth an estimated $800 billion, these contracts may have to be renegotiated at a time when prices are extremely low, giving purchasers much more bargaining power than producers. With massive oversupply predicted, new contracts could even see Japan soon become a net exporter of LNG.

After downgrades in 2015, both major ratings houses – Moody’s and Standard & Poor’s – listed Origin at just above junk status in 2016. Reports suggested Origin was looking to separate its oil and gas production arm from its domestic power business in a bid to prevent further downgrades.

Australia’s big banks are all heavily exposed to Origin. In September 2011, ANZ and NAB each contributed $250m to a corporate financing deal, while each of the big four participated in the APLNG project financing in May 2012. That deal saw ANZ stump up $359m, Westpac $307m, and NAB and CommBank $256m each. As if these numbers weren’t big enough, NAB, ANZ and CommBank each contributed a further $200m in a December 2014 refinancing.

APLNG, GLNG and QCLNG plants at Gladstone in the Great Barrier Reef World Heritage Area
Credit: GreensMPs

#8 Santos – GLNG

Santos’ GLNG project, also residing on Curtis Island in the Great Barrier Reef World Heritage Area was written down to the tune of $565m in 2015 from approximately $10b. This impairment charge contributed to Santos’ massive total $2.7b loss throughout 2015. And the project’s fortunes have only gone downhill since then, with a further writedown of almost $2b announced in August 2016.

GLNG is supplied by Santos’ highly controversial coal seam gas (CSG) projects in Queensland’s Bowen and Surat Basins. As more is being understood about the serious risks posed by CSG production, community opposition is mounting, leading to a moratorium on the practice in some Australian states.

On top of this, Santos’ proposed Narrabri CSG project has hit a number of stumbling blocks including strong community opposition. The Narrabri project was written down by $800m to $500m in 2015, before Santos announced in February 2016 it had written down the total value of its NSW assets to $0.

When GLNG was originally financed in 2011, ANZ contributed $305m and NAB and CommBank each chipped in $132m. In December 2014, ANZ also provided a $1b bilateral bank facility to Santos to help restructure the crippling debt obligations imposed by GLNG, Narrabri and other struggling projects.

Community opposition to CSG in NSW
Credit: Lock the Gate Alliance

#9 Aurizon

Uncovered coal wagons
Hunter Valley, NSW
Credit: Bob Burton

As the owner and operator of coal and iron ore rail systems, Aurizon is inextricably linked to the fortunes of those industries. In fact, almost 70% of the company’s revenue in 2015 was derived from coal-related business. Recognising this level of dependence on ailing coal producers is far from a healthy business model, a Moody’s review of Aurizon in 2016 confirmed their ‘moderate credit risk’ rating and noted a negative outlook.

With many of Aurizon’s coal-producing clients – including Cockatoo, Peabody and Whitehaven – struggling to hold on through the industry’s structural decline, the flow-on effect to Aurizon’s bottom line saw the company’s net profit for the year ending June 2016 drop to $72m, a massive 88% less on the previous year.

Australia’s big four banks all participated in an Aurizon refinancing deal in 2013, which is due to be repaid in 2018. NAB and CommBank each contributed $236m, while ANZ and Westpac loaned $143m apiece.

#10 Dodgy deal in the pipeline

The North East Gas Interconnector proposes to link Tennant Creek in NT to Mt Isa in Queensland, effectively hooking NT gas reserves into the eastern gas market. The contract to construct and operate the pipeline was controversially awarded to Chinese- and Singaporean-owned Jemena, giving the company an unregulated monopoly over the project. Construction of the $800m pipeline began in July 2017.

In 2016 the ATO was asked to investigate Jemena over a potential tax avoidance system that could cost Australia $500 billion over 35 years.

Doubts over just how much gas will actually be supplied from NT reserves forced the company to reduce the size of the proposed pipe. Growing wariness over unconventional gas extraction and lower than expected demand have led many to question the necessity of the pipeline, but politicians continue to push it as a ‘nation-building’ project.

The $800m project is backed by Chinese and Singaporean state-owned power companies, and has not sought any debt finance from Australia’s banks. But this is yet another example of a dodgy fossil fuel project could lock in oversupply and slow down the transition to clean energy sources – all without providing any financial benefit to Australia.

Land clearing for coal seam gas pipeline, Qld
Credit: Max Phillips (Jeremy Buckingham MLC)

…And one that’s already gone bad

Callide C coal-fired power station, QLD

Callide C, the fourth largest coal-fired power station in Queensland, went into receivership in July 2016 after failing to meet a $50m debt repayment deadline. The debt stemmed from a package worth around $350m provided in June 2012.

Having loaned $125m, NAB was by far the biggest player in the deal, which also involved four international banks. Since then it appears US private equity firm KKR have taken over Bank of Scotland’s share of the debt, while some redistribution amongst the lenders may have occurred.

While this financial distress won’t stop the power station from running in the short term, the lenders will now need to work out how to handle the insolvency of the plant’s owners. NAB and co could find themselves the proud owners of a loss-making coal-fired power plant.

Whatever the outcome, it’s a messy future for the banks who backed this dirty coal power plant, which should serve as a lesson for any bank considering their involvement in the sector.