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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.
— Market Forces (@market_forces) May 17, 2016
In May 2016, Westpac revealed lower than expected cash profits of $3.9 billion, having added $252 million to it’s bad debt charge for the quarter. According to CEO Brian Hartzer, these “higher impairment charges related principally to four large exposures,” and commentators have pointed to Peabody Energy and Wiggins Island Coal Export Terminal (WICET) as likely offenders.
Just a few days later ANZ announced a 24% drop in profits in the six months to March, with its cash profit coming in at $2.8 billion – some $800 million less than expected. The bank is now provisioning a massive $918 million for bad debts, citing “weakness associated with low commodity prices in the resources sector and in related industries.” According to Fairfax, ANZ is facing particular problems from its big business lending, pointing to Peabody as a “major ANZ client culprit.”
Bad debt charges cost NAB $341m for the quarter, although this was slightly less than the same time last year, when they were forced to add an overlay for bad mining and agriculture debts.
Also in May, CommBank announced it’s bad debts had increased to $6.3 billion, the highest reported since December 2014. Loan impairments cost the bank $427m during the third quarter of the 2015-16 financial year, including “a single relatively large domestic exposure with a syndicate of lenders including other Australian major banks.” Wondering what that deal could be? Take a look at the list of projects below – see if you can spot it!
At the same time, the collective public ambition to transition to a low carbon economy has never been stronger, as we begin to see some of the terrifying effects of climate change that will only worsen as the world continues warming to unprecedented levels. Politicians are slowly catching up with the rest of the world, highlighted by the Paris agreement to keep global warming well below 2°C. The carbon budget imposed by this limit means around 80% of global fossil fuel reserves must remain in the ground.
Below are ten of the worst coal and gas deals currently hanging over the Australia’s banks, threatening to leave them billions of dollars out of pocket.
#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, thermal coal markets have dried up, prices have dropped and three of the project’s proponents – Caledon Coal, Bandanna Energy and Cockatoo Coal – have gone into administration.
In September, it was reported that Caledon Coal’s administrators were looking to sell the company’s 15% stake in WICET. Caledon went into liquidation on 31 July, leaving the five remaining owners to repay the debt. Clearly the crack are showing, as lenders have been asked to take a 30% hit in a restructure deal proposed by Glencore.
Export charges at WICET are up to five times more expensive than other ports and the six remaining partners have to pay for the unused capacity, a total extra cost of $150m per annum. So while the port is operating well below capacity, these tough contract terms are keeping it afloat for now. But if the mounting pressures become too much for any of the remaining counterparties to bear, the entire project could go under.
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.”
It has also been reported that other lenders may also be looking to on-sell their loans at less than face value. In July 2016, insolvency specialists McGrath Nichol were appointed to represent the project’s lenders in negotiations to refinance its $4.1b debt. So which Aussie banks are amongst these nervous lenders?
ANZ is the most heavily exposed, 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 the dodgy coal port.
#2 Peabody Energy
Coal mining in Queensland’s Bowen Basin, where Peabody operates six mines.
Credit: Greenpeace/Tom Jefferson
— Market Forces (@market_forces) May 3, 2016
On 13 April, 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.
#3 Adani Abbot Point Coal Port
Adani’s Abbot Point terminal was hit with a credit rating downgrade in March, now sitting just one notch above ‘junk’ status. Despite destructive plans to expand the port to accommodate coal from the Galilee Basin, current forecasts for coal demand would actually see a decrease in the volume going through Abbot Point.
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 is going to be very difficult.
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 has seen the company’s market value drop more than 90% from its April 2011 peak.
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 been the target of strong and sustained community opposition due to its horrific environmental impacts.
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.
The terminal project (NCET) is reported to be currently seeking a refinancing deal for its $3.5b worth of loans.
— Market Forces (@market_forces) June 24, 2016
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 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 currently produces a quarter of all coal shipped from the port!
With the future of Peabody’s Australian operations now under a very dark cloud, and fellow Dalrymple user Anglo American currently selling it’s 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 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 recently 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 over the past year.
With an extra 100 million tonnes of LNG about to flow from new projects into the global market, prices have been pushed to less than a quarter of what they were in early 2014. The spot price of around US$4.50 per unit is so low that APLNG exports can’t cover its operational and financing costs. That’s right – this $25b mega project is currently running at a loss!
In further bad news for the LNG sector, Japan is now investigating the legality of current 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 become a net exporter of LNG in the next few years.
After downgrades in 2015, both major ratings houses – Moody’s and Standard & Poor’s – currently list Origin at just above junk status. Recent reports suggest Origin is looking to separate its oil and gas production arm from its domestic power business in a bid to prevent further downgrades. This will come as a concern for each of Australia’s big banks, who are all heavily exposed to the struggling company.
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.
#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 that it had written down the total value of its NSW assets to $0. It now seems unlikely Narrabri will ever produce the gas Santos was expecting, and questions must be raised over the company’s ability to produce the volumes of gas required to fully supply GLNG.
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.
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 last year was derived from coal-related business. Recognising that this level of dependence on ailing coal producers is far from a healthy business model, Moody’s in February conducted a review of Aurizon, eventually confirming their ‘moderate credit risk’ rating and noting 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 would have investors very worried. The company’s net profit for the year ending June 2016 was $72m, down a massive 88% percent on the previous year.
In mid-2013, each of Australia’s big four banks participated in an Aurizon refinancing deal, 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.
The ATO has been 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 have 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 our 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.