Coal funding premia: Port of Newcastle USD deal

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Port of Newcastle has issued an inaugural US dollar bond at yields significantly higher than the rating would imply. We interpret this as a clear sign of high funding costs for coal-related issuers. The transaction was sized at USD300mn and priced at a 6% yield, equivalent to a spread over swaps/z-spread of around 465bps.

The bond has an expected rating of Baa3/BBB-/BBB- (Moody’s/S&P/Fitch). This pricing implies a very substantial increase in the cost of capital for coal issuers for longer-dated capital.

ROIs required for coal projects should accordingly see adjustments for such high costs of capital going forward. It should be noted that in general, credit ratings have an up-to-five-year forward-looking window. In order to calibrate what the wide pricing implies in terms of credit rating/default probability, we compare the bond with 10-year equivalents in lower rating categories (BB+/BB/BB-). We include a chart in the article to illustrate this.