The Reformed SSA Trader: "Be aware of" ideas of March

4 minute read

We revisit our SSA exclusion list on the back of China stopping new Bangladesh coal funding, but not SSA issuer JICA (Japan International Cooperation Agency), as well as consider the announced JBIC coal exit.

In the JICA case, why not just sell Japan sovereign credit default swaps (CDS) instead of funding coal? We propose to add Japan International Cooperation Agency (JICA, A1/A+) to the SSA exclusion list, and in doing so also propose that market participants should consider selling old JICA bonds and replacing the risk by selling protection on Japan sovereign CDS, to reduce coal plant funding exposure at approximately zero cost.

We have added the JICA to the SSA exclusion list as we expect that JICA will support gigawatt-sized coal projects in Bangladesh (Matarbi) and Indonesia (Indarmayu) that – beyond being obviously non-Paris aligned – also are associated with other ecological and social issues.

As a contrast, China’s Belt and Road Initiative has recently rejected potential coal funding in Bangladesh.

The JICA USD bond curve trades quite close to Japan sovereign CDS in credit spread terms. As the Japan sovereign is a guarantor of JICA, it really does not make sense to expose an SSA portfolio to JICA if one can achieve the same return profile directly on the sovereign, but without being tainted by JICA on-lending of cash bond proceeds to coal.