While most companies avoid issuing bonds amid rising interest rates, Tokyo Gas has taken the bold step of issuing transition bonds.
It is a move that demonstrates the firm's commitment to transforming from a "fossil fuel company" into a "Net-zero transition brand," a push to support the global shift toward a carbon-free society.
On Feb. 22, Tokyo Gas issued the first transition bonds as a city gas company – 10 billion yen (some $75.4 million as of June 2022) with maturities of 10 and 7 years, and interest rates of 0.359% for the longer bond and 0.26% for the shorter term. All funds raised will be used for the company's decarbonization projects, which include the Harumi Hydrogen and Niihama LNG Projects, as well as the Smart Energy Network.
Corporate bond yields are linked to long-term interest rates. The indicator, the yield of newly issued 10-year government bonds, was until recently around 0-0.1% due to the Bank of Japan's monetary easing measures. However, in early February, the rate exceeded 0.2% and reached the highest level in six years due to the influence of speculation around the possibility that the US will tighten monetary policy.
The higher the interest rate, the greater the company burden of paying interest becomes. In February and March this year, various companies, including JERA, a joint venture of TEPCO Fuel & Power and Chubu Electric Power, and Japan Airlines among others, postponed issuances of corporate bonds.
Escaping the "Fossil Fuel Industry"
The interest rate for the straight bonds Tokyo Gas issued in July 2021 (15 billion yen - $111.5 million- with a maturity of ten years) was 0.17%. This time, the interest rate for the transition bond has doubled. So, why did the company issue these bonds despite the trying conditions?
Most importantly, the firm decided to issue these bonds despite financially burdensome circumstances in order to erase the negative status of being a fossil fuel company. Tokyo Gas aims to decarbonize by 2050, announcing its transition plan in November last year with details up to 2030. This earlier date is the year the company targets for completion of their energy conversion from fuel to natural gas, which emits less carbon dioxide. From 2030 onward, the firm will shift to methane synthesis and hydrogen for zero carbon emissions.
"If we become stuck with the image of dealing only with fossil fuels, investors will lose interest and we would lose all their support. We issued transition bonds shortly after announcing our detailed measures for transition to show everyone that we are serious about this transformation." said Mr. Go Soga, General Manager of the Tokyo Gas Accounting Department.
High investor demand for ESG bonds also helped boost sentiment behind the issuance. The transition bonds attracted a huge amount of investor attention, and the investment statement was 2.3 times the planned procurement amount.
The company believes that if the issuance had been for straight bonds, then the interest rate could have been higher than for the transition category. In the future, Tokyo Gas intends to continue issuing transition bonds to increase recognition among investors regarding the company's status as a "Transition Brand." The firm is demonstrating its commitment to transforming into a carbon-free society.
For energy firms that handle fossil fuels, the success or failure of their decarbonization transitions will determine whether or not they are able to survive. ESG policy is the key to corporations being able to take advantage of long-term financing.