Corporate bonds are a critical source of finance for coal, oil and gas companies. Yet, compared to the stock market, the bond market has been overlooked. As a result, the fossil fuel industry has issued bonds to obtain backdoor funding for expansion.
Bond Issuers: Fossil Fuel Companies
Fossil fuel companies issue bonds to borrow money for general operations, capital intensive projects such as new coal mines, and refinancing other debt. Issuing bonds is attractive to fossil fuel companies because: they offer less scrutiny than loans (direct project financing); they can borrow large sums of money at cheaper rates than loans; they don’t have to hand over any control (equity) of the company to investors. The Dirty 30 are thirty of the worst fossil fuel companies in the world that are issuing bonds to fund coal, oil and gas expansion.
When an investor purchases a bond from a fossil fuel company they are lending it capital to fund its activities. The majority of investors or bond holders are asset managers, pension funds and insurers. This shows that investors are using the public’s money – the money that we entrust them with – to fund the climate crisis.
Bond Underwriters: Banks
Acting as a bookrunner (also known as an arranger or underwriter), investment banks manage all aspects of the issuance process, in particular they advise companies issuing bonds and help market bonds to investors. Fossil fuel companies rely on banks’ credibility to gain access to potential investors. Underwriting bond issuance allows banks to profit without risk being carried on the books (as a private loan would). Instead the risk is passed on to the bondholders.
Credit Rating Agencies
For a bond to be issued, the credit worthiness of the issuer needs to be rated. Three credit rating agencies (CRAs) dominate 95% of the credit rating business – S&P, Moody’s and Fitch. They tell potential investors how risky a bond is. The lower they deem the risk, the cheaper and easier it becomes for companies to secure debt. Though they claim these ratings are independent, CRAs are paid by the same companies they rate. Despite the risks from investing in fossil fuel projects, all three agencies stress will not downgrade the ratings of firms with strong balance sheets based on environmental, social and governance (ESG) issues alone.
Bonds are a debt security, like an IOU, where investors (bondholders) lend money to a company for a set period of time (maturity period) in exchange for regular interest payments (coupon rate). After the maturity period, the principal (also known as face value or par value) is repaid to the bondholder.
When a company wants to raise money they have two choices: equity financing or debt financing. Equity financing means giving up a percentage of ownership in the company by selling shares. Debt financing means companies have to pay back the funds over an agreed time period, plus interest. Companies pursuing debt financing can choose one of two routes: a loan from a bank or other financial institution, or by issuing bonds.
The primary market is where companies issue bonds and seek investors for their debt. The primary market should be thought of as the point of maximum leverage for increasing cost of capital to companies or disrupting bond issuance entirely. Financial institutions must stop giving fresh capital to fossil fuel companies via new bond issuance – or, as we say, deny new debt.
Bonds are also traded on the secondary market (like shares) but this doesn’t have an immediate impact on the cost of capital for the issuing company. Asking financial institutions to divest from their existing bond holdings is a less crucial ask, although it can send helpful market signals and lead to the fossil fuel company having to pay out higher interest rates on future bonds.
Issuing companies engage banks or other firms to advise and assist during the process. Banks enhance the credibility of the offer and ensure a higher chance of successfully issuing a bond. An investment bank’s role involves managing all aspects of the issuance process, including structuring the bond, preparing the prospectus, managing the roadshow and investor meetings, pricing, allocation and the listing process.
In a large bond deal a group of banks will not only advise a company, but can each take a chunk of the bond deal (the “book”) and assume the financial risk for selling this onto investors. Banks will pocket the profits from the transaction. Companies seek out known and experienced investment banks for this role, such as Citi, JP Morgan and Barclays.
Credit rating by a known agency is also important. The three large global credit rating agencies (CRAs) are S&P, Moody’s and Fitch. In certain jurisdictions local rating agencies are also well established and dominate those markets.
Roadshows allow the issuing company and its adviser to gauge market appetite under the proposed bond terms. If not enough interest is achieved, the issuer and the investment bank may revise and re-launch the bond.
It’s very difficult to get advance notice of new bond issuance. The most notice the public usually gets it a few days before the bond is issued. This means there’s limited time to build a campaign to disrupt new bonds as they come to market.
However, companies need to keep refinancing their debt and seek continuous access to debt markets. Bond maturity dates therefore provide a more reliable indicator around when bonds will be issued to refinance the debt. Companies will seek to refinance their bonds up to a year in advance of their bond maturity dates. This is a key influencing moment.
The 100 days prior to a bond maturity (refinancing) is a key moment for influence. During this time, debt denial by investors who are not current holders of the company’s bonds would send strong market signals, but debt denial by existing bondholders is the best lever because the company is expecting these investors to refinance the bonds.
If 10% of existing bondholders refuse to buy new bonds of a company, the company is placed under immense pressure to make up the financing shortfall and this is likely to increase cost of capital or even stop the bond issuance. Until the end of 2025, €288 billion of fossil fuel company bonds in the CA100+ will mature that may need refinancing, providing an excellent opportunity to disrupt capital.
A toxic bond is any bond issued by a fossil fuel company with expansion plans.
Bonds are a key source of finance for fossil fuels and are increasingly being used to raise money for coal, oil and gas expansion. Out of the largest 100 emitters – responsible for almost 75% of global greenhouse gas emissions – only 30 are listed on equity (stock) markets, but all are dependent on bond markets for their financing. The Toxic Bonds Network has to-date identified the top thirty corporations – the Dirty 30 – issuing bonds as a back-door way to finance major fossil fuel expansion.
Companies can often borrow much larger sums with lower interest rates via bonds compared to bank loans. Bonds also typically have fewer restrictions compared to bank loans and don’t involve handing over any control of the company to investors, as with shareholdings. Thus, by issuing bonds, fossil fuel companies can enjoy less public scrutiny, less transparency, and ready access to trillions of dollars of debt.
As bank lending for coal has become increasingly restricted, toxic bonds remain a backdoor to fund expansion projects. Nearly all companies in the Global Coal Exit List have issued bonds to finance and develop their operations. Coal companies raise 2.5x more capital through bond issuance than through bank loans, and bonds have become the single largest source of financial support for coal in China and India.
To limit global warming to 1.5 degrees there is no room for new fossil fuel projects. Every time investors buy fossil fuel debt they are helping drill a new oil well or open a new coal mine. The course of action therefore is clear: financial institutions must deny new debt to expansionary fossil fuel companies. Click here to view detailed demands.
Investors – pension funds, insurers and asset managers – must stop all new bond purchases in companies expanding fossil fuels and divest existing bond holdings, including in passive funds, from fossil fuel companies that do not have adequate phase out plans in line with 1.5C.
Banks must stop underwriting bonds for companies expanding fossil fuels.
The Dirty 30
Learn about the 30 worst companies issuing bonds to finance their coal, oil and gas expansion