Engelhart's Acquisition of Trailstone to Transform Power Trading Amid Market Volatility

Key Takeaway

• Engelhart's acquisition of Trailstone, expected to finalize in Q3, marks a significant move into power trading amid market volatility.
• Kansai Electric Power plans to issue ¥30 billion ($191 million) in transition bonds for nuclear and zero-carbon projects, reflecting Japan's climate strategy.
• Emerging-market investors are shifting focus to local debt and currencies like the Polish zloty due to election shocks and economic policy changes.

Engelhart Acquires Trailstone

Engelhart Commodities Trading Partners has announced an agreement to acquire Trailstone from private equity group Riverstone. The deal, which is subject to regulatory approval, is expected to be finalized in the third quarter. The financial terms of the transaction were not disclosed. This acquisition is poised to create a significant player in the power trading market, a sector that has seen increased activity and profitability due to volatile electricity prices.

The volatility in power markets has been driven by several factors, including the impact of Russia’s invasion of Ukraine, which has caused significant price swings. This has attracted trading firms and hedge funds to power markets globally, from Japan to Scandinavia. While other energy markets like oil have stabilized, the electricity market remains volatile due to deregulation, the rise of renewable energy, and extreme weather patterns linked to climate change.

Engelhart's acquisition of Trailstone marks a return to large-scale physical commodity trading for the company. Engelhart had previously scaled back its physical trading operations to focus more on commodity derivatives after experiencing several years of losses following its spin-off from Brazil’s Banco BTG Pactual SA. Trailstone specializes in trading and optimizing renewable power generating assets and has a natural gas supply and storage business in North America. Both companies have been investing heavily in technology and data management, which are crucial for trading short-term power supply contracts.

Huw Jenkins, CEO of Engelhart, will lead the combined business, while John Redpath, Trailstone’s current head, will become the deputy CEO.

Japan's Transition Bonds

Kansai Electric Power Co. is planning to issue Japan’s second transition bond to finance nuclear power projects. The Osaka-based utility aims to sell approximately ¥30 billion ($191 million) of transition notes in two tranches in July, according to SMBC Nikko Securities Inc., one of the underwriters. The funds will be used for the company’s carbon-neutral projects, including nuclear power and zero-carbon thermal power projects.

The issuance of transition bonds in Japan has surged following the government’s support for such debt earlier this year. The government argues that these securities allow for a more gradual achievement of climate goals for an industrialized nation like Japan. However, transition bonds have faced skepticism abroad because they typically do not finance specific environmental projects like green bonds do. Last month, Kyushu Electric Power Co. also issued similar bonds.

Emerging Markets Shift to Local Debt

Emerging-market investors are increasingly turning to local bonds and relative-value currency trades in response to election shocks that have disrupted long-standing bets in major emerging economies. Firms like Ashmore Plc and Ninety One are adding to positions in local debt, particularly in frontier markets. Others are recommending currencies like the Polish zloty, which is seen as insulated from political turbulence.

Christine Reed, a portfolio manager at Ninety One, stated, “We’ve been increasing the frontier risk, through both local bonds and FX derivatives. We like the story in Egypt, we like some of the stories in smaller Latin American names. We’re trying to diversify and not load up where positioning is heavy.” Reed also noted a constructive outlook for Turkey, which has overhauled its economic policies and appointed investor-friendly officials following recent elections. This has led to a surge in demand for local-currency assets, with foreign holdings of Turkish lira-denominated government bonds increasing tenfold in a year.

Valentina Chen, co-head of emerging-market debt at Mackay Shields in London, commented on the lira, “It’s a fundamental story supported by the central bank, which has hiked a lot and the inflation trajectory is coming down. You get compensated very well.”

The search for new returns has intensified after election surprises disrupted some of the best trades of 2024. Mexico’s peso, for example, experienced its worst week since the pandemic onset, with volatility spiking as traders reacted to potential reforms following Claudia Sheinbaum’s landslide win. Gustavo Medeiros, head of research at Ashmore in London, noted, “Mexico is a good story, which got a bit muddled. We have a bigger exposure in rates than FX across the board.”

Management Quotes

• Huw Jenkins, CEO of Engelhart:

  "The purchase, from private equity group Riverstone, is subject to regulatory approval and expected to be completed in the third quarter."

• Huw Jenkins, CEO of Engelhart:

  "Trailstone specializes in trading and optimizing renewable power generating assets and has a natural gas supply and storage business in North America. Both companies have been investing heavily in technology and data management functions that are key to trading the 15 and 30 minute supply contracts for power."