Experts question credibility of the world’s first official transition bond despite high investor demand

Questions raised over Bank of China’s decision to include gas projects as part of the $780m offering

The credibility of the world’s first official benchmark transition bond is in question from a leading expert today, who says the notes “should not be labelled as transition bonds” under the new Transition Bond Principles from the International Capital Markets Association.

Bank of China’s Hong Kong branch raised $780m this week in a deal with two tranches: a $500m three-year offering and CNH1.8bn of two-year notes. The issuer is rated A1 by Moody’s and A by S&P and Fitch.

The USD tranche priced at 99.829% with a coupon of 0.875% and yield of 0.933%. The order book was more than three-times oversubscribed, reaching $1.76bn. Two-thirds of the 68 interested accounts – primarily banks (48%) and official institutions (31%) – came from Asia (64%), with the rest in Europe, the Middle East and Africa. 

The smaller Renminbi bond was priced at 100% with a coupon and yield of 2.8%. Demand was five times supply, at CNH9.8bn, with the vast majority of the interested accounts (94%) coming from Asia. By investor type, the biggest buyers were asset liability management firms (47%), followed by asset managers (36%), private banks (14%), and hedge funds and other investors (3%).

The paper was labelled as being in line with the Transition Bond Principles developed by institutional investors last year, and has a pre-issuance attestation from EY on its compliance with the Principles. 

The Principles were officially launched by the International Capital Markets Association – which also hosts the Green Bond Principles and the Social Bond Principles – in December, in a bid to provide clarity on what investors expect from companies issuing transition bonds. 

Last month, French banking group BPCE issued €100m in labelled transition bonds as part of a private placement with Axa, but BOC are the first to issue a benchmark sized-deal which explicitly claims to align with the new Principles. The use of proceeds are based on its Transition Bonds Management Statement, which was published this month and includes gas projects. 

In the document, the bank states, in addition to aligning with ICMA’s principle, it would issue the bond “in consideration of the climate change mitigation transition activity classification as defined in the TEG Final Report on the EU Taxonomy, and including the principles of ‘Avoidance of Carbon Lock-in’ and ‘Do No Significant Harm’” – referring to the Technical Expert Group on Sustainable Finance that advised the European Commission on its flagship green taxonomy last year. 

But Sean Kidney, Founder of the Climate Bonds Initiative and a member of that Technical Expert Group, told RI that he “does not believe the bonds meets the 1.5°C Paris Agreement trajectory…and should not be labelled as transition bonds, or at least not ones that say they comply with the Transition Bond Principles”. Its inclusion of gas “is not actually consistent with the ICMA Transition Bond 1.5C requirement, as explained in the EU Taxonomy,” he added. 

HSBC was global joint book runner on both bonds alongside the Bank of China, Crédit Agricole, BNP Paribas. Agricultural Bank of China, China Minsheng Banking Corp, CTBC Bank, DBS Bank and Standard Chartered were also book runners on the Renminbi bond. Bank of America Securities, China International Capital Corporation, Citigroup, ICBC (Asia) and Mizuho Securities assisted the book running on the US denominated bond. 

Transition bonds have a longstanding history of controversy. Spanish oil and gas company Repsol sparked outrage with their transition bond in 2017, which was slated to finance energy efficiency measures for oil production. In 2019, meat producer Marfrig was left red-faced after huge backlash against its $500m transition bond, which it promised to use to finance sustainability projects, but made no commitment to reduce its production of beef – considered to be a major contributor to climate change. 

In another ‘world first’ this week, New World Development Company became the first real estate developer to issued a USD sustainability-linked bond, which saw demand at six times the $200m offering. The Hong Kong-based firm will use the proceeds to move its entire rental property for the Great Bay Area to renewable energy by 2026. The 10-year, 3.75% deal priced at 275 basis points above US Treasuries, which the issuer said was five basis points below new issue premium, and marked its lowest ever yield for a USD offering.