Green Bond Round-up, Aug. 8: New research on primary markets — as China preps ‘green’ coal bond

The latest green bond market developments

The Climate Bonds Initiative (CBI) has conducted an assessment of primary-market pricing and performance of green bonds in an attempt to answer long-standing questions about whether there is a ‘greenium’ or any performance patterns linked to the asset class.

The first report, in what will now become a series, looks at eligible green deals announced between the start of 2016 and March 31 2016. It comes to no ground-breaking conclusions – establishing that the green bonds priced, on average, 11.2 basis points tighter (for euro-denominated issues) and 15.3bps tighter (for USD deals) than initial price talk. This rises to 13.4bps and 22.2bps, respectively, when looking exclusively at the corporate market. However, the report says this is broadly in line with the overall bond market. Oversubscription also mirrors the wider market, with averages of 2.7 times (on euro deals) and 3.16 times (USD). However, demand from investors – driven by interest from those with an ESG mandate – can lead to a more diversified order book, which benefits treasurers “because it offers more stability during volatile times”, the report states. “Further, bookrunners are quoted as saying that the ‘green angle’ can help them to price more tightly than otherwise, due to the extra interest they receive,” it adds. Although the research has a focus on the primary market, it also looks at how the bonds perform in the first month after issuance. It concluded that within a week of being announced, 70% of green bond spreads got tighter; and by 28 days this figure was 63%. Compared with their “corresponding index” (chosen from iBoxx bond indices), 70% had tightened more than the index within a week, and 71% over 28 days. “This suggests that within the first month, green bonds on average perform better than ‘the market’,” the report states. “For an investor who is marking their portfolio to market, and comparing their performance to a bond index, this could translate into outperformance.”
HSBC’s latest report on green bonds claims that smart cities are behind a growing number of transactions in the market, as municipalities and real estate firms raise money for low-carbon projects. According to the bank’s figures, green bonds to fund climate-smart cities grew 61% in the first half of the year compared with the same period in 2016: to $10bn from $6.2bn. “This is not a surprise,” says the report, penned by Michael Ridley, Head of Green Bonds and Corporate Credit Analyst, and Charlotte Edwards, Analyst for Credit Strategy. “As attention moves to reducing emissions from transport, buildings, housing and heating, and away from decarbonising thermal power generation, so the focus moves to cities.” The authors predict more issuance from emerging market cities, due to their growing populations and changing demographics. Bond investors should seek out deals that are linked to cities with growing or stable populations, financing projects that won’t impose an “excessive financial burden” or drive businesses away, it said. To ensure the integrity of these projects, they should be designed at local, ‘bottom-up’ level and the issuer should have “the appropriate powers [to] support or allow these local level initiatives, and the appropriate tax raising powers”.h6. China

A Chinese power producer has renewed investor concerns about what the country accepts in its green bond catalogue, by announcing plans to issue a ‘green bond’ linked to coal-fired power plants. Tianjin SDIC Jinneng Electric Power Co will sell 1bn yuan (€126m) of labelled notes on the interbank market later this year, to repay loans attached to two 1GW coal plants, the company has said. The plants are what’s known as ‘ultra-supercritical’ – meaning they are significantly more efficient than traditional coal-fired facilities. ‘Clean’ coal such as this is accepted under China’s national green bond guidelines, much to the dismay of green investors outside of the country, many of whom cannot invest in any fossil-fuels due to their mandates, and who argue that ‘clean’ coal locks in conventional energy sources, preventing a full transition to renewables in coming decades.

North America

Electric car heavyweight Tesla plans to raise $1.5bn in eight-year senior unsecured notes, it has said. There are no details about whether the deal, which is expected to include ‘junk’ bonds, will be labelled ‘green’ – but Tesla’s products are all low-carbon. Proceeds from the transaction will be used “to further strengthen its balance sheet during this period of rapid scaling with the launch of Model 3, and for general corporate purposes,” it said in a statement.

Europe

KfW will settle the latest tap of its outstanding Australian-dollar green bond today. The German development bank sold a further A$200m in the deal, which priced last week. It brings the total for its 2.4%, July 2020 Kangaroo bond to A$800m. The latest tranche has a re-offer price of 100.488%, giving it a yield of 2.225% semi-annually.

LatAm

The World Bank has sold $360m of catastrophe bonds for Mexico. Proceeds from the deal will provide financial protection to the country in the event of a natural disaster. The deal had three tranches to cover against three types of disaster: earthquakes and Atlantic and Pacific cyclones. Pay outs will be triggered by the occurrence of any of these events, in which case holders of those notes will not be repaid in full. Proceeds will be made available, via Munich Re and Mexican state-owned insurer Agroasemex, to Mexico’s Fund for Natural Disasters. Buyers across the three tranches – which mature between 2019 and 2020 – came from Asia Pacific, North America, Western Europe and Bermuda.
Colombian development bank Banco de Comercio Exterior de Colombia (Bancóldex) is due to come to market tomorrow with what RI understands will be a private placement. Insiders say that, due to Colombia’s relatively stable financial market and the support it has from NGOs and others to build its economy, the country is likely to produce more green bonds before the year is out.