World Bank adds carbon credits component to rhino bond revamp

Investors forego fixed coupon in exchange for payments linked to emissions avoidance from Vietnamese water purification projects.

Water fountain

The World Bank has returned to the market with a twist on its successful Rhino bond, raising $50 million from a deal linked to water purification devices in Vietnam.

Proceeds from the deal will be diverted to World Bank projects, as with any other sustainable development bond issued by the bank. However, the coupon payments that the World Bank would have paid to investors will instead be used to fund a project manufacturing water purifiers in Vietnam.

The project, which is not managed by the World Bank, aims to manufacture 300,000 water purifiers and distribute them to schools and other institutions in Vietnam. According to the World Bank, this will have the dual effect of improving access to clean water for two million children and displacing biomass burning, which is traditionally used to boil water to make it safe for consumption.

The reduced emissions from the use of purifiers will be turned into carbon credits, issued on the Verra registry. These carbon credits will then be sold to fund a coupon payment for bond investors.

This is the World Bank’s second outing with this structure, with a previous bond seeing investor returns linked to the success of two Rhino conservation projects. Unlike the rhino bond however, the coupon payments to investors are self-funding. The rhino bond relied on a philanthropic donor for coupon payments.

The Vietnam deal is a third of the size of the previous deal, which raised $150 million. The size of the deal is tailored to project funding needs. The previous bond saw around $10 million channelled to Rhino conservation from the coupon payments, whereas for the current deal rising interest rates mean that only $50 million needed to be raised to meet the funding requirement of around $7.2 million with the coupon.

Citi and Credit Suisse were joint leads on the rhino bond. This time, the US group acted as sole lead manager.

Michael Bennett, head of market solutions and structured finance at the World Bank, noted that part of the appeal for investors was the chance to earn a higher yield than on conventional IBRD bonds.

Coupon payments will be contingent on sales of carbon credits from the Vietnamese projects, with proceeds from the first 1.8 million tonnes of carbon credits sold being earmarked for bondholders. The World Bank estimates the potential uplift on conventional instruments at around 100 basis points, according to Bennett.

Impax Asset Management, Velliv Pension and Nuveen were the three investors on the deal.

Tony Trczinka, senior portfolio manager at Impax, told Responsible Investor that the manager had been attracted to the deal by the combination of environmental and social impact and the return opportunity versus normal World Bank bonds.

He noted that Impax had spent a lot of time examining the carbon credit side of the structure – “addressing hot button issues like leakage, additionality and permanence” – and was satisfied with the checks and balances in place.

“You can expect to see us involved in more of these type of issues,” he said.

Thor Schultz Christensen, Velliv’s deputy CIO, called the deal “truly exceptional” for its strong social profile and “significant green carbon credit”.

Steve Liberatore, head of ESG/impact for global fixed income at Nuveen, noted that the bond had an attractive relative valuation and welcomed the targeted additionality it provided. He also welcomed the verification of the carbon credits by a third party.

A number of investors in the new bond had previously participated in the rhino deal. “One thing that we’re excited about now is that the pool of investors who are willing to seriously examine these kinds of structures, and they are fairly complex, seems to be growing nicely,” said Bennett.

He noted in December that the World Bank had been looking at other topics, including healthcare projects and other endangered species. “We’re very hopeful to do more in 2023,” he said.

Speaking after the launch of the Vietnam bond, World Bank Group president David Malpass said the structure “can be replicated and scaled to channel more private capital to development and climate activities”.