Capital Markets Weekly: Germany extends Green Bond curve with record demand

This week's main new issue development was Germany's latest Green bond, a 30-year sale priced throughout marketing at tighter levels than the country's "twin" bond - with the same size and terms and conditions in non-ESG format - finally achieving a 2 basis point "greenium" saving. Amazon's USD18.5 billion package was a further highlight.

ESG

Germany has sold its third green bond, extending its curve to 30 years (after a 10-year debut in September 2020 and a five-year sale in November). The issue was originally marketed with a one basis point "greenium" or yield saving to reflect its incremental ESG audience. It priced at 0.391%, two basis points under its conventional "twin", attracting EUR39 billion demand. According to Reuters, this represented a record, beating the EUR33 billion obtained for its Green debut. The same source claims Germany is planning to raise a further EUR6 billion from a ten-year auction and tap in late 2021. Overall, Finanzagentur (the German debt agency) flagged "very impressive" demand "in its extent and diversity", stating that "this renewed high interest" confirmed the merits of its "innovative twin concept".

According to a government report, Uruguay is working towards the sale of a sovereign Green bond. It is also planning "to develop the global local currency bond market" with a peso-denominated sale targeting international buyers.

Australia's Port of Newcastle has arranged the "first sustainability-linked financing by an Australian seaport", according to arranged National Australia Bank. The bank consortium loan raised AUD595 million in 2.5 and 5-year funding and AUD50 million specifically for Green purposes. Funding margins will be lowered if the port meets five key performance indicators including emissions reduction and various social goals including Australia's first use of a modern slavery metric. A premium is applicable if they are missed.

The transaction has gained high profile given the port's role as a leading location for coal exports, with Australian Financing Review describing the deal as "peak greenwashing", claiming that NAB had "stepped in to fund the world's largest thermal coal terminal when ANZ pulled out". Within the criticism, it was suggested that NAB's role brings into question its own use of Green bonds.

Emerging markets

Late last week, Tullow Oil sold a USD1.8 billion five-year issue priced at 10.25%, with demand exceeding USD4.2 billion. Proceeds will extend the company's liabilities, being used to redeem its USD300 million 6.625% 2021 and USD650 million 6.25% 2022 issues among other liability management, with the operation "leverage neutral" overall. The firm also has raised USD600 million of bank facilities.

The Asian calendar was particularly active on 10 May, with 12 deals being launched from the region.

It included a debut issue for JSW Hydro, described by Mint newspaper as "the largest private hydropower producer in India". Demand exceeded USD2.6 billion, permitting pricing of 4.125% versus 4.5% guidance. 64% was placed in Asia with 22% and 14% respectively sold in EMEA and the US.

Turkey's LimakPorts, which owns and operates Iskenderun container port and provides port services has sold a 15-year amortizing dollar bond with an average life of 10.6 years in a positive test of appetite for investor enthusiasm for Turkish risk. It placed USD370 million at 9.5%.

Other debt

Amazon raised a record USD18.5 billion eight-part package on 10 May. Its maturities ranged from a two-year sustainability bond, priced at just 10 basis points over US treasuries, through to 40-year debt at a 95 basis point spread. Pricings were tightened by 20-25 basis points across the deal from initial guidance with demand close to USD50 billion.

Press media have focused on "cheap borrowing costs" being "too tempting to resist" for the firm despite its sizeable cash holdings, with Bloomberg suggesting companies like Amazon might use cash to fund acquisitions and "dividend hikes" and claiming "borrowing might not be needed". While Amazon have not commented, IHS Markit views the borrowing as boosting Amazon's current asset/liability balance.

In its first quarter results, Amazon reported holdings of USD33.8 billion of cash, along with holdings of marketable securities of USD39.4 billion, within total current assets (including inventories and accounts receivable) of USD121.4 billion. However, it also had USD63.9 billion of accounts payable, and USD40.9 billion of accrued expenses, within current liabilities of USD115.4 billion. Its cash and securities holdings had declined in Q1 2021, having stood at USD42.1 and USD42.3 billion respectively at end-2020, with its overall current balance down from USD6.48 billion to USD6.04 billion. While far from "necessary", the borrowings boost Amazon' operating flexibility and resilience, as well as facilitating distributions and acquisitions.

Canada has raised USD3.5 billion of five-year US dollar debt, priced six basis points over comparable US Treasuries with a 0.75% coupon. It last sold dollar debt in January 2020, when it paid the same margin. The deal serves to "supplement and diversify Canada's liquid foreign reserves" according to Canada's Department of Finance.

Hong Kong-based airline Cathay Pacific sold USD650 million of 5.25-year bonds at 4.875%, versus 5.2% area guidance. The unrated deal gained over USD1.5 billion of demand. The issue is Cathay's first dollar sale since 1996 and follows 2020 full-year losses of HKD21.65 billion (USD2.8 billion). The company sold HKD6.74 billion of five-year convertible debt in February.

Implications and outlook

Germany's latest Green Bond included the innovative step of marketing the deal from the initial stage with price guidance tighter than its conventional twin. Demand was impressive although far smaller than that for syndicated sales by Spain and Italy earlier this year, which is likely to reflect the lower yield on German debt, and the decision to start pricing at a level already charging a "green premium". The deal's success nevertheless further formalizes the trend of price advantage for ESG debt, particularly in the Euro-denominated sector, given the incremental target audience of dedicated ESG funds and the relative scarcity of Green instruments. In turn, such price savings encourage further sovereign issuance of such instruments, with the borrower population likely to expand in 2021. However, the direct comparison between conventional and ESG "twin" instruments may overstate actual savings as it does not reflect any hypothetical benefits that might have been obtained if Germany had instead issued a EUR12 billion single issue, given its larger size and thus better trading liquidity.

The Port of Newcastle loan syndication is a clear example of ESG instruments being used by borrowers whose activities may be viewed as environmentally unfriendly. As with recent bond issuance relating to coal infrastructure (see last week's report for details of the Newcastle Coal Infrastructure bond), it shows that there is still demand for coal-related assets. The sustainability-linked format is obviously controversial - using a growing segment of ESG funding that does not specify the use of proceeds - but raising debt under an ESG banner despite the port's obvious links to coal. Such developments make clear that despite interest group pressure, firms in carbon-intensive segments still enjoy access to bond and bank financing, although this will in turn face continued and potentially heightened pressure and criticism ahead.

High media focus has been made on Amazon's high cash balances and liquidity, but in an environment where interest rates look likely to rise within a two to three-year outlook, or even sooner, it is potentially prudent for companies to boost liquidity and to lock in current rates for extended periods. Amazon's stance aligns with our repeated forecasts that the corporate sector has - and will continue - to manage its liability structure to extend duration, lock in current long-term rates and raise liquidity in advance of higher long-term rates.

In this context, the volume of Tullow's issue is impressive, with the firm paying up significantly to replace 2021 and 2022-maturing debt with five-year funding. This suggests it may have concerns about future market conditions (and the credit direction of some of the countries, like Ghana, where it has a significant presence).

Lastly, Cathay Pacific's bond is a positive indicator - along with prior sizeable financings involving US carriers and a EUR825 million 1.125% seven-year convertible issue for IAG this week -of the continuing ability of the global airline industry to resist the severe impacts of the COVID-19 pandemic on their operations. The latest issuance enables these major carriers to preserve liquidity.

Posted 13 May 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit