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Capital Markets Weekly: Spain, Germany issue Green Bonds

09 September 2021 Brian Lawson

The EU has confirmed its EUR250 billion Green Bond program and EU announced plans for monthly Green Bond issuance near term: Spain debuted in the sector, Germany also conducted a Green Bond auction, while the UK's debut - one of two projected syndicated Green Bonds in 2021 - will follow shortly.

ESG

The European Union (EU) announced on 7 September that it will start issuing Green Bonds under the Next Generation EU program in October 2021. Budget and Administration Commissioner Johannes Hahn reconfirmed that the EU will issue 30% of its NGEU funding in Green format, with the intention of selling up to EUR250 billion by the end-2026, making it the "largest green bond issuer in the world". It proposes to sell one syndicated deal and one auction per month. NGEU Green Bonds will fund "climate-relevant expenditure" within its Recovery and Resilience Facility, under which each member state is required to allocate at least 37% of its national Recovery and Resilience plan to climate-related "investments and reforms"

The statement refers to an issuance target of "around €80 billion of long-term bonds this year", complemented by "tens of billions of euros of short-term EU-Bills". This is expected to include EUR35 billion of Green Bond sales in the fourth quarter of 2021 through a potential three syndications and three auctions.

Kingdom of Spain has arranged its Green Bond debut, a EUR5 billion 20-year sale. Demand reached over EUR60 billion, with the issue priced at six basis points over comparable Spanish government debt, three basis points tighter than initial guidance. Spanish media suggest that the "Greenium" or cost-saving from the incremental investor base of ESG funds, was two to three basis points. In November 2020, a Treasury representative had suggested that the issue would be tapped to reach an eventual size of EUR20 billion.

Germany followed with a EUR3.5 billion auction of 10-year Green debt maturing in August 2031: a further EUR3 billion tap is planned for October. The issue was only modestly covered: Finanzagentur, the German debt agency, received EUR3.658 billion in bids, allocating EUR3.198 billion at -0.38%, a 1.1 times coverage ratio. EUR302 million were retained by the government. In parallel, it placed EUR3.5 billion of conventional debt with the same characteristics into government holdings, bringing the conventional issue - the current 10 reference Bund - to EUR16.5 billion.

Trading data showed the conventional issue to have traded during the day between -0.319% and -0.331%, closing at -0.322%, implying a "Greenium", or yield saving from the ESG format of 5-6 basis points. In August the outstanding August 2030 Bund registered a peak differential of seven basis points tighter than its conventional peer, according to ING.

The UK has appointed six banks (an unusually high number) to lead its debut Green Bond sale, an issue due on 31 July 2033 and for sale in the week starting on 20 September. A second Green Bond syndication is scheduled for mid to late October for a 20-30 year maturity.

Walmart Inc has sold a debut USD2 billion ten-year Green Bond, the largest US corporate Green sale on record according to Bloomberg. The issue formed part of a seven tranche USD7 billion package also designed to fund a tender offer for up to USD8 billion of existing debt. ESG applications include renewable energy projects, electric vehicles, and improved waste management, according to Walmart's green framework, with the firm targeting net zero emissions by 2040.

China Development Bank enjoyed a strong response to its sale of USD500 million of three-year Green Bonds. The deal attracted over USD3.5 billion in demand and priced at just 23 basis points over comparable US Treasuries (at 0.64%), versus guidance of a 60-basis point spread, the tightest spread to date for mainland Chinese issuance, even coming two basis points tighter in spread than the country's sovereign three-year sovereign bond last October. 71% was placed in Asia with the remainder allocated to EMEA: banks were allocated 63% of the deal with 28% purchased by official buyers.

Emerging markets

Latin American supply restarted with a USD500 million 40-year deal for Empresa de los Ferrocariles del Estado de Chile, the country's state railway system. The deal was priced at 185 basis points over US Treasuries, versus initial guidance of 210 basis points: demand reached USD1.5 billion.

Abu Dhabi marketed a two-tranche sovereign sale on 8 September. It offered initial guidance of 90 and 130 basis points over 10 and 30-year US Treasuries respectively, raising USD3 billion priced at a 60-basis point margin and 3%, a spread of 105.6 basis points.

Other debt

This week's debt issuance has been extensive with several deals focused on a healthy "duration bid".

Spain's CaixaBank sold a EUR750 million perpetual non-call 7.5-year bond on 2 September at 3.625% versus guidance of 4.125% area. The AT1 offering gained demand of EUR3.5 billion.

ING followed on 7 September with a USD2 billion sale of perpetual debt first callable after six and ten years: the USD1 billion tranches were priced at 3.875% and 4.25%, each 50 basis points tighter than initial guidance.

Having raised hybrid (60.5-year) in January at 1.95%, which was over four times subscribed, EDP returned to the hybrid market with a two-tranche offering, again with final tenor of 60.5 years and divided into a EUR750 million tranche callable after 5.5 years and EUR500 million first callable after eight years. Pricing was set at 1.6% and 1.95% after demand exceeded EUR3.1 billion, the former setting a new low for hybrid debt by EDP.

Danone "successfully" sold a EUR500 million perpetual issue first callable after 5.25 years, with a 1% coupon. The issue will be used to fund a tender of equal amount for the company's outstanding EUR1.25 billion hybrid deal, first callable in 2023.

There have been several multi-tranche offerings as well:

  • Nestle enjoyed a strong reception for a USD5 billion six-part deal ranging from three to 30 years, while Toronto Dominion Bank sold a five-part USD4.5 billion package ranging from three to ten-year debt.
  • They were followed on 8 September by Eli Lilly with a EUR1.8 billion three tranche deal alongside a GBP250 million sale. The Euro tranches mature in 2033, 30 and 40 years, with pricing of 0.515%, 1.214% and 1.447%, while the 2043 sterling portion priced at 1.743%. Demand reached EUR5.65 billion-plus GBP1.75 billion.
  • Both Sumitomo Mitsui Trust Bank and CBA also sold three-tranche dollar deals.

Our take

Green issuance by the EU, Spain, and the UK has been announced well in advance and represents the materialization of the expected growth in supply in the European ESG sector. While there are marginal cost savings from such issuance, the main purpose appears to make a political statement of commitment to environmental goals, as all those issuing Green Bonds would be perfectly capable of funding such projects through conventional debt. While Green Bonds specify that issuers must use the proceeds raised for eligible projects and subject themselves to external scrutiny, this does not prevent them from funding carbon-intensive activities from their conventional debt programs, for which broader scrutiny of their environmental footprint is required. However, the debut issuance does boost the ESG segment by giving a wider range of assets for purchase by the growing number of dedicated funds. The modest oversubscription for the German auction is likely to reflect its deeply-negative yield against a background of potential tapering, rather than market saturation.

Elsewhere, the heavy and wide-ranging supply this week, including several borrowers with multi-tranche deals, continues to show companies and financial institutions preparing for a potential worsening of issuance conditions. It also indicates that despite ongoing debate over central bank tapering of their asset purchases, markets remain receptive with a healthy "duration" bid to obtain improved returns. Next week's supply, when US equity markets return to full activity after Labor Day, will test investor appetite in the US IPO market, but overall sentiment appears favorable.

Posted 09 September 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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