We are generally a proponent of “vanilla bonds”: simple bond structures that can most easily fit into institutional investor portfolios.
The world of retail bonds can be different; in fact it can look like a whole different planet with interest rate complexity seen as a selling point rather than a barrier.
There haven’t been a lot of retail green bond offerings but this is beginning to change, and now we’re seeing some of that complexity emerge: the World Bank has recently issued three small structured green bonds, following on from earlier issuance of structured green bonds in July and August.
The first, issued on 18 September, was a US$5m, 10-year, AAA-rated, green bond set up as a callable, step-up bond, with the following coupon schedule: Years 1-5: 2.25%, Year 6: 3%, Year 7: 4%, Year 8: 5%, Year 9: 6.50%, Year 10: 8%. J.P. Morgan was underwriter of the bond.
This structure essentially means the World Bank can repay it whenever they want. If interest rates remain lowish the World Bank will have a strong incentive to repay the bond within 5 years. In fact the investor might as well be buying a 5 year bond; but if interest rates go up and the World Bank decides not to repay, they could be in it for 10 years. It sold.
A few days later, on 23 September 23, the Bank issued a EUR10mn (cUS$12.9mn), 10-year, AAA-rated, green bond structured as an index-linked bond. This means the bond has a zero coupon, with returns beyond the principal linked to the performance of the index the bond is linked to – in this case, Solactive’s Ethical Europe Equity Index, an index with inclusion criteria based on ESG analysis of companies by Vigeo and Forum Ethibel. The manager for the bond was BNP Paribas. This is the World Bank’s second equity index-linked green bond, following the same structure set up for the first index-linked green bond issued in July and mentioned in an earlier post.
A 3rd structured green bond was issued on 25 September: a USD30m, 10-year, AAA-rated, green bond. This was also set up as a callable, step-up bond, with the following step-up schedule: Years 1-5: 2.25%, Year 6: 3%, Year 7: 3.5%, Year 8: 4%, Year 9: 4.50%, Year 10: 6% - lower rates for year 7 to 10 than the other step-up bond. The issuance was initially planned for USD10m but the size was tripled due to investor demand. Wow! The bond issuance was set up for investors with Morgan Stanley Wealth Management, with Morgan Stanley as sole manager.
We believe there is significant pent-up demand among retail investors, for both low risk and higher yield products, so we expect the market to steadily grow.
From a green perspective, these structures use the same earmarking of bond proceeds for green projects used for the usual World Bank green bonds. The coupon does not rely on the underlying index or metric having green credentials.
Interesting development.
