Mkt update: 1st GBs - ING EUR500m (7x oversubs!) + $800m, SocGén €500m (6x oversubs!), HSBC €500m. US Sthn Power $500m; IDBI 3x oversubs; CreditAg commits $2bn to buying GBs; C’wlth Govts set up $1bn fund with GBs; muni GBs from CN & NJ

Banks are driving growth in green bond markets ahead of this week’s COP21 in Paris with IDBI, ING, Société Générale and HSBC all issuing inaugural green bonds. And India’s financial services regulator says it’s working on regulations for the green bond market.

Corporate

Double whammy from ING with $1.3bn of green bonds hitting the market (€500m, 0.75%, Ae/A1e, 5-yr;  $800m, 2%, Ae/A1e, 3-yr)

Dutch bank, ING launched its inaugural green bonds, adding up to the total of $1.33bn! A euro-denominated bond was issued at €500m ($530m) with 0.75% coupon and 5-year tenor, and a USD-denominated bond at $800m with 2% coupon and 3-year tenor. The Euro bond received EUR3.4bn in orders - nearly 7 times oversubscribed -Whoa! - and the US bond $1.8bn (2x oversubscribed). Note that the EUR bond was said to have been trading 5bp tighter in the secondary market on the Wednesday after closing.

Both bonds are rated Aa1 (Moody’s) and Ae (Fitch). Citigroup, Credit Agricole CIB, ING, Lloyds, and SEB were the joint lead managers.

In the second review prepared by Oekom, proceeds will be dedicated to five categories of projects with estimated allocation proportion:

  • Renewable energy  41% – 3 solar and 6 wind (onshore and offshore) projects
  • Green buildings 35% – 4 new or acquisition of existing buildings at BREEAM Excellent, LEED Gold, or DGNB (German Sustainable Building Council) Silver level. Energy efficiency can be only one of many indicators within these buildings standards therefore it was brilliant to see additional disclosure in the Oekom report that 58% of the portfolio achieved good results in the energy efficiently components of the standards.
  • Public transport 16% – electric train and other rail infrastructure (train network operations and building of rail stations) in developed countries
  • Waste 2% – operation or service contract of landfill gas power plants
  • Water 5.% – operation and service contract of wastewater treatment and water facilities

This level of disclosure on use of proceeds gives a better flavour of the green credentials, helping investors to understand the project portfolio of the bonds. ING commits to report annually on proceeds allocation, details of newly selected projects, as well as environmental impacts of projects (indicators are specified for renewable energy and green building projects).

The bank's auditor, EY, will carry out assurance about the green lending framework for the first year. KPMG will provide assurance in subsequent years, when it takes over as the bank's auditor.

Its worth noting the bank aims to reserve at least 20% of proceeds for new financing, with the remaining will be used for refinancing. Both new capital and refinancing are both important to mobilize capital on green investment, providing the breakdown and disclosure to investors allows those that want to focus one or then other to understand the end use of proceeds.

Exemplary entrance to green bonds – bravo ING!

 

Société Générale issued its first “Positive Impact Bond” for renewable and public transport (€500m, 0.75%, Ae/A2e, 5 yrs)

French domiciled Société Générale (SocGen), , issued its €500m ($534.8m) inaugural green bond (they called it “Positive Impact Bond”) this week. It received EUR3.1bn of orders!

The bond offers a 0.75% coupon with 5-year tenor. SocGen obtained ratings of Ae (Fitch) and A2e (Moody’s) for this bond and a second review by Vigeo. The bank also commits to report annually on the proceeds allocation, outstanding amount, and climate benefits of projects (in tCO2e or MW). SocGen was the sole underwriter

Eligible projects for this bond include renewable energy (approx. >80% proceeds) and collective/public transportation and infrastructure (approx. <20% proceeds). .

Renewable energy projects:

  • Hydro – it would have been beneficial to have some transparency around types of projects (run-of-river or dam), the size (large or small) and geo-locations tropical zone or all Nordics are eligible
  • Geothermal – additional detail would help ascertain if projects are to be certified, CDM compliant or zero emissions
  • Wind
  • Solar
  • Biomass – Feedstock certification is an important criteria though is not disclosed at time of publishing
  • Collective transport (public transport)

All projects will be evaluated based on an ESG framework and Positive Impact Assessment Framework, which consists of 17 social, environmental and economic convergence impact categories. As of date of issuance, eligible assets portfolio for this bond consists of renewable energy only.

SocGen note that all proceeds will be allocated to eligible projects throughout the lifetime of the bond. This is what all green bond investors should expect (and is required under the Climate Bonds Standard). Any financed assets, which would be repaid early or no longer eligible, will be replaced with other similar eligible assets – to maintain the value of the underlying pool of qualifying assets. This maintenance of the pool value is particularly important for green bonds issued by banks, so that bond proceeds are then allocated to green loans and not elsewhere.

Overtime, such loans may be repaid before the bond maturity date and hence free up some proceeds. Without “recycling”, the green bond proceeds may flow back to regular investment stream instead of maintaining the scale of portfolio the proceeds support.

 

Southern Power Co. issued its inaugural green bonds at a total of $1bn for its solar and wind projects in the U.S. ($500m, 1.85%, BBB+/Baa1, 2-yr;  $500m, 4.15%, BBB+/Baa1, 10-yr)

U.S. based utility, Southern Power Company, issued two $500m inaugural green bonds, yielding up to $1bn to support its solar and wind projects development.  Just what we’ve been waiting for; a large US utility with a mixture of green and brown assets issuing an inaugural green bond to grow its green assets.

Plus it’s investment grade! Both rated as BBB+ (Fitch, S&P) and Baa1 (Moody’s), Investment grade issuance is significant as it means the bond will fit well with the risk profile required by a sizeable chunk of investment managers and pension funds.

One bond offers a 1.85% coupon at 2 years tenor, whereas another one offers 4.15% coupon maturing in 10 years. Bank of America Merrill Lynch, Barclays, Mitsubishi UFJ Securities, Mizuho Securities, and Morgan Stanley are the joint lead managers for both issuances.

The emphasis of Southern Power’s green bond is to finance current (financing started 12 months before issuance) or planned (financing occurring after issuance and by maturity date) solar and wind power plants in U.S. This is great for all those investors that are less interested in refinancing green bonds (though for us at Climate Bonds refinancing is an important role of green bonds).

Since Southern Power has a mixed asset base it's great to see that the company commits to report the allocation of proceeds and key environmental features of projects on an annual basis. Perfectly in line with the green bond principles – Bravo!

Our only question mark on the green bond is the short-term use of proceeds. Before proceeds are allocated to eligible green projects, they can be used to pay down some of SP’s short-term debt - which is debt linked to its extensive coal operation of its parent company (The Southern Company). For certification against the Climate Bonds Standard, proceeds must be linked to a neutral short-term portfolio (for example a treasury portfolio with money market instruments) if the proceeds are not immediately deployed to eligible green projects. In this case it would seem to be only a short-term use of proceeds, but it’s a shame with a fantastic green bond to have even a hint of coal support in there. Fortunately, once allocated the bond will ONLY finance dark green renewable energy projects.

 

Scatec Solar ASA issued a NOK 500m ($58m) green bond to support its pure-play business (7.66%, 3-yrs)

The Norwegian independent solar energy producer, Scatec Solar ASA, issued a senior unsecured green bond of NOK500m ($57.9m). The bond offers a 7.66% coupon with 3 years tenor. DNB Bank, Nordea and Swedbank were the joint lead managers.

Scatec Solar is a pure-play company meaning that over 90% of its revenues come from climate-aligned assets (in this case solar). Being a pure-play Scatec chose not to follow the usual process of earmarking proceeds and instead will use proceeds for general corporate purposes, similar to the Vestas and Goldwind green bonds. This depends on investors being happy with a nominal link between the total bond proceeds and the total solar assets. According to an independent review by DNV-GL, Scatec’s solar project “development pipeline significantly exceeds the value of the Bond”.  Big Tick!

Of course it also matters that one, two and three years into the bond that the total proceeds can be linked to eligible projects of equivalent or greater value. Scatec will provide reporting on its solar project, though it may be on the size (MW) installed capacity.  We’d prefer asset value, but there seems little risk here that bond amount will exceed assets value.

The review compares the bond against the Green Bond Principles, but confusingly it highlights that the bond doesn’t adhere to the GBP Management of Proceeds pillar “since the Bond is a general corporate purpose bond” –and so Scatec Solar will not trace the use of proceeds of the bond... That’s a bit weak.

Scatec Solar is aiming to list the green bond on the Oslo Bors stock exchange green list.

Welcome to the green bond market Scatec.

 

IDBI’s first green bond, $350m, 5 years, BBB-/Baa3, 2.85x oversubscribed from 110 investors, 82% Asian investors

India’s IDBI green bond, which we blogged about a week ago, ended up closing at $350m. This was the first green bond from IDBI Bank. Rating was Baa3 / BBB- by Moody's / Fitch. Joint Lead Managers were Standard Chartered and Citibank, with HSBC, ANZ, BNP Paribas and JP Morgan bookrunners.

The bond was a drawdown under a USD 5 billion EMTN program setup by IDBI Bank Limited. Pricing was 2 basis points inside the secondary yields of comparable IDBI Bond – every little bit helps.

According to IDBI CFO N.S. Venkatesh, “The feedback from investors was positive due to the green assets on the ground in various sectors and also the initiative of IDBI to get external certifications from Climate Bond Initiative”.

Investors were Fund Managers (50%), Banks (28%), Private Banks (17%) and Corporate / Others (5%). 82% of bonds were placed in Asia and 18% in Europe / Middle East.

IDBI has, unusually, committed to post-issuance Climate Bonds Certification. This is because not all the Climate Bond Standards eligibility criteria they needed for their asset pool are finalised, but they needed those assets to get to a benchmark size bond, and they wanted to get a bond out to mark the UN Climate Change Conference in Paris.  

So they’ve said to investors stating that their bond is “aligned with the Climate Bonds Taxonomy” (a phrase NRW Bank and Verbund used with their green bonds) and that will seek post-issuance certification under the Climate Bonds Standards in January, once further criteria are published. That would make it India's first Certified Climate Bond.

According to Mr Venkatesh, IDBI plans to lend close to $2 billion to green projects over the next 12-18 months.

 

Municipal

New Jersey Environmental Infrastructure Trust’s inaugural green bond for wastewater and water quality improvement ($9.56m, 3-5%, AAA/Aaa, 2-20 yrs)

State financing authority, New Jersey Environmental Infrastructure Trust (NJEIT), issued its inaugural green bond to support financing of State wastewater and water projects. This 19-tranche issuance comes in a total of $9.56m, with 3-5% coupon and 2-20 years of maturity. Rated as AAA (S&P) and Aaa (Moody’s), the bond is underwritten by Citi.

Proceeds will be used to finance system improvements aiming to enhancing quality of wastewater treatment systems and drinking water supply in NJEIT’s financing program. Currently there are three main types of projects under this financing program:

1) Smart Growth Projects i.e. combined sewage overflow project, transportation centre, Brownfield Development Area, septic management in urban development);

2) Technology Projects i.e. green infrastructure – though it would have been useful for more details on whats these projects will look like; and

3) Small Water System Projects.

 

Market Moves

More exciting news form India! The Securities and Exchange Board of India (SEBI) to create rules & incentives for domestic green bonds – now this is seriously cool.

India’s financial regulator SEBI is to set incentives for green bonds to make it cheaper to issue green than non-green! To be able to enforce these incentives it will also create rules that green bonds need to meet in order to qualify for the incentives. It’s not yet clear as yet what these rules will look like but we hope they will require both transparency on the management and reporting on proceeds as well as setting clear definitions of green.

Nordic Investment Bank (NIB) plans to establish a green bond program and aims at issuing €700m of green bonds each year in the future according to Environmental Finance. This pledge will mostly be in retail green bonds (€500m) with some private placement as well (€200m).

Fantastique! Credit Agricole pledges to invest $2 billion in green bonds, in the nick of time for COP21. Bring your green bond offers now!

Credit Agricole joins a flurry of other banks with USD1 billion or more mandates including HSBC, who announced earlier in November, Barclays (who last week announced they’d invested their first USD 1 billion within 12 months and committed to a second $1 billion), Deutsche Bank and KfW – and of course IFC that is judiciously investing to stimulate green bonds in emerging markets. Plus a few insurance funds, like Zurich with its USD2bn and investors like ACTIAM and its EUR1bn green bonds commitment.

 

Green Bonds Gossip:

IFC is issuing a ZAR 1bn ($70.1m) green bond in South Africa, as the first green bond issued by multilateral institution in the country. The bond will be closing in early December and we'll provide more details in a future blog.

Renovate America labels its $202m ABS as green! And since it’s a securitization of US residential Property Assessed Clean Energy (PACE) loans – it’s a very green abs! Bravo Renovate America we’ll give you more details in the next blog.

A Commonwealth Heads of Government meeting in Malta has agreed to look at setting up a $US1bn Commonwealth Green Finance Facility, aimed at developing nations - in the Commonwealth of course. The facility would be capitalised initially through sovereign contributions and then through green bond issuance, and is expected to be fully operational by the end of 2016.

The Inter-American Development Bank (IDB) regional Energy Efficiency Green Bond Facility, which we discussed in May, has received $217 million in funding from the Green Climate Fund to roll out in multiple Latin America countries. IDB is investing $400 million of it’s own funds.

Providing an alternative financing mechanism for energy efficiency projects through the issuance of green asset-backed securities (ABS), the programme will also contribute to the development of capital markets in the region.

IDB said that Mexico will be the first country to implement this programme, followed by the Dominican Republic, Jamaica, and Colombia.

The IDB's loan of up to US$400 million will be complemented by a loan of up to US$50 million from the China Co-Financing Fund, administered by the IDB, in connection with the first utilisation of the facility in Mexico.

HSBC issues inaugural green bond €500m ($528m) for renewable energy, energy efficiency (in industry and buildings), sustainable waste management, sustainable land use, clean transportation, sustainable water management and climate adaptation projects. CICERO provides the detailed second review and HSBC commit to annual independent assurance on the allocation of proceeds to green projects - excellent! Look out for a full review in the next market update.

 

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Overall November has been the biggest month EVER for green bonds with $7.39bn issued! Brilliant to see such momentum for green bonds. Now for a success at COP21 to renforce green growth.