By Bridget Boulle
Yesterday, French multinational electric utility company, GDF Suez, announced its first green bond – a whopper EUR2.5 billion ($3.5 billion) bond linked to ‘renewable energy and energy efficiency projects that contribute to fight climate change’. The bond shares GDF’s credit rating of A1/A-.
The bond was issued in two tranches: a 6-year tranche of EUR1.2 billion with a 1.375% interest rate, and a 12-year tranche of EUR1.3 billion with a 2.375% interest rate.
The bond was only on sale for 2.5 hours, yet was three times oversubscribed – despite being upsized from the original target of EUR750 billion. That means they got $10 billion of orders for the bond - does anyone still doubt investor demand?
The biggest single issue green bond before this was EDF’s EUR1.4 billion last November.
According to Environmental Finance, 64% of the issue was taken by socially responsible investors, helping GDF diversify its pool of investors. Asset managers, pension funds and insurers accounted for most of the demand.
For the six-year tranche, 69% was bought by asset managers, and 12% by pension funds and insurers. Banks and central banks bought 9% and 6% respectively. UK-based buyers took the biggest share, at 21% of the issue, followed by France and Austria.
The 12-year tranche saw 51% bought by asset managers and 43% by insurers and pension funds. French buyers accounted for 35% of the issue, followed by German, Austrian and British.
Credit Agricole said that the pricing of the bond was “in-line with the curve of GDF’s mainstream bonds”, although there was a small “new issue premium” of 4 basis points for the six-year tranche and 2 basis points for the longer dated tranche.
According to the company demand was strong due to a combination of factors of which the green theme was one. The green aspect did enable the company to pick up new investors as well as larger orders from existing investors than they would otherwise have received. Investors were mostly French, German and UK institutional investors with 64% issuance going to sustainable investors.
It’s pretty darn green...
When we first looked at the bond we were a little unsure.
Firstly, the term ‘energy efficiency’ for a power producer (with significant coal and gas power generation) can mean all manner of things including making coal/gas power stations a little better (not very green in our view).
However, thanks to the criteria put forward by independent reviewer Vigeo, such projects are automatically ruled out of this bond. The criteria ensure that ‘the project is not linked to energy production by fossil fuels or nuclear sources and contributes to the decrease of GHG emissions of the business area’. We’re actually agnostic about nuclear from a carbon perspective, but certainly not about coal and gas so this is a very important point. Vigeo’s report is available on the GDF Suez website.
Our second anxiety was with hydro projects, as the pipeline of investment includes Jirau, a 3,750MW hydro project in Brazil ... large hydro projects in tropical areas can be problematic because of substantial methane leakage from rotting flooded vegetation. However, closer examination shows it’s a “run-of-river” project (no reservoir) and is the only large hydro project to fall under the Clean Development Mechanism. As for future hydro projects, any large reservoir projects that investors might be worried about are effectively ruled out by Vigeo’s criteria on biodiversity and other environmental impact assessments.
There’s a big pipeline for future bonds
The company specifies that eligible projects could be future, existing projects or acquisitions of companies. The company has a large pipeline of projects that include a wind farm in South Africa, a biomass combined heat and power plant in France and smart metering projects. Renewable energy projects are more capex-intensive and so the vast majority of the proceeds will be allocated to such projects.
The company estimates that proceeds will be allocated within approximately three years depending on the projects. This means that although GDF Suez just won a tender for French offshore wind projects, capital expenditure will only start in 2017 so it will not be included in the green bond as all proceeds would have been allocated by then.
GDF has already identified a EUR1 billion pipeline of eligible projects in 2013/2014, and more than EUR1.5 billion of projects after 2014 that bonds can be used to finance.
Bond proceeds will be held in GDF’s treasury until projects are ready for invested.
Deloitte, the company’s auditor, will conduct a financial audit of the use of proceeds and the company will report back to investors on progress with allocation annually through the website.
The bond is part of the company’s ambitious environmental objectives which include a target to increase renewable energy generation capacity 50% between 2009 and 2015 and increase its energy efficiency business activity in Europe by 40% by 2018.
Utilities will be pivotal to the growth of a genuinely green bonds market. GDF has blown away our expectations of just how big this could be – EUR2.5 billion so far with plenty more in the pipeline further down the line.
Crédit Agricole CIB was sole Structuring Advisor and along with Citi was also co-global co-ordinator of the latest deal. Bookrunners included BNP Paribas, Unicredit, Mitsubishi UFJ Securities, Natixis and Societe Generale.