MünchenerHyp cracks first thematic covered bond! EUR300m ($389m) Aaa 5yr, for coop housing. 1.6x oversubscribed. It’s the prototype for a Green Pfandbrief – at last!

Münchener Hypothekenbank eG has just issued an “ESG-labelled” covered bond (or Pfandbriefe, as covered bonds are called in Germany) for refinancing of housing cooperatives. Oekom Research provided a second opinion on the “social” benefits – you can find it on our web site.

It’s a EUR 300 million ($389m) bond with 5-year maturity, coupon of 0.375 and Aaa rating by Moody’s, as stated in the bank’s press release. Joint book-runners were Credit Agricole CIB, Landesbank Baden-Wuerttemberg and WGZ-Bank.

The bond succeeded in broadening MünchenerHyp’s investment-base, with 32% of the bonds picked up by SRI-investors, a group of investors not seen in the bank’s deals in the past. The bond was 1.6x oversubscribed – yes, that means they had a lot more orders than they could fill.

This is not a green or climate bond – proceeds got to loans to cooperative housing schemes, which may be green, but we’re not sure. It does establish the principle of thematic covered bonds – a big innovation in that $3 trillion market. The German Pfanbriefe Association (VDP) was involved at an early stage – a critical piece of engagement. That’s why we’re writing about it: it’s the model for how we can bring green covered bonds to market.

Münchener Hypothekenbank actually wanted to do a green covered bond, but clear data on building performance was hard to pin down. We’re now going to work with them to see if we can help with that, based on the Green Property criteria for the Climate Bonds Standard.

We have long argued the potential for green bonds in the covered bonds market.

Covered bonds are dual-recourse bonds, where, if the bond issuer can’t pay back the bond, investors also have recourse to the cover pool of loans. It’s a much safer instrument than a simple bank bond, so it gets a higher credit rating. That’s great for the issuer, because they get to raise capital at a lower interest rate than they’d for their own corporate bonds. The secret of the success of this market has been government regulation – there are clear rules about what you can do and can’t do, what proportion of your loan book can be used, etc. This tight supervision makes investors very happy, and contributes greatly to the ongoing strength of the market and the financial instruments involved.

For green covered bonds, the key benefit is that bond investors would be able to gain exposure to green assets at low risk.

In most jurisdictions the cover pool is transparent, so bond analysts would have the opportunity to gain experience of how green assets, such as green property loans, perform without taking a direct exposure to the underlying credits. This would start addressing a problem for institutional investors, which is that most portfolio managers lack the information on performance of low-carbon financial assets that they need to build a robust track record for investment analysis. By giving insight to institutional investors to the performance of the underlying green assets we not only build a strong green covered bonds market, but support appetite for green asset-backed securitisation.

Green covered bonds can be a bridge between the corporate green bond issuance that is currently dominating the market, and green securitisation, which is where the green bonds market needs to go. 

While covered bonds have a different financial structure to the green bonds seen to date, the process of ensuring green credentials can and should follow the same processes as are already established in the labelled corporate green bond space, such as evaluating green credentials on use of proceeds, rather than the green credentials of the issuer. As MünchenerHyp has done with this “ESG” bond, an independent review confirms the credentials of the issuance.

Now that the model for thematic covered bonds is out there, on to green covered bonds!