Abengoa Greenfield S.A, a subsidiary of Abengoa S.A., has issued two green high-yield bonds (i.e. below investment-grade) for a total of EUR500m equivalent. For those of you unfamiliar with the company, Abengoa’s operations are focused on renewable energy (solar and biofuels), electricity transmission, energy IT systems, desalination and wastewater treatment.
According to the press release, the first green bond is a US$300m, 5-year, B-rated bond, with a coupon of 6.5%. The second bond is a EUR265m, 5-year bond, with a coupon of 5.5% - this second bond has no rating. The bookrunners were the same for both bonds: Banco Santander, Bank of America Merrill Lynch, Credit Agricole SA, HSBC Natixis and Societe Generale
These bonds are the first high yield green labeled bonds in Europe – this means they have higher risk, but consequently also offer higher return for investors. As we’ve previously seen major market demand for lower investment-grade green bonds (e.g. Italian’s utility Hera’s BBB-bond being 3x oversubscribed!), we have been waiting to see ratings move further down the ratings spectrum to below investment grade. Now we’re finally there – and have another piece of evidence showing that the green bond market is beginning to show signs of maturity.
The issuance demonstrates that a green bond can be successfully placed in the rocky high yield market. Abengoa's bond drummed up a lot of interest because not only does it open up the opportunities of the high yield market to green investors, but it also introduces green bonds to traditional high yield investors. By all accounts the bond has got people talking - both in mainstream and green investment houses.
As for the green credentials of the bond, the eligible green projects criteria have been made publically available on Abengoa’s website, alongside a second opinion by Vigeo. The eligible projects include renewable energy, transmission and distribution of energy and water, energy efficiency, water management, waste to energy and bioenergy.
Great, but what do these very broad categories actually mean? Disclosure that only includes the broad bucket definitions of use of proceeds without addressing some of the real issues at a more detailed project or asset level does not give investors adequate the information to assess the green credentials of the bond. For example, bioenergy is a controversial area, and one would at least want to know that higher emission corn ethanol plants had been excluded.
We've taken a while getting this bog out because we wanted to follow up on these topics with Abengoa; they happily provided more insight into the green criteria of the bond. Since the information is there and the company was more than willing to disclose it – all we need is for these details to be included in the reporting in the future. To show you specifically what we were looking for to be comfortable with the green credentials:
- Energy transmission and distribution: Without more details, our concern was that the investment did not exclude grid lines linking a new coal plant to the grid. Not a problem according to Abengoa (phew!) as projects will facilitate renewable energy production by linking plants to the common grid. Moreover, energy efficiency criteria must be met for the lines to reduce energy loss. Good!
- Water projects: From the reporting we weren’t sure if eligibility criteria took into account that pumping water to areas of scarcity can require high levels of energy use. We’re happy to see that Abengoa is establishing an energy efficiency plan at the start of the project. They also optimize energy use through installation of high yield pumps and power regulators to avoid continuous operation. (In the context of climate adaptation there are also issues of risk around changing rainfall patterns that ought to be assessed by investors. The Climate Bonds Water Experts Committee starts work on this in a couple of weeks.)
- Desalination projects: Desalination can be very energy intensive, which can contribute to an increase in emission in a “brown” grid. The reporting didn’t tell us how Abengoa is addressing this issue. Turns out Abengoa is mitigating this by aiming to get the highest level of energy efficiency possible by using high yield membranes and continuously improving membrane washing systems. Not quite as good as ensuring there’s renewable energy powering the plants, but of some comfort. This is another area where an Expert Committee needs to have a closer look at the issues involved; we plan to convene one in the New Year.
- Bioenergy: We became anxious when we saw “energy crops” in the Vigeo review of the bond. Bioenergy can be controversial stuff with change of land use for energy crops having potentially negative environmental impacts. Abengoa confirmed its Bioenergy business does not use agricultural land or any property whose land use has changed in the last 6 years. Also encouraging was that their Bioenergy criteria includes reference to feedstock standards:
“The procedures we use to manage the growth of energy crops are based on RBSA (RED Bioenergy Sustainability Assurance), the voluntary scheme created by Abengoa Bioenergy to fulfill the sustainable requirements of the European Directive for the Promotion of Renewable Energy Sources (RED), and the RSB Principles and the SBP (Sustainable Biomass Partnership) principles.”
This is pretty good; a Climate Bond Standards Bioenergy Expert Committee has been looking at criteria in this area, and I suspect they’ll be happy.
This is all information we hope Abengoa will include in their use of proceeds reporting for future bonds. Abengoa has committed to annually report (with 3rd party verification AND publically – what we like to see!), and so hopefully this ongoing reporting can provide some of these details we were missing in the initial second opinion.