The first EVER green Pfandbrief is a hit with 4x oversubscription AND 15 brand new investors for BerlinHyp! Plus it’s greening the cover pool – which is seriously cool! EUR 500m ($545m), 7 yr, 0.125%, Aaa/AA+
Huge German real estate and mortgage bank BerlinHyp last week closed the first-ever green Pfandbrief (a German form of covered bond). The EUR 500m ($545) green Pfandbrief has a 7 year tenor and coupon of 0.125%. The bond received a rating from Moody’s of Aaa and Fitch rated AA+. The lead underwriters for the deal were Credit Agricole, DZ Bank, JP Morgan, Land Baden-Wuerttemberg and Unicredit.
Investors flocked to the bond with an order book of EUR2bn for the EUR 500m bond with German investors accounting for 71%. Just under half of the green bond, EUR 239m, was allocated to Socially Responsible Investors (SRI). Plus BerlinHyp got investor diversification as the deal attracted 15 investors that are new to their books. Overall, the investors were a mixture of banks (52%), funds (19%), central banks 18%, corporates (6%) and insurance (5%).
Green Pfandbrief 101: Pfandbrief is a bank issued bond with recourse to a cover pool of assets and to the bank. Pfandbrief offers extra security than conventional bank bonds because if the bank goes into insolvency the bondholder has priority recourse to a protected pool of assets – known as the cover pool. There are different types of asset class in Pfandbrief; real estate mortgages, public debt, shipping mortgages and aircraft mortgages. Each bank can only have one cover pool per asset type. They are subject to a legal framework and regulation to maintain the credit quality of the cover pool at all times. As a result, investors see Pfandbriefe as very low risk - for example, BerlinHyp successfully issued a Pfandbrief just a week after the 2008 financial crash.
And – they are huge – the current outstanding amount is EUR 2,600bn! We need to tap into this pool of capital to grow green buildings.
What makes a green Pfandbrief? The starting point for BerlinHyp was to find out what mortgages for green buildings were already in its cover pool. The easiest way to identify green assets is to look for certified green buildings. Now, a difficultly for BerlinHyp is that a big chunk of the cover pool is German mortgages but few German buildings are certified (the suggestion is that strict building regulations make all new builds de facto green. True?). Instead BerlinHyp had to look more to their international assets in the cover pool, with recognised certifications, and discovered a total of EUR650m green buildings from Germany, France, UK, Netherlands and Poland.
How does the earmarking work in Pfandbrief? Proceeds have been earmarked for green assets within the cover pool. However we had questions on the maintenance of the green assets in the pool. Regulation on the credit credentials of assets in the cover pool is notoriously strict; so what happens if one or more of the green assets mature or default making them ineligible, from a regulatory point of view, for inclusion in the cover pool? Does that mean that the total of green assets could drop below the EUR500m earmarked? Good news; this has been addressed in two ways; there are more green assets in the pool EUR650m compared with earmarked amount EUR500m to give some breathing room and there is a corporate strategy to acquire more green assets going forward. The potential to grow green assets and thereby greening of the cover pool is exactly what we need! So it’s not a formal ring-fencing of assets but a commitment to maintain (and aim increase) the total green assets in the cover pool – here will be where reporting will play a key role to give investors confidence.
The difficulty with the metrics available to BerlinHyp is that they are largely design rather than performance standards, typically awarded when a building is first built. They're great, but from a climate perspective our primary concern is the emissions performance of a building, which can be different to what was expected, depending on how the occupants use it, changes they make, etc. Also, research coming out of the US suggest that lower rated LEED buildings (Basic, Silver) have a minimal correlation with improved emissions performance. LEED and BREEAM and others do have modules to address emissions performance, and are working to improve those; but only a small proportion of rated buildings use those.
BerlinHyp have gone some way to address this by requiring new acquisition properties to achieve a green building certification and score over 50% in the energy efficiency component of the certification. We're still a little concerned that there are a few (not as green as we'd like) LEED Silver buildings in the portfolio, but this is perhaps nitpicking against the lack of emissions-related metrics in the market.
To grow a green property bonds market in Germany we need to be able to provide assurance to investors as to their green credentials. That requires us to tackle the lack of available performance metrics. For this we believe the German government needs to get involved: So Angela - come talk to us!
Our summary view on the world's first green Pfandbrief? An excellent example of how to do it and a brilliant kickstart for the market. Wunderbar!