Anecdotal evidence has suggested that green bonds are heavily oversubscribed and may price tighter than expected. Green Bond Pricing in the Primary Market: January 2016 - March 2017 explores the data to discover whether or not this is happening.
What’s it all about?
The green bond market continues to grow and as of July 2017 totalled over USD 233 billion. The ongoing strength of the labelled green bond market illustrates the extent of investor demand for climate-related investments.
Climate Bonds & International Financial Corporation (IFC) with support from Rabobank, Pax and Obvion undertook a detailed analysis of recent green bond issuance compared to vanilla bonds looking for any differences in pricing performance.
Green Bond Pricing in the Primary Market: January 2016 - March 2017 is the result of that initial study comparing green and vanilla bonds.
Is there a Greenium?
Anecdotal evidence has suggested that green bonds may be heavily oversubscribed, and may price tighter than vanilla equivalents giving issuers access to cheaper funding.
In total we looked at sixty two (62) investment grade green bonds issued in EUR or USD over a 15 month period, to better understand the dynamics of green bond pricing in the primary market.
To be included, bonds had to meet the following parameters:
- Currency: USD or EUR only
- Date: announcement 01/01/2016 - 31/03/2017
- Size: > = USD200 million
- Rating: Investment grade rated
- Maturity: Minimum term of 3 years
Summary of findings:
Some indicators show that there are differences between green and vanilla bonds
- Green bonds tend to attract a broader range of investors including those looking to comply with ESG focused mandates.
- USD corporate green bonds within our sample priced on average 22.2bps tighter than Initial Price Talk when compared to corporate vanilla bonds (16-17bps) issued during the same period.
- Spread performance compared to a corresponding broad market bond index: seven (7) days after announcement date, 70% of green bonds had tightened more than their corresponding index, 71% after twenty-eight (28) days.
- This suggests that green bonds within our sample perform better than the market within the first 28 calendar days.
Some indicators show green bonds behave in line with vanilla bonds
- EUR corporate green bonds in our sample price on average 13.4bp tighter than IPT. This is within the normal range of 13-14bp for vanilla bonds over the same period.
- Average oversubscription in our sample is 3 times. Oversubscription of 3-4 times is not unusual in the corporate bond market.
- Spread performance: 70% of green bonds had tighter spreads 7 days after announcement date, 63% 28 days after*. Bonds often tighten in the immediate secondary market.
- The ‘Greenium’– some green bonds in the sample priced inside their own credit curves, some priced on their own credit curves, and some priced outside their own credit curves.
- This is broadly comparable to vanilla bonds.
What’s it all mean?
This is a complex subject, the market is still immature and it’s a relatively small pool of bonds being compared in this initial analysis.
Accordingly, results are mixed. It’s best illustrated by us simply replicating the last few paragraphs of the Conclusion:
Sometimes, green bonds price outside their curves, sometimes, they price inside, and sometimes, they price on their curves. In this respect, green bonds perform no differently from other categories of bonds as far as we can tell.
We have however, seen that after generating good demand, and pricing tight, for many green bonds, spreads tightened materially in the first seven and twenty-eight days after the announcement date, both on an absolute basis, and when measured against a corresponding index.
This suggests that many green bonds are under-priced at issuance.
We are not able to say whether this market behaviour will persist, but this could point towards tighter pricing in the future.
For the time being, this data should allay concerns among investors about longer term underperformance by green bonds, since there doesn’t seem to be any.
There is certainly no penalty attached to holding green bonds as opposed to other bonds of the same issuer and, in some instances, our analysis suggests there may be a reward.
The full report carries additional detail and various examples. You can download it here.
More to come
Note that this publication is part of an ongoing series. Our next publication will monitor qualifying bonds issued in Q2 2017, April to June.
As well as the metrics we have included here, we will explore other ways of comparing green bonds to a vanilla sample.
‘Till next time
PS: Special thanks to the report partners and funders: IFC, Pax, Obvion and Rabobank
Disclosure: This report has been prepared by the Climate Bonds Initiative IFC, Obvion, Rabobank, and Pax. Additional funding was received from the Ministry of Finance of Japan and the Government of the Kingdom of Denmark through the Ministry of Foreign Affairs.
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