Use-of-proceed corporate treasury guaranteed bonds are simply corporate bonds where the funds have been ring-fenced to “qualifying” areas of investment.
The corporate bond market is very large, with strong demand for investment grade product. The Climate Bonds Initiative believes that companies could be encouraged to steer effort to low-carbon industries if they were able to tap new investors interested in those low-carbon activities.
For a bank, they can be ring-fenced to existing loan pools, say for wind and solar energy, or to planned project loans. (The Climate Bond Standard specifies that funds must be expended within 12 months or the bond will be de-certified.)
Ring-fencing does not require setting up a special-purpose vehicle or legal separation. It simply requires internal tagging and internal procedures to ensure that the amount of the pool does not drop below the amount of the bond. In that sense a use-of-proceeds bond is similar to arrangements for a covered bond cover pool, but without recourse to the pool.
This is the same model used for the earmarked bonds issued by the World Bank (“Green Bonds”) and the European Investment Bank (“Climate Awareness Bonds”, each linked to low-carbon investments. “Wind bonds” issued by utilities operate on the same principle. The same principle can be applied to corporate bonds more generally.
Special purpose use-of-proceeds bonds have been issued before – such as war bonds in the UK in the 1940s and highway bonds in the US in the 1950s – and could be again for the purpose of investing in the low-carbon economy.
The advantage for the investor with a use-of-proceeds bond is that they have no credit exposure to what are still seen as “novel” assets, but get the reputational and socially responsible investing benefits.
Benefits for issuers?
- Access to new investors interested in the climate theme.
- Opportunity to educate investors about the cover pool, preparing them for later asset-backed security issuance.