A CoCo Bond That Wants to Save the World

Spanish lender Banco Bilbao Vizcaya Argentaria SA is claiming a milestone in the global fight against climate change. It has just become the first lender to sell the riskiest type of bank debt while putting a fashionable environmental label on it. Sadly, as is often the case in finance, this innovation may do more harm than good.

BBVA sold a 1 billion-euro ($1.1 billion) additional tier-1 perpetual note on Tuesday, and designated it as a green bond. AT1s — otherwise known as contingent convertible bonds, or CoCos — are popular because they pay more interest than other debt, in exchange for investors being at the front of the queue to bear losses if the bank fails. In this case the coupon was 6%.

But this equity-type capital performs a particular function in supporting the banking system: Regulators know these investors will have to bear some of the brunt if things go wrong. As such, it’s strange to also try to use AT1s as a way to promote funding for climate-change projects. Can you really use a bond as capital and a green-financing tool at the same time?

The danger is that this becomes another form of greenwashing, giving a bad name to what is truly green financing. BBVA has committed to “make an effort to dedicate a percentage of the proceeds … to finance green projects originated in the current year.” That’s pretty vague. The bank also said it might use some of the proceeds from the new sale to redeem an existing CoCo from 2016, which is paying out an 8.875% coupon. That would be a sensible reduction in BBVA’s funding costs, but it has little to do with climate change.

A CoCo Bond That Wants to Save the World

It’s hard to see whether there was much to be gained from labeling this issue as green. Investors placed orders for almost two times what was available, but that’s pretty unimpressive for this type of high-yielding debt. Sales of AT1s by other banks last month drew many times more demand than BBVA’s.

Transparency on how the funding has supported environmentally friendly causes will be critical if the Spanish bank is to avoid the greenwashing tag.

With a sprawling commercial lending business from Mexico to Turkey, BBVA has total assets of 730 billion euros. Of that pool, less than 3 billion euros — or less than 0.5% — is eligible for green lending, although the bank plans to help finance another 70 billion euros of sustainable causes through 2025. It also has five senior bonds already allocated to green lending, sold in line with guidelines from the International Capital Markets Association. 

It’s unclear how many socially responsible investors availed themselves of the new green CoCo, although it might appeal to regular bank-capital investors who can apportion this bond as part of their own green efforts. Yet it’s hard to be confident that this novel branding effort will be of much benefit to planet Earth. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

©2020 Bloomberg L.P.

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