First Green Euro CoCo Gives ESG Buyers Rare High-Coupon Bond

(Bloomberg) -- Banco Bilbao Vizcaya Argentaria SA has become the first lender to offer euro green CoCo bonds, giving environmentally focused investors a rare chance to lock in high coupons.

The Spanish lender will price the 1 billion-euro ($1.1 billion) Additional Tier 1 at 6% after attracting orders of more than 2.75 billion-euros, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it. The perpetual notes, which are the riskiest type of bank debt, are callable after 5.5 years. They were offered at an initial price target of about 6.5%, the person said.

BBVA’s offering gives investors a new way to boost returns in the environmental-debt market, where euro coupons only average about 1% due to a preponderance of higher-rated deals from banks, governments and utilities. More lenders may also soon offer green AT1s, given the demand for socially responsible debt and banks’ efforts to grow green lending, according to Tom Kinmonth, a fixed-income strategist at ABN Amro Bank NV.

“I do expect other banks to follow the trend now that BBVA has tested the waters,” he said.

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Moody’s Investors Service rates the BBVA notes at Ba2, or two steps below investment grade. Cooperatieve Rabobank UA is also selling non-green AT1s, which are the first bonds to take losses in a crisis.

“The green feature of the bond does not affect its creditor hierarchy position, and the notes remain deeply subordinated in the capital structure -- this is also a key investment feature that must meet investors’ appetite,” CreditSights analysts Paola Biraschi and Puja Karia wrote in a note.

BBVA previously told Bloomberg News that it would sell a single 1.5 billion-euro AT1 this year, or two smaller deals this year and next. The new issue may replace an old AT1 callable in April 2021, the bank said.

The proceeds of the new note will finance loans in sectors such as renewable energy and clean transportation, and it’s part of the bank’s commitment to mobilize 100 billion euros in sustainable finance by 2025, according to a presentation. The bank’s total portfolio of green assets stands at 2.9 billion euros, a net increase of 1.8 billion euros since 2018.

Lenders issuing green AT1s need a pipeline of environmental assets to ensure a constant flow of projects can be earmarked against a bond with an unknown final maturity date, Kinmonth said.

“Banks have to be confident that they want to be ‘green’ in the future,” he said.

South Korea-based Kookmin Bank issued a sustainable dollar AT1 last year.

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