Lenders Ramp Up Sales of Riskier Bonds in European Green Market

The explosion of green finance has reached the market for riskier bank debt.

German lender Bayerische Landesbank sold a bond on Wednesday that took this year’s supply of so-called green Tier 2 bonds to 4 billion euros ($4.8 billion), according to data compiled by Bloomberg. That compares to just 1.5 billion euros over the whole of last year.

The majority of green and other sustainably-flavored debt issued by banks has so far been in a senior format rather than these subordinated bonds, which have a higher chance of being bailed-in during a crisis. Their growth now shows the reach of environmental, social and governance factors extending into most corners of the debt market.

“Subordinated debt is a really important part of the ESG puzzle as far as banks are concerned,” Bank of America analysts led by Richard Thomas wrote in a note this week, adding they were bullish about the outlook for more issuance. “Pools of sustainable assets should, where possible, be notionally capitalized by sustainable bank capital instruments.”

Lenders Ramp Up Sales of Riskier Bonds in European Green Market

Raiffeisen Bank International AG, which sold a green Tier 2 earlier this month, wanted to underpin its commitment to sustainability by issuing green capital, said Katarzyna Kapeller, head of asset liability management. The lender was also “convinced” that the green format would “support the placement and reduce price sensitivity,” she said.

The 500 million-euro bond was more than four times covered by investor orders and priced 30-35 basis points inside initial price thoughts, at 160 basis points over the benchmark. That fits a pattern of borrowers often getting lower costs with a so-called “greenium” for ethical debt.

Greenium May Foster Subordinated Bank Bond Sales: Nomura Banker

For investors, part of the attraction is the additional yield that subordinated debt offers, said Dennis Haring, head of capital and senior funding at ING Group NV. The Dutch bank’s green Tier 2 bond sold earlier this month is yielding 0.87%, about twice the yield on its green senior bond due 2030.

“A green Tier 2 is another step in the development of the green bond market in general,” Haring said.

ESG debt issuance overall has now topped $3 trillion, though is still scarce in the riskiest type of bank debt. Banco Bilbao Vizcaya Argentaria SA is the only lender so far to have issued a green Additional Tier 1, which ranks below Tier 2. It sold a 1 billion-euro note last July.

©2021 Bloomberg L.P.

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