Record Demand for EU Green Debut Shows Supply Can Hardly Keep Up
(Bloomberg) -- The European Union drew record demand for its debut green bond, in the sector’s biggest-ever deal.
The bloc sold 12 billion euros ($13.9 billion) of securities maturing in 2037, after seeing more than 135 billion euros in orders Tuesday. Both the demand and size eclipsed the U.K.’s debut last month. The deal is just the first in a 250-billion-euro program of EU green-bond sales for coming years, though investors may have to wait until 2022 for more.
“What makes this deal special is the message it sends about the strength of green bond demand, after a flurry of deals targeting the same investor base,” said analysts at ING Groep NV, including Antoine Bouvet. It “confirms that green bond supply is still catching up to demand.”
The jostle for orders was an “absolute riot,” according to Kerr Finlayson, the head of the frequent borrowers group syndicate at NatWest Markets Plc in London. The EU also holds the overall debt-market record, of 145 billion euros in orders for a social bond debut last year, reflecting the surge in interest in ethical investing.
The deal was big business for joint lead managers Bank of America Securities, Credit Agricole SA, Deutsche Bank AG, Nomura Holdings Inc. and TD Securities, coming as banks compete for fees from ethical debt sales this year of about $1.2 trillion. The world’s top three green arrangers -- JPMorgan Chase & Co., BNP Paribas SA and Citigroup Inc. -- weren’t on the sale.
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Demand for this kind of debt is typically so high it commands a green premium, or “greenium,” versus conventional bonds. The pricing was set at eight basis points below midswaps, cut from initial guidance of five basis points below swaps.
That meant it achieved a greenium of 2.5 basis points, according to the EU’s Budget Commissioner Johannes Hahn. The timing of further green bond issuance will depend on the different needs and payment requests of member states.
“I wouldn’t exclude something this year, but probably it’s not realistic,” Hahn said in a press briefing after the sale.
The proceeds will be chaneled to member states for spending in areas such as energy efficiency, clean energy and climate change adaptation. That process will be scrutinized by investors, who are increasingly on the lookout for greenwashing -- where the benefits are overstated -- and by banks under pressure from regulators over the labeling of environmental, social and governance assets.
The relative scarcity of sustainable debt often means it also beats conventional peers in the market. Floortje Merten, a strategist at ABN Amro Bank NV in Amsterdam, expects the EU’s greenium to extend further.
“The bond can perform -- we think the greenium can grow to potentially around five basis points,” said Merten.
However, the rush to start the funding means the debut comes before lawmakers and member states have actually approved the EU Commission’s green bond standards, potentially undermining its goal to make that a “gold standard” for other borrowers around the world.
The Commission said the debt will adhere to its framework where feasible, and also to widely-used principles from the International Capital Market Association. It has been reviewed by a second party opinion provider, Vigeo Eiris, part of Moody’s ESG Solutions.
“The EU had to find a compromise between the urge of issuing its first green bond and waiting for the final version of its taxonomy, which is currently suffering from heavy lobbying,” said Maia Godemer, a sustainable finance associate at BloombergNEF. “If the EU wants to show the robustness of its green action plan, the next issuance should be fully financing projects aligned with the taxonomy.”
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