Rare Green Junk Bond Shows How High-Yield Lags Investment Grade
Transport services company Getlink’s sale this week of an environmentally friendly bond has pushed 2020’s tally for European green junk debt issuance past the total for the whole of last year, though the market still lags its investment-grade peer.
A serial issuer, Getlink’s new 700 million-euro bond ($830 million) will go to refinance an existing 550 million-euro green bond due in 2023. The remainder will fund capital expenditure on green projects, such as the company’s U.K-France power cable Eleclink.
Financing linked to environmental targets, however, is still rare in the high-yield market, even as the supply of global green bonds intensifies. Investment-grade green issuance in Europe, excluding public sector borrowers and financials, stands at 14.8 billion euros for this year. Green junk bond volumes, on the other hand, stand at 1.27 billion euros, according to data compiled by Bloomberg.
Read more: Green Bond Market Booms to Break Trillion-Dollar Mark
The meager supply of high-yield green bonds has left investors competing to get a slice of the action. Getlink’s bond was “very strongly oversubscribed” according to an emailed statement from the company, pricing at the tighter end of guidance with a 3.5% coupon. Volvo AB’s 500 million-euro green bond was five times oversubscribed when it launched in September, the company’s chief financial officer highlighted at the time.
“The transition to green bonds will slowly cover the entire market -- the next step from investment grade is high-yield,” said Rhys Petheram, who co-manages the Jupiter Global Ecology Diversified fund at Jupiter Asset Management. High-yield bonds comprise 5% of his ESG-focused portfolio. “You are starting to see that, even if supply is fairly limited now.”
High-yield can still offer investors opportunities for greener investments even without a designated green bond. Petheram points to auto parts suppliers playing a part in electrification like ZFF and packaging companies such as SIG Combibloc that are providing alternatives to single-use products.
Other areas “prime for deploying money in a green way” in the high-yield space include real estate and airports, according to Anna-Marie Slot, global sustainability partner and high-yield global head at Ashford LLP.
Getlink and Volvo’s capital-intensive projects meant issuing a green bond was an easy choice, but for other high-yield issuers the decision is not so simple. Thinking of a project large enough to use the capital generated by a bond and gathering the manpower to monitor its compliance can be enough to put companies off, said Slot.
“I think there’s definitely a perception in the market of onerous reporting,” she said. “High-yield companies aren’t usually the ones who have tons of people sitting around to help track metrics.”
Sustainability-linked bonds could be the answer as they offer a “more holistic” view of the company’s strategy rather than being tied to a specific green project. “I think that flexibility will enable the high-yield market to be more active in that transition bond space than it has in the past,” she said.
Moves by the European Union to compel companies to disclose their sustainability data will also make green investing in the high-yield space easier in the future, Petheram added.
“ESG-minded investors will have all the information at their fingertips.”
©2020 Bloomberg L.P.